r3 Flashcards
What is the max amount a company can deduct for compensation to executives?
$1,000,000
Accrual basis taxpayers are required to use what method of accounting for tax purposes?
Direct write off method
What are the limitations to business interest expense?
Limited to the SUM of:
-business interest income
-30% of adjusted taxable income
-floor plan financing interest expense
What are charitable contributions limited to?
10% of taxable income before the charitable contributions CC deduction, the dividends received deduction (DRD), and any capital loss carryback
If property is fully destroyed what amount of loss is deductible?
The adjusted basis of the property
IF property is partially destroyed what amount of loss is deductible?
Limited to the lessor of:
-the decline in value of the property or
-adjusted basis of the property
What is the tax rule for Start up costs?
Deduct $5,000 and amortize the excess over 180 months
-GAAP expense
Are life insurance premiums paid by the corp for policies on key employees deductible?
No
- if employee is the beneficiary then deductible by the corporation
Are entertainment expenses deductible?
No
Are payroll taxes deductible?
Yes
Are federal income taxes deductible?
No
What is the carryback/forward rules for corportations
Only use capital losses to offset capital gains. Carryback 3 years / forward 5 years
Ownership 0% < 20%
DRD
DRD is 50%
Ownership 20% < 80%
DRD
DRD is 65%
Ownership is 80% or more
DRD
DRD is 100%
The DRD equals the lessor of
50% ( or 65%) dividends received or
50% (or 65%) of taxable income computed without regard to DRD, any NOL carryforward, or capital loss carryback
Schedule M-1
Part of form 1120 C corporation federal income tax return, where book income is reconciled to taxable income
Schedule M-3
A more detailed version of the M-1; it distinguishes between temporary and permanent differences
-required if assets are greater than $10 million
If the allowance method is used for book, what must you do for tax purposes
Add back the allowance taken because it is not allowed. Only the direct write off method.
A corporations is considered large if
Taxable income is greater than $1 million
General Business Credit consists of:
-Investment credit
-Work opportunity
-alternative fuels
-R & D
-low income
-Small employers pension plan
What’s the limitation on business credit?
The credit may not exceed “net income tax” less 25% of net regular tax liability above $25,000
Unused Credit Carryover
Carried back 1 year and forward 20
What can a corporation do if they pay taxes in a foreign country?
They can either take a credit or a deduction for eligible taxes paid or accrued
How to calculate the foreign tax credit
- Determine the qualified foreign income taxes paid or accrued for the tax year
- Compute the foreign tax credit limitation
- Take the lesser of 1 or 2
Compute the foreign tax credit limitation
- Worldwide taxable income * US tax rate
- Foreign income / WTI
- Multiply 1 and 2
Unused foreign tax credit can be
taken back 1 year and forward 10 years
Accumulated earnings tax
20% Penalty tax imposed on C corps whose accumulated retained earnings are in excess of $250,000 IFFFF:
the earnings are considered to be improperly retained instead of being distributed as dividends to shareholders
Personal Holding Tax
20% on net income not distributed to shareholders
What is a personal holding company
-more than 50% owned by 5 or fewer people
-having 60% ordinary gross income of:
Net rent
Interest that is taxable
Royalties
Dividends from unrelated domestic corporation
NOL arising before 2018
carried back 2 years and forward 20 years
NOLs arising in 2018, 2019, 2020
can be carried back 5 years and forward indefinitely
NOLs arising in tax years after 2020
cannot be carried back but can be carried forward indefinitely
-80% max offset
How are capital losses treated?
Offset by capital gains
-excess are carried back 3 years and forward 5
How to qualify as an S corp?
-Qualified domestic corporation
-Eligible shareholders (individuals, estates, certain trusts, qualified retirement plans, 501 (c) charities)
-Shareholder limit (100 max, family members count as one)
-One class of stock (differences in common stock voting rights allowed)
Can C corporations own shares in S Corp?
No
What date must you file by in order to be considered S corp for the current year?
March 15
Can a owner of a S corp be foreign?
No
What does excess passive investment income mean for an S corp?
If more than 25% of the corporations gross receipts are from passive investment income for three consecutive years the S corp status is terminated
What is the way shareholders can terminate S corp status?
they vote more than 50% consent to a voluntary revocation
How are S corporations different from partnerships?
An S corp shareholders is not subject to self employment tax
What are some separately stated items for S corp K-1?
-rental real estate income or loss
-Interest income
-Dividend income
-royalties
-net short term capital gain or loss
-net long term capital gain or loss
-net section 1231 gain or loss
-charitable contributions
-section 179 expense deduction
When are fringe benefits deductible?
-for non shareholder employees and
-those employee shareholders owning 2% or less of S corp are deductible by the S cop; unless S corp includes the benefit on the W-2
Unlike partnerships, S corporation shareholders do not include any…
S corporation debt in their stock basis. However, S corporation shareholder does have separate debt basis in loans from the shareholder to the S corporation
What is the tax basis limitation for S corporations?
A loss can only be flowed through to an S corporation shareholders to the extent of the shareholders tax basis
What happens if there is a loss in excess of the shareholders tax basis?
A loss in excess of the shareholders tax basis is suspended until tax basis is reinstated in future years
A suspended loss due to insufficient tax basis can be carried forward…
indefinitely
If a shareholder has a suspend loss and they dispose of their shares the loss is..
lost
Accumulated adjustments account
account to hold earnings and profit (retained earnings)
How does AAA increase or decrease?
Increases through business income, separately stated income and gain. Decreases by business losses, separately stated losses and deduction, nondeductible expenses and distributions (may bot reduce AAA below zero).
What is the partnership tax return?
Schedule 1065
-informational return that provides info about partnership income and expenses
-Schedule K: separately stated items
-Schedule K-1: Amount and type of each partners share
What are guaranteed payments?
Reasonable compensation paid to a partner for services provided or use of capital without regard to the partners ratio.
How are guaranteed payments treated for the partnership?
Tax deduction to the partnership
How are guaranteed payments treated for the partner?
Included on Schedule K-1 to be included as ordinary income
Are syndication costs deductible?
Not deductible
-costs associated with raising capital
Basis in partnership interest includes
Capital account + Partners share of partnership liabilities
What is an LLC?
A separate legal entity. All member of an LLC have limited liability. Can be treated as Partnership, corporation, sole proprietorship.
For partnerships are distributions considered income?
Distributions are not income, since the money was taxed when the partnership earned such money
Is interest income separately stated?
YES
What kind of interest expense is a separately stated item?
Only investment interest expense. Business interest expense is included in ordinary income
Tax exempt organizations are…
not for profit organizations that qualify for exemption from federal income tax.
-Section 501 (c) is the most common
Examples of 501 (c) organizations
-religious
-charitable
-scientific
-testing for public safety
-literary
-educational
-prevention of cruelty to children or animal
Are contributions to 501 c organizations deductible?
Yes
What are the requirements for a private foundation?
- the foundation will distribute income each year as required under the tax law
-the foundation will not engage in any act of self dealing or retain any excess business holdings as defined in the tax law
How to qualify as a public charity?
One third of the support must come from governmental units and the public
Section 527
Political Organizations that are organized and operated for the purpose of collecting contributions, or making expenditures, for an exempt function
What are the other organizations that you can donate to and deduct the contributions?
US instrumentality or volunteer fire department
What is a nexus?
The minimum level of contact a taxpayer may have with a jurisdiction to be subject to its tax. Caused by having property, payroll or sales within a state
Public Law No. 86-272
federal law prohibits a state and its political subdivisions from imposing a net income tax on a persons net income derived from interstate commerce occurring within the states borders
What are examples that will trigger a nexus?
-owning or leasing tangible personal or real property
-sending employees into the state for training or work
-soliciting sales in a state
-providing installation, maintenance to customers within a state
-accepting or rejecting sales orders within the state
Public Law No. 86-272 does not apply to
-sales and use taxes
-franchise taxes
-gross receipts taxes
What is allocation?
Allocation refers to the process of removing the NONBUSINESS income and assigning it entirely to the state where it should be taxed
What is apportionment?
The portion of income which are not allocated entirely to one state are apportioned to all the states in which the corporation does business
-generally the apportionable items are business income
Apportionment factor calculation
((Property and rent expense located within the state / total property) + (payroll paid to employees within the state / total payroll) + (sales from sources within the state / total sales)) / 3
