Module 2: Corporate Taxable Income Flashcards
What are some GAAP income items that are not includable as taxable income?
- Interest from municipal/state obligations/bonds
2. Certain proceeds from life insurance on the life of an officer where corp is beneficiary
What is form 1120?
US Corporation Income Tax Return
Schedule M-1
Reconciliation of Income (Loss) per books with income per return
Schedule M-2
Analysis of unappropriated R/E per books
Schedule L
Balance Sheets per Books (Beginning of tax year & End of tax year)
What does “ordinary and necessary” expenses mean?
The expenses are common (or accepted) in the particular business or profession and they relate to producing the current year’s income
Domestic production deduction
Deduction of specific percentage of qualified production activities income
DOMESTIC PRODUCTION DEDUCTION
Limitation
May not exceed 50% of W-2 wages paid by the corp for year
DOMESTIC PRODUCTION DEDUCTION
How do you calculate qualified production activities income?
Domestic production gross receipts
= QPAI
DOMESTIC PRODUCTION DEDUCTION
Define domestic production gross receipts
Gross receipts derived in significant part w/in the US from any disposition of qualified production property that is:
- manufactured
- produced
- grown
- extracted
- constructed
- engineering services
- architectural services
DOMESTIC PRODUCTION DEDUCTION
What is the deduction %?
9% of the lesser of:
- QPAI
- Taxable income (disregarding QPAI deduction)
What are the limitations on deduction of compensation expenses?
Publicly held corp may not deduct compensation expenses in excess of $1M paid to CEO or 4 other most highly compensated officer (unless based on commission/performance-based plan)
Bad debts: Specific Charge-off method
—Accrual basis
Direct write-off method
Will write off bad debts as they become worthless
Bad debts: Specific Charge-off method
—Cash basis
Bad debt is not deductible b/c rec’vable not included in gross income, except in case of uncollectible check
Is interest expense on debt incurred to purchase “tax-free” bonds deductible?
No
Bonus accruals to non-shareholder/employees
Must pay by April 15th in order to deduct
Business interest expense:
On business
On investment
Prepaid
On business => incurred and paid = deduction
On investment => up to taxable investment income
Prepaid => Deduct “later” when incurred
Max deduction for charitable contributions
10% of adjusted taxable income limiation
Disallowed may be carried forward 5 years
Accrual must be paid by April 15 to be deducted
What are two important differences concerning business casualty for corp and for individuals?
- No $100 reduction
2. No 10% of AGI reduction
What is the casualty loss deduction limited to if property is only partially destroyed?
Lesser of:
- decline in value of property (change in FMV) or
- adjusted basis of property immediately before casualty (NBV)
What are allowable org. expenditures and start-up costs? Excluded costs?
Fees paid for legal services in drafting corp charter, bylaws, minutes of org meetings, fees paid for acct services, and fees paid to state of incorp
Excluded: Costs of issuing and selling the stock, commissions, underwriter’s fees, and costs incurred in transfer of assets to corp (COST OF RAISING CAPITAL)
Is a deduction for capital losses allowed?
Deduction not allowed; can only use to offset capital gains
Excess: carried back 3 forward 5
Basic inventory valuation methods
- Cost method
- LCM
- Rolling-average method
- Retail method
Common inventory ID methods
- FIFO
- LIFO
- Specific identification method
