R3- C Corporations, Deprecation and MACRS

Question 1

What are the tax consequences for a Corporation upon formation?

Answer 1

No Gain or loss recognized

Question 2

What is the basis of property that a corporation receives upon formation?

Answer 2

Basis is greater of -

1. Adjusted basis or property i.e. NBV
2. Debt assumed by Corporation

Question 3

What are tax consequences for a Shareholder upon formation of a Corporation?

Answer 3

No Gain or Loss recognized if 2 conditions met-
1.80% Control
2. Boot not involved
Cash withdrawn
Receipt of debt securities
Excess of liabilities taken by Corp over NBV =boot

Question 4

What is the basis of stock for shareholder?

Answer 4

a. Cash
b. Property-NBV
Adjusted basis is reduced by any debt taken over by Corp.
Gain recognized by the shareholder i.e when debt exceeds NBV is added to bring the stock basis to 0
c. Services@ FMV

No Boot if liabilities do not exceed basis
but liabilities reduce basis of stock

Question 5

What are the temporary differences in calculating

taxable income of a corporation?

Answer 5

Cash received in advance

1. Interest in Advance
2. Rental Income in advance
3. Royalty Income in advance

Question 6

What are the permanent differences in calculating

taxable income of a corporation?

Answer 6

Some GAAP Income is not includable as taxable income

1. Interest income from municipal or state obligations/bonds
2. Life insurance proceeds of key person policy- Corporation is beneficiary
3. Federal Income Taxes

Question 7

What kind of Trade and Business deductions are allowed?

Answer 7

Ordinary and necessary Expenses

Question 8

Trade and Business Deductions- Domestic Production Deduction

Answer 8

9% Deduction of the lesser of -
Domestic Production gross Receipts

=Qualified Production Activities Income

Question 9

Trade and Business Deductions- Executive Compensation

Answer 9

• 1,000,000 to CEO or 4 other most highly compensation officers
• Other Entertainment Expenses may be deducted only to the extent included in the income

Question 10

Trade and Business Deductions- Bonus Accruals

Answer 10

• paid by accrual basis taxpayer
• deductible if paid within 2 1/2 months after year end
  i. e March 15 if dec 31 year end

Question 11

Trade and Business Deductions- Bad debts

Answer 11

Specific Chargeoff Method- Deduct when specific AR is written off
Accural Basis
Cash Basis not allowed

Question 12

Trade and Business Deductions- Business Interest Expense

Answer 12

Prepaid Interest- must allocate to correct period- incurred and paid

Question 13

Trade and Business Deductions- Charitable Contribution

Answer 13

10% of Adjusted Taxable Income Limitation

• must be paid within 2 1/2 months
• carryforward 5 years

Question 14

Trade and Business Deductions- Business Losses or Casualty Losses related to Business

Answer 14

1. Partially Destroyed- Loss limited to lesser of-
   a. decline in value
   b. adjusted basis of property after casualty
2. Fully Destroyed- NBV

No $100 Deduction
No 10% AGI limit

Question 15

Trade and Business Deductions- - Organizational and Startup costs

Answer 15

• $5000
• Excess over $5000 amortized over 180 months
• Carefully look for month of startup

-Costs Allowed- Legal and Accounting Services
-Costs Not allowed- Selling expenses i.e. underwriters fees, transfer of assets to corp,
commissions for selling stock

Question 16

Trade and Business Deductions- Amortizations, Depreciation and Depletion

Answer 16

Non-tangible Assets- Amortized at 15 yr SL method

Question 17

Trade and Business Deductions- Life insurance premiums

Answer 17

1. Corporation is beneficiary- Non-Deductible

2. Insured employee named as beneficiary- Tax Deductible

Question 18

Trade and Business Deductions- Business Gifts

Answer 18

$25 per person per year

Question 19

Trade and Business Deductions- Business Meals and Entertainment

Answer 19

50% TAx Deductible

Question 20

Trade and Business Deductions- Penalties and Illegal Activities

Answer 20

Non-Deductible

Question 21

Trade and Business Deductions- Taxes

Answer 21

Deductible Taxes-
1State
2Local
3Federal Payroll

Not Federal Taxes

Question 22

Trade and Business Deductions- Lobbying and Political expenditures

Answer 22

Non-Deductible

Question 23

Trade and Business Deductions- Capital Gains and Losses

Answer 23

1. Capital Losses Deductions not allowed
2. Capital Loss Carryover- 3 back 5 forward
3. Capital Gain Tax- taxed at ordinary income rate

Question 24

Trade and Business Deductions- Net Operating Losses

Answer 24

2 Back 20 forward
Note: For calculating NOL
1. NO Charitable Contribution Deduction allowed
2. DRD deduction is allowed

Question 25

Trade and Business Deductions- Inventory Valuation Methods

Answer 25

A Change in inventory method is considered change in accounting method and has to be approved by IRS

1. Basic Valuation Methods-
   a. Cost Method
   b. Lower of Cost or Market Method
   c. Rolling Average method
   d. Retail Method

Common Inventory Identification Methods-

a. FIFO
b. LIFO
c. Specific identification Method

Uniform Capitalization Rules Impact
RM
DL
FOH

Question 26

Trade and Business Deductions- General Business Credit

Answer 26

Credit may not exceed net income tax less the greater of-
a. 25% of regular tax liability abover 25000
or
b. Tentative Minimum tax for the year

Unused Credit
1 back 20 forward

Question 27

What is Dividend Received Deduction?

Answer 27

• it is to prevent triple taxation
• DRD is allowed for dividend received from a corp to another corporation, based on percentage owned
• Corp share holder must own the investee stock for at least 46 days during the 91 day period beginning on the date 45 days before ex dividend date of the stock

% Owned DRD Allowed
0-<80% 80%
80% or more 100%

Question 28

What are the requirement for DRD Deduction?

Answer 28

Requirements

1. 1st Corporation is taxed
2. Owned 45 days before or after

Dividend Income
-100% (owned 80-100%) Consolidate
-80%(20-under 80%) Large Investment
-70%(0-under 20%) Unrelated Corp.
-Exception
if taking the full % of dividend Income, it creates or adds to corp. loss

Question 29

Taxable Income limitation for DRD

Answer 29

DRD is lesser of-

a. % Dividend Recevied
b. % of taxable income computed without regard to DRD, any NOL deduction or capital loss carryover

Question 30

What is the loss rule for DRD Exception?

Answer 30

If taking lesser of (%DRD or % Total Income) deduction adds to NOL, take the higher of DRD Or TAxable Income

Question 31

What are MACRS Rules for Property other than Real estate?

Answer 31

-Machinery and Equipment
-MACRS Rules 87 and beyond
-Salvage Value ignored
Half Year Convention
Mid-Qtr Convention- more than 40% property placed in the last qtr of the yr, use mid qtr

Question 32

MACRS- Real Estate Rules?

Answer 32

• Buildings
• Salvage Value ignored/ subtract land cost
• Residential Property- 27.5 Yr Straight Line
• Non-Residential Property- 39 Yr Straight Line
• Mid Month Convention
• Half month is the month property is placed in service and disposed off.
• Carefully look for month asset used

Question 33

Expense Deduction in Lieu of Depreciation Rules

Section 179

Answer 33

Not Building
Deduct as expense in lieu of depreciation, a fixed amount of depreciation
machinery, equipment, and computer software