R3 C Corporations

Question 0

What is the half year conversion?

Answer 0

Six months is taken in the year of acquisitions and year of disposal

Even in straight line is used instead of MACRS and the same methods must be used to all personal property acquired that year in a given property class

Question 1

For assets acquired after 1986 what is the recovery method for 3-, 5- 7- and 10-year property?

Answer 1

MACRS 200% declining balance and salvage value is not considered

Taxpayer may choose s/l depreciation in lieu if 200% declining balance

20-year property used 150% deluding balance (15 year too)

Question 2

What is the mid quarter convention?

Answer 2

Mid quarter convention replaces the half year convention if 40% or more of property was placed during the last 3 months of the year

Mid quarter convention treats all property placed during any quarter as if it was placed in the middle of the quarter

Question 3

What is the mid month conversion?

Answer 3

Mid month convention is used for calculating depreciation of real property (residential rental 27.5 years and commercial 30 years)

The real estate property is treated as if it was placed in the middle of the month

Question 4

What is the expense deduction (section 179) in lieu of depreciation?

Answer 4

$500,000 of acquisition cost of personal property not land or real estate used in the trade of business may be deducted in any one year. New bad used property qualifies

Reduced $1 for each $1 of property placed in service in excess of $2,000,000

179 deduction is no allowed when a net loss exist or if the deduction will create a net loss you can still decrease the basis of the asset but can carry the deduction unlimited

Question 5

What are section 1231 assets?

Answer 5

Depreciable or real property used in the the trade or business and held over 12 months

Net all section 1231 gains and losses

Net gains = capital gains
Net losses = ordinary losses

Question 6

What is the tax treatment of section. 1245 assets?

Answer 6

Depreciable personal property used in the trade or business held over 12 months (machinery and equipment)

Recapture as ordinary income the lesser of all accumulated depreciation taken or gain recognized (sp-nvb)

The remaining is section 1231 gain

Question 7

Identify the tax treatment given section 1250 assets

Answer 7

Real property used in a trade of business and held over 12 months (buildings)

If placed after 1986 ordinary income is 20% of accumulated depreciation and the rest is section 1231 gain

If placed before 1987 ordinary income is the recapture of the excess ACRS over S/L depreciation

Question 8

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

Answer 8

Transferors/shareholder own at least 80% of the voting and non voting stock (not including shareholders that provided services)

Boot (cash or other property) or cancellation of debt was not involved

Question 9

What is the basis of common stock received by shareholder?

Answer 9

Cash = amount given

Property = NBV plus any gain recognized less debt assumed by corporation

Services = FMV and generates ordinary income to shareholder

Question 10

For corporations are bad debts deductible?

Answer 10

Bad debts are deductible up to the extent that bad debts were previously in included in income. The charge off method must be used (not allowance method)

Question 11

How are charitable deductions treated by corporation?

Answer 11

The max deduction is 10% of ATI before the following deductions:

• charitable contributions
• dividend received deduction
• NOL carry back
• capital loss carry back
• US production activities reduction

Question 12

What is the bonus depreciation and which property qualifies?

Answer 12

Only for new property not used, it is taken after 179 deduction and the deduction is:

• 50% for equipment placed between 2012 to 2014
• 100% for equipment placed between 2010 and 2011
• 60% for equipment placed before 2010

Question 13

When are life insurance premiums deductible?

Answer 13

Policies for key employees are not deductible if the corporation is the beneficiary

Policies for employees where they name the beneficiaries as their relatives are deductible as employee benefits

If life insurance premium cover more than $50,000 in proceeds it must be included as compensation anything above $50,000

Question 14

Identify the corporate tax treatment for capital gains and losses

Answer 14

Net Capital gains = ordinary income
Net Capital losses can be carried back 3 forward 5 as short term capital losses

Can only net capital losses to capital gains not ordinary income

Except 1231 gains and losses

Question 15

State the general NOL carry back and carry forward rules

Answer 15

Carry back 2 years

Carry forward 20 years

Question 16

Name some non deductible trade or business expenses

Answer 16

• Bad debts allowance methods (only charge off allowed)
• Illegal activities (bribes, penalties)
• Business gifts over $25 per person per year
• Business meals and entertainment are limited to 50%
• Political contributions
• Club dues
• Executive compensation over $1 million per year per each of top 5 executives in public companies unless compensation is performance base

Question 17

Identify the three levels of dividend received deduction

Answer 17

Own less than 20% - 70% DRD
Own 20%-80% - 80% DRD
Own more than 80% - 100% DRD

Deduction is limited to lesser of DRD or same percentage of taxable income before DRD

If DRD will create a NOL take ALL DRD ignore taxable income limitation

Question 18

What are the requirements for filing a consolidated return?

Answer 18

Own 80% or more of subsidiary in voting power of all outstanding stock and value of all outstanding stock

All corporations in a group:

• Must have been members of an affiliated group at time during the year
• Each member must file a consent (act of filing a consolidated return is considered consent)

Question 19

Identify the advantages if filing a consolidated return

Answer 19

• Capital losses of one corporation can offset capital gains of another
• Operating losses of one corporation can offset profits of another
• Elimination of tax in intercompany transactions
• Use of excess foreign tax by the corporation group
• Designation of parent company as agent for the group

Question 20

Describe the corporate AMT

Answer 20

AMT rate is 20% on all AMTI

Exemption is. $40,000 less 25% in
AMTI over $150,000 (eliminated by $319,000)

It is the difference between AMTI and regular tax

Question 21

Name the corporate adjustments to AMT

Answer 21

L- long term contracts diff between completed and % of completion +
I - installment sales by dealers +
E- excess depreciation post 1986

Question 22

Name some corporate AMT preferences

Answer 22

P - percentage depletion +
P - private activity bonds +
P - pre 1987 accelerated depreciation +

Question 23

What is the adjusted current earnings adjustment? ACE

Answer 23

75% of the difference between ACE and AMTI before this adjustment and alternative tax NOL deduction

M - municipal and state bond interest +
I - increase in life insurance CSV +
N - non S/L depreciation after 1989 vs ADS +
D - dividend received deduction on unrelated corporation 70% +

Question 24

What is the accumulated earnings tax?

Answer 24

Is a tax on accumulated earnings beyond reasonable needs of the business

Corporations $250,000
Personal service $150,000

Tax rate is flat 15% of the unreasonable accumulated earnings

Use taxable income before:

• DRD
• charitable deductions
• NOL
• Capital loss carryover

Allowable excuses are:

• All charitable contributions
• All taxes paid
• All capital losses
• Dividends paid

Question 25

Define a personal holding company

Answer 25

A PHC must meet both if the following:
*At any time during the last 6 months 50% or more of the corporation is owned by 5 or less individuals
*At least 60% if the adjusted ordinary gross income consist of:
N - net rents
I - interest income except tax exempt
R - royalties
D - dividend from unrelated domestic corporation

Penalty tax is 15% of the undistributed PHC income

The PHC is given 90 days to pay out the deficiency dividend

Question 26

What is a personal service corporation? What is the tax rate?

Answer 26

A corporation primarily involved in the performance of: tax rate 35%
Accounting
Law
Consulting
Engineering
Architect
Health
Actuarial science

Question 27

What are the tax implications of a tax-free reorganization?

Answer 27

Non taxable except to the extent of boot received