R3 - C Corporations Flashcards
What is the only type of entity whose earnings are subject to double taxation?
C corporations
What is the general rule when the corporation issues stock in exchange for property in the formation stage?
No gain or loss recognized
What is the general rule when the corporation purchases treasury stock?
No gain or loss recognized
What is the general rule when the corporation sells treasury stock?
No gain or loss recognized
The general rule is that the basis of the property received from the shareholder by the corporation is the greater of what two things?
1) Adjusted basis (NBV) of the shareholder (plus any gain recognized by shareholder)
2) Debt assumed by corporation (transferor may recognize gain to prevent a negative basis)
The S/H contributing property (not services) in exchange for corporation CS has no gain or loss if what two conditions have been met?
1) 80% control
2) Boot not involved (received)
Is boot taxable?
YES
What two items represent boot and will trigger gain recognition for the shareholder?
1) Cash withdrawn
2) Receipt of debt securities (e.g. bonds)
If a shareholder receives CS for services rendered, should the FMV be recognized as ordinary income?
YES
What is the basis of the common stock to shareholders who contribute property?
Adjusted basis (NBV)
Would you add federal income taxes back to book income?
YES
Do special capital gains rates apply to corporate capital gains?
NO
EXPLANATION: capital gains are taxed at the same rate as ordinary corporate income.
True or false.
Corporations are entitled to the same NOL rules as individuals.
True
What is the carryback and carryforward period for corporate NOLs?
- Back 2
- Forward 20
True or false.
Deferred taxes are only established for permanent differences.
False
EXPLANATION: deferred taxes are only established for TEMPORARY differences.
List three entities for which DRD does not apply.
1) Personal service corporations
2) Personal holding corporations
3) (Personally taxed) S corporations
What is the DRD for 0% to
70%
What is the DRD for 20% to
80%
What is the DRD for 80% or more ownership?
100%
What is the filing due date for a corporation with a 12/31 year end?
March 15th
What qualifies as a large corporation?
TI was $1 million or more in any of its three preceding tax years
Up to 3 taxes may be levied on a C-corporation. What are they?
1) Regular tax
2) Minimum tax
3) Accumulated earnings tax OR personal holding companies tax
Define affiliated group.
Means that a common parent directly owns:
a) 80% or more of the voting power of all o/s stock AND
b) 80% or more of the value of all o/s stock of each corporation
Is there a 100% DRD on a consolidated tax return?
YES
What do you call corporations where an individual owns 80% or more of the stock of two or more corporations?
Brother-sister corporation
May brother-sister corporations file consolidated returns?
NO
What is the difference b/w consolidation under GAAP vs. Tax?
GAAP = over 50% Tax = 80-100%
True or false.
One of the advantages of filing a consolidated return is that income from certain intercompany sales may be deferred.
True
What does ACE stand for?
Adjusted Current Earnings
Why is the ACE adjustment included?
To ensure that corporations do not report a profit for F/S purposes but pay little or no income taxes
What is the additional tax rate for accumulated earnings?
Flat 20%
If a corporation’s tentative minimum tax exceeds the regular tax, what happens to the excess amount?
Payable in addition to regular tax
What effect would a “state tax refund from prior year received in current year” have on E&P?
No effect
How does the IRC define a dividend?
A distribution of property by a corporation out of its earnings and profits (E&P)
Is current E&P (by year-end) a taxable dividend?
Yes
Is accumulated E&P (distribution date) a taxable dividend?
Yes
Is return of capital (no E&P) a taxable dividend?
No
EXPLANATION: tax free and reduces basis of common stock
Is capital gain distribution (no E&P/no basis) a taxable dividend?
No
EXPLANATION: Taxable income as capital gain
Is a stock dividend generally taxable?
NO
When is a stock dividend taxable?
When shareholder has a choice of receiving cash or other property
On January 1, Year 1, Kee Corp., a C corporation, had a $50,000 deficit in earnings and profits. For Year 1, Kee had current earnings and profits of $10,000 and made a $30,000 cash distribution to its shareholders. What amount of the distribution is taxable as dividend income to Kee’s stockholders?
$10,000
Temporary or permanent difference.
Certain proceeds from life insurance on life of an officer where the corporation is the beneficiary.
Permanent difference
What does QPAI stand for?
Qualified production activities income
How do you calculate QPAI (qualified production activities income)?
Domestic production gross receipts (COGS) (Other directly allocable expenses or losses) (Proper share of other deductions) = QPAI
A publicly held corporation may NOT deduct compensation expense in excess of what paid to the CEO or the four other most highly compensated officers?
$1 million
Accrual basis taxpayers must use what method for bad debts for tax purposes?
Specific charge-off method
EXPLANATION: Tax deduction when specific A/R written off
When should one deduct a prepaid business interest expense?
Deduct “later” when incurred
How much should one deduct for business interest expense on investments?
Deduct up to investment income
Any disallowed charitable contribution by a corporation may be carried forward for how long?
5 years
Up to what percent may a business deduct for business losses or casualty losses related to the business?
100% deductible
For property that is only partially destroyed, the loss is limited to the lesser of what?
1) Decline in value of property (Change in FMV)
2) NBV of property immediately before casualty
For property that has been fully destroyed, the amount of the loss is what?
NBV of the property
What is the difference in the GAAP and the tax rule for organizational and start-up expenses?
Tax Rule: $5,000 expense maximum/180 months of amortization of remainder
GAAP Rule: Expense
What is the difference in the GAAP and the tax rule for purchased goodwill?
Tax Rule: amortized on straight-line basis over 15 years
GAAP Rule: not amortized; test for impairment
Business gifts are deductible up to a maximum deduction of what amount per recipient per year?
$25
Business meals and entertainment are what percent deductible to the corporation?
50% tax deductible
What types of taxes are deductible when incurred on property or income relating to the business?
1) State income tax
2) City income tax
3) Federal payroll tax
Are direct-type lobbying expenses in connection with LCOAL governmental lobbying tax deductible?
YES
Are lobbying expense incurred in attempting to influence state or federal legislation tax deductible?
NO
Is the $3,000 deduction for net capital losses available to corporations?
NO
EXPLANATION: corporation can only use capital losses to offset capital gains
What is the capital loss carryover period for corporations?
3 back, 5 forward
EXPLANATION: they are carried over as ST capital losses and are applied only against capital gains.
How are capital gains taxed?
At ordinary tax rates
What is the NOL carryover period for corporations?
2 back, 20 forward
EXPLANATION: same rules as for individuals
Deferred taxes are only established for what type of differences?
Temporary differences
What is the additional tax rate for accumulated earnings?
Flat 20%
The accumulated earnings tax is imposed on regular C corporations whose accumulated (retained) earnings are in excess of what amount if improperly retained instead of being distributed as dividends to (high tax bracket) shareholders?
$250,000
Is the accumulated earnings tax imposed on personal service corporations?
YES
Is the the accumulated earnings tax imposed on personal holding companies?
NO
What is defined as corporations more than 50% owned by 5 or fewer individuals (either directly or indirectly at any time during the last half of the tax year) and having 60% of adjusted ordinary gross income consisting of NIRD?
Personal holding company
In relation to personal holding companies, what does NIRD represent?
NIRD
Net rent (if less than 50% of ord. gross income)
Interest that is taxable
Royalties (not mineral, oil, gas, copyright roy.)
Dividends from an unrelated domestic corp.
Corporations deemed to be personal holding companies are taxed at an additional ____ percent on personal holding company net income not distributed.
20%
A corporation’s E&P is a major factor in determining the ability of the corporation to do what?
Pay dividends to the shareholders
What is the starting point for the calculation of E&P?
Start w/ corporate taxable income
Stock dividends are generally not taxable unless the shareholder has a choice of what?
Receiving cash or other property
What is defined as a distribution by a corporation of its own stock to its shareholders?
Stock dividend
The value of a taxable stock dividend is the FMV on what date?
Distribution date
True or false.
The general rule is the PMT of a dividend does not create a taxable event. A dividend is a reduction of earnings and profits (retained earnings).
True
True or false.
A corporation’s capital loss carryback or carryover is always treated as a ST capital loss.
True
EXPLANATION: Corporations may not deduct any capital loss from ordinary income, but instead only carry it back 3 and forward 5 as “ST” capital loss to deduct from net capital or Section 1231 gains.
True or false.
PHCs are corporations that meet certain “closely-held” ownership criteria and have over 50% of their AGI consisting of net ret (less than 50% of ordinary gross income), taxable interest, most royalties, and dividends from an unrelated domestic corporation.
False
EXPLANATION: While most of the info is correct, it is when over 60% of the AGI of a closely-held corporations consists of “NIRD” that it is defined as a PHC. Not over 50% (as in the selection).
Mock operates a retail business selling illegal drugs. Which of the following may Mock deduct in calculating business income?
I. Cost of merchandise
II. Business expenses other than cost of merchandise
I. Cost of merchandise
EXPLANATION: A gain from an illegal activity is includible in income. To determine the gain, a deduction is permitted for the cost of merchandise. Business expenses for operating illegal business, other than the cost of merchandise, are not permitted as deduction.
True or false.
The general rule is that the accrual method of accounting will be required by tax shelters, large C corporations and manufacturers.
True
True or false.
A qualified personal service corporation is permitted to use the cash method of accounting.
True
Does a PHC deduct federal income taxes in computing undistributed PHC income?
YES
Does a PHC deduct net LT capital gain less related federal income taxes in computing undistributed PHC income?
YES
