R3 C and S Corporation Taxation Pt 1

Question 1

When does a shareholder contributing property in exchange for corporate common stock have no gain or loss recognized?

Answer 1

The following 2 conditions must be met:

1. Transferors / shareholders own at least 80% of the voting and nonvoting stock immediate after the transaction and
2. Boot (cash or receipt of debt securities) or cancellation of debt is not involved.

Question 2

Generally, what is the basis of common stock received by the shareholder?

Answer 2

Basis of common stock received:

1. Cash - Amount contributed
2. Property contributed - Adjusted basis (NBV)
3. Services - fair value

Plus any gain recognized by the shareholder.

Question 3

For corporation are bad debt deductible?

Answer 3

For TP in general (including corporation) bad debts are deductible to the extent the bad debts were previously included in income. The charge-off method (not allowance method) must be used for tax purposes.

For cash-basis taxpayers, a bad debt is not deductible bc the amount leading to the debt would not have been included in income unless if was related to an uncollected check connected with an amount included in income.

Question 4

How are charitable contributions treated by corporation?

Answer 4

The maximum deduction is up to 10% of taxable income before the deduction of the following deductions: The charitable contribution, the dividends received deduction, any NOL carryback, any capital loss carryback, and the US domestic production activities deduction.

Question 5

When are life insurance premium deductible?

Answer 5

Policies on key employees are not deductible when the corporation is directly or indirectly the beneficiary.

If insured employees name the beneficiaries, premiums are deductible as an employee benefit.

Note: if life insurance coverage exceeds $50K payment of premiums by employers may represent income to the employees.

Question 6

identify the corporate tax treatment of capital gains/losses

Answer 6

1. Capital gains are taxed the same as ordinary corporate income
2. Corporations may not deduct any capital loss from ordinary income
3. Capital losses deductible to the extent of capital gain
4. Net capital losses may be carried back 3 yrs and forward 5 yrs as a ST capital loss.

Question 7

State the general NOL carryforward / carryback rules.

Answer 7

NOL can be carried back 2 yrs and / or forward 20 years.

Question 8

Name some nondeductible trade or business expenses.

Answer 8

1. Bad debt, allowance method (only specific write-off method is deductible)
2. Illegal activities (bribes, penalties)
3. Business gift exceeding $25 per person per year
4. Business meals and entertainment are limited to 50% of total expenses
5. Political contributions
6. Club dues
7. Executives compensation in excess of $1 million per year for the CEO or other amount the 4 highest compensated officer (other than the CEO), unless compensation is performance based.
8. Federal income taxes

Question 9

ID the 3 levels of the DRD?

Answer 9

1. 70% – less than 20% ownership; 70% of dividend received are deductible from taxable income up to a limit of 70% of taxable income
2. 80% – 20% < 80% ownership, can claim 80% dividends received are deducted from taxable income up to a limit of 80% of taxable income
3. 100% – affiliated companies (80% or more common ownership)