Module 4: Tax Computations and Credits

Question 1

Form 7004

Answer 1

Allows for an extension of 5 months (7 months for C corps)

Question 2

When would a penalty be assessed on estimated tax payments?

Answer 2

If the quarterly payments are not made or the amount owed on the return is $500 or more

Question 3

How much are corporations other than large corporations required to pay?

Answer 3

The lesser of:

• 100% of the tax shown on the return for CY
• 100% of the tax shown on the return for PY

Question 4

How much are large corporations (taxable income = $1M or more) required to pay?

Answer 4

100% of the tax as shown on CY return

Question 5

What is the tax rate for personal service corporations?

Answer 5

Flat tax of 35% regardless of income

Question 6

What is included in the general business credit?

Answer 6

• investment credit
• work opportunity credit
• alcohol fuels credit
• R&D tax credit
• low-income housing credit
• small employer pension plan start-up costs credit
• alternate motor vehicle credit
• other infrequent credits

Question 7

How is the general business credit calculated?

Answer 7

May not exceed “net income tax” (regular tax + AMT - nonrefundable tax credits) less the greater of:
- 25% of regular tax liability above $25K
OR
- “tentative minimum tax” for the year

Question 8

How is the R&D tax credit calculated?

Answer 8

20% of the increase in qualified research expenditures over a defined base amount

Question 9

What is an qualified small business when talking about the R&D tax credit?

Answer 9

Business w/ less than $5M in annual gross receipts and having gross receipts for no more than 5 years

Question 10

How much can qualified small businesses offset the FICA employer portion of payroll taxes with the R&D credit?

Answer 10

Up to $250,000

Question 11

What is an eligible small business when talking about the R&D tax credit?

Answer 11

Business w/less than $50M in avg gross receipts for the 3 preceding years

Question 12

What can eligible small businesses offset with the R&D credit?

Answer 12

AMT

Question 13

How is the foreign tax credit calculated?

Answer 13

Step 1: Determine the qualified foreign income taxes paid/accrued for the tax year
Step 2: Compute the foreign tax credit limitation
Step 3: Determine the lesser of qualified foreign taxes paid or the foreign tax credit limitation

Question 14

How is the foreign tax credit limitation calculated?

Answer 14

Pre-credit US tax paid in year X (foreign taxable income / foreign and domestic taxable income)

Question 15

Carry over rules for Foreign Tax Credit

Answer 15

Back 1 year

Forward 10 years

Question 16

Define accumulated earnings tax

Answer 16

Penalty tax imposed on regular C corps whose accumulated (retained) earnings are in excess of $250,000 if improperly retained instead of being distributed as dividends to shareholders

Question 17

What is the additional rate for accumulated earnings?

Answer 17

Flat 20%

Question 18

Define personal holding companies (PHC)?

Answer 18

Corporations set up by high tax bracket taxpayers to channel their investment income into a corporation and shelter that income through the low normal tax (15-25%) of corporation

Question 19

What is the tax law definition of PHC?

NIRD

Answer 19

Corporations > 50% owned by 5 or fewer individuals and having 60% of adjusted ordinary gross income consisting of:

1. Net rent (if < 50% of ordinary gross income)
2. Interest that is taxable
3. Royalties
4. Dividends from unrelated domestic corps

Question 20

What is the additional tax assessed on PHC net income not distributed?

Answer 20

20%