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REGULATION > R3 - Corporations > Flashcards

R3 - Corporations Flashcards

0
Q

When does a shareholder NOT recognize a gain from incorporation?

A

BOTH conditions are met:

  1. Gets 80% control
  2. Boot is NOT received by the shareholder
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1
Q

Corporation basis - general rule and exception?

A

The basis is the GREATER of:

  1. Adjusted basis + gain recognized by the shareholder
  2. Debt assumed by the corporation

Exception: total AB > total FMV
then the basis is total FMV

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2
Q

What is shareholder’s stock basis?

A

ADD:
Cash contributed
Asset NBV less liabilities assumed by the corp
Any gain recognized

LESS:
cash received
FMV of non-money boot received

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3
Q

What happens if the shareholder contributes services to the corporation?

A

Recognize FMV as ordinary income

If services is the only thing you contributed, you don’t count as part of the 80% control group

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4
Q

What kind of income is recognized in current year even though it is received in advance of accrual GAAP?

A

Interest
Rent
Royalty income received in advance

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5
Q

How is DPAD calculated?

A

9% of the lesser of:

  1. QPAI
  2. Taxable income without DPAD

The end amount is limited to 50% of the wages paid by the corporation for the year

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6
Q

What activity or service counts as domestic production gross receipts?

A

Manufactured, produced, grown
Extracted (natural resources)
Constructed

Services - engineering and architectural

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7
Q

How is executive compensation limited?

A

If publicly held and NOT under qualifying commission or performance based plan (nice loophole)

Then cannot deduct more than 1 million paid to CEO or other four most highly compensated officers

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8
Q

How are bonus accruals for employees and officers accounted for?

A

Officers - temporary M-1

Employees - can deduct if paid within 2.5 months after year end

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9
Q

How are bad debts accounted for?

A

Accrual - direct write-off only

Cash - no bad debt because no AR

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10
Q

How is prepaid interest accounted for by an accrual taxpayer? Cash taxpayer?

A

The same!!!

Prepaid interest expense must be allocated to the period it’s related to, whether or not you are cash basis

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11
Q

How is charitable contribution limited?

A 
10% of taxable income, which is income before:
Dividends received
DPAD
NOL carryback
Capital loss carryback

Ok to deduct if accrued and paid within 2.5 months of year-end

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12
Q

How are business casualty losses accounted forks property is partially destroyed? Fully destroyed?

A

Partially - the lesser of decline in FMV or adjusted basis
Fully - adjusted basis ONLY

In either case must reduce by the insurance proceeds

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13
Q

How are organizational and start up costs accounted for?

A

Can expense 5,000 immediately.
Reduce 1 for 1 if over 50,000

The rest is amortized over 180 months (5 years) from the moth business started operations

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14
Q

What costs are NOT organizational?

A

Issuing or selling stock
Commissions
Underwriter fees
Costs incurred in the transfer of assets to the corporation

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15
Q

How are intangibles amortized?

A

SL over 15 years

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16
Q

When are lobbying expenses deductible?

A

When it’s direct type in connection with LOCAL governmental lobbying

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17
Q

How are capital gains accounted for by corporations?

A

No deduction in current tax year.
Carry back 3 years, carry forward 5

As SHORT TERM ONLY and no special rates for cap gains

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18
Q

How is NOL calculated and accounted for?

A

No charitable contribution is allowed in calculating NOL

carry back 2, carry forward 20

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19
Q

Which inventory valuation methods are not allowed for tax purposes?

A 
Prime cost (no overhead)
Direct cost (variable overhead only)
Rolling average under certain circumstances (fluctuation in price)
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20
Q

When can LIFO be used for tax purposes?

A

If elected in the 1st year and the financial are accounted under LIFO as well

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21
Q

What if your inventory is unusable or unsellable?

A

Must be valued at the expected selling price within 30 days

Less the disposition costs

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22
Q

What is the time frame to qualify for dividends received deduction?

A

Must own for at least 46 days
During 91-day period
Beginning on the date 45 days before ex-dividend date

I.e. owned 45 days before or after

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23
Q

Dividend received deduction percentage?

A

0-20% ownership - take 70% Unrelated
21-79% - take 80%
80-100% - take 100%

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24
Q

What is taxable income limitation for DivRD?

A

Limited to the lesser of:
calculated percentage 70/80/100
Corresponding percentage of taxable income before NOL or capital loss

EXCEPTION: if using tentative DRD creates a loss and corresponding amount doesn’t - use DRD
be a loser

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25
Q

To which entities does DivRD NOT apply?

A

S corporations
Personal service corporations
Personal holding companies

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26
Q

Who is permitted a constant 100% DivRD?

A

Small business investment corporation

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27
Q

What are MACRS percentages in regard to type of property?

A

3-10 year class - MACRS 200

20 year class - MACRS 150

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28
Q

When is mid-quarter convention used?

A

When 40% or more of DEPRECIABLE property (no land!) is placed in service in the last quarter of the year

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29
Q

What are section 179 rules in regard to SUVs?

A

25,000 limit
SUV is 6,000 - 14,000 gross weight
But not a heavy pickup truck or a van

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30
Q

Is the taxpayer limited to MACRS only? Are there other options?

A

May elect to depreciate on SL basis

In this case may choose between regular recovery period or ADS (alternative depreciation system)

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31
Q

How can depletion be accounted for?

A
  1. Cost depletion

2. Percentage depletion (5-22%) - limited to 50% of taxable income unless oil or gas property - then no limit

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32
Q

How are research expenses amortized?

A

Over 60 months

as opposed to all other intangibles amortization of 180 months

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33
Q

What is sec 1231 property and what is its treatment?

A

Depreciable personal and real property held for over a year

LTCG treatment (0-15%) but ordinary loss (no netting)
Best of both worlds
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34
Q

What is sec 1245? How are gains and losses accounted for under it?

A

Upon sale - the lesser of gain recognized OR!!! accumulated depreciation is recaptured as ordinary income, the rest is 1231

No losses under 1245

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35
Q

What is sec 1250? What is the general rule for recapture under this section?

A

Real property only, gains only

Recaptures only part of depreciation taken IN EXCESS of straight line
Generally applies to assets placed in service before 1987 because now real property must be SL

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36
Q

What is the amount of total taxable recapture as ordinary income under sec 1259 for corporations?

A

Ordinary income under 1250 + 20% of SL depreciation

Limited to recognized gain
The remainder is taxed at 25% maximum

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37
Q

Who is required to use accrual basis of accounting?

A

Inventory
Tax shelters
Certain farming corporations
If 5,000,000 of average gross receipts in 3 years and you are:
a corporation
a partnership with a C corp as a partner
a trust with unrelated business income

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38
Q

When is a corporation required to make estimates? Is there a penalty?

A

Always
May be unequal payments if using annualized income method

Underpayment penalty is assessed if the amount owed in over $500

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39
Q

What is a large corporation? How does being a small corp affect you?

A

Large - had taxable income of 1,000,000 or more in any 3 prior years
Must pay 100% of CURRENT year tax - the only option

Small has a choice of paying 100% of prior year tax
But NOT when prior year was a short year or there was no tax

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40
Q

Which entities are NOT allowed to file a consolidated return?

A 
S corporations
Foreign corporations
Real estate investment trusts - most of them
Exempt organizations - most of them
Insurance companies - some of them
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41
Q

What is corporate AMT rate?

A

20% of (AMTI - exemption)

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42
Q

What is the very first starting point for calculating AMT?

A

Taxable income before NOL

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43
Q

What are the corporate AMT adjustments?

A

PIE/LIE

P - percentage of completion VS completed contract
I - installment sales
E - excess depreciation of property in service after 1986 over
SL-40 for real and 150DB for personal

44
Q

What are corporate AMT preferences?

A

Same as individuals

P - private activity bonds
P - percentage depletion over adjusted basis
P - pre-1876 over SL

45
Q

What goes into ACE adjustment?

A

M - muni interest
I - increase in CSV of life insurance
N - non-SL depreciation after 1989 vs ADS
D - DivRD if 70%

46
Q

How is ACE adjustment for AMT calculated?

A

75% of (AMTI before AMT NOL - less ACE)

Can be positive or negative

47
Q

What is corporate AMT exemption?

A

40,000 - 25%(AMTI - 150,000)

Almost the same as MFJ (45,000)

48
Q

What is the only credit allowable for corporate AMT?

A

Foreign tax credit

49
Q

How can AMT be used in future years?

A

As a credit against minimum tax

Carry forward indefinitely

50
Q

What is accumulated earnings tax? How is it calcuted?

A

15% on accumulated retained earnings over 250,000

Lifetime amount

IRS assessed!!! As a result of audit

51
Q

What is the accumulated earnings amount that a personal service corporation won’t get taxed on?

A

150,000 as opposed to 250,000

52
Q

Who is exempt from accumulated earnings tax?

A

Personal holding companies
Tax-exempt corporations
Passive foreign investment corporations

53
Q

How can a corporation avoid accumulated earnings tax?

A

Demonstrate reasonable needs for earnings accumulation

Need to redeem corporate stock included in deceased shareholder’s estate

54
Q

What are the qualification criteria for personal holding company?

A
  1. Corporation, more than 50% owned - directly or indirectly - by 5 people or less during the last 6 months of taxable year
  2. 60% or more of adjusted ordinary gross income comes from:
    • net rent
    • taxable interest
    • royalties other than mineral, oil, gas or copyright
    • dividends from unrelated corporation
55
Q

What are tax rates for personal holding corporation?

A

15-25%

Additional 15% tax on net income not distributed - self-assessed!

56
Q

What is the taxable base for additional tax for PHC?

A

Taxable income
Less: federal income tax
Less: net long-term capital gain, net of tax

57
Q

What is a personal service corporation and what are its tax rates?

A

Accounting, law, consulting, engineering, architecture, health and actuarial science

Flat rate of 35%

58
Q

Name always negative E&P adjustments (7)

A

All non-deductible items:

Federal income tax
Non-deductible penalties, fines, political contributions etc
Meals and entertainment
Officer's life insurance premiums
Expenses for producing tax exempt income
Non deductible charity
Non deductible capital losses
59
Q

Name always positive adjustments to E&P

A 
Refunds of federal income tax paid
Tax exempt income
Refunds of items not subject to regular tax under tax benefit rule
NOLs
Capital loss carryover
Charitable contribution carryover
Life insurance PROCEEDS
Increase in CSV of life insurance
Non taxable cancellation of debt
DivRD
60
Q

Name 4 general dividend categories

A

Current E&P - taxable dividend
Accumulated E&P - taxable dividend
Return of capital (no E&P) - reduction of basis
Capital gain distribution (no E&P and no basis)

61
Q

What are dividend categories for preferred shareholders?

A

None. It’s always a taxable dividend no matter what

62
Q

If you have dividends from both current and accumulated E&P, how are they allocated?

A

Current - pro rata

Accumulated - chronological order

63
Q

Give examples (4) if constructive dividends

A

Excessive salaries to shareholders
Excessive rents and royalties
Loans to shareholder with no intent to repay
Sale of assets below FMV

64
Q

Are stock dividends taxable?

A

Generally not, unless given a choice of cash or property

In which case it’s FMV at distribution date

65
Q

What happens if the corporation distributes appreciated property as a dividend?

A

It recognizes gain as if the property has been sold (FMV - adjusted basis)

The corporation cannot recognize a loss though

66
Q

How is stock redemption accounted for by the shareholder?

A

If proportional - taxable income
If disproportional - capital gain. Basically a sale of stock initiated by the shareholder. Other shareholders didn’t sell

Less than 50% after redemption and new ownership is less than 80% of old ownership

67
Q

Name reorganization types by letter

A

A - merger/consolidation
B - stock for stock
C - stock for assets
D - division into separate operating corporations
E - recapitalization
F - mere change in identity, form or place

68
Q

Are reorganizations taxable?

A

If shareholder recognizes gain from boot - yes

Otherwise generally non taxable

69
Q

What are the requirements for nontaxability of reorganizations?

A

Continuity of business - acquiring corporation must continue the business of the old entity or use a significant portion of its assets

Control requirement - 80% of voting and other classes of stock

70
Q

What happens if a corporation’s stock becomes worthless (from the shareholder’s perspective)? Qualifications?

A

Must be an ORIGINAL shareholder of up to $1 million worth
Purchased for cash or property, NOT services rendered!
Ordinary loss up to 50,000 (100,000 MFJ), everything over is capital
Shareholder can be an individual or a partnership

71
Q

What makes small corporation stock qualified for gain exclusion?

A

C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business

72
Q

Name eligible shareholders of S corporation

A

Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK

73
Q

How to become an S corp?

A

ALL shareholders consent, whether voting or non voting

If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year

74
Q

What are three corporate-level tax that an S corp is subject to?

A

LIFO recapture
Built-in gains
Tax on passive investment income

75
Q

How is LIFO recapture calculated and when is it applicable?

A

Changing from C to S
Excess of inventory under FIFO over LIFO

C corp pays the 1st installment with the final return
S corp pays the other 3

76
Q

How can an S corp avoid built-in gains tax?

A

If it was never a C corp
Or doesn’t sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years

77
Q

How is built in tax calculated?

A

35% on the lesser of:

UNREALIZED built-in gain. FMV - adjusted basis
Taxable income if it were a C Corp

78
Q

When and how is an S corp taxed on passive investment income?

A

35% on the lesser of:

Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts

PII does not include gain on sale of securities

79
Q

What makes small corporation stock qualified for gain exclusion?

A

C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business

80
Q

Name eligible shareholders of S corporation

A

Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK

81
Q

How to become an S corp?

A

ALL shareholders consent, whether voting or non voting

If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year

82
Q

What are three corporate-level tax that an S corp is subject to?

A

LIFO recapture
Built-in gains
Tax on passive investment income

83
Q

How is LIFO recapture calculated and when is it applicable?

A

Changing from C to S
Excess of inventory under FIFO over LIFO

C corp pays the 1st installment with the final return
S corp pays the other 3

84
Q

How can an S corp avoid built-in gains tax?

A

If it was never a C corp
Or doesn’t sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years

85
Q

What makes small corporation stock qualified for gain exclusion?

A

C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business

86
Q

Name eligible shareholders of S corporation

A

Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK

87
Q

How to become an S corp?

A

ALL shareholders consent, whether voting or non voting

If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year

88
Q

What are three corporate-level tax that an S corp is subject to?

A

LIFO recapture
Built-in gains
Tax on passive investment income

89
Q

How is LIFO recapture calculated and when is it applicable?

A

Changing from C to S
Excess of inventory under FIFO over LIFO

C corp pays the 1st installment with the final return
S corp pays the other 3

90
Q

How can an S corp avoid built-in gains tax?

A

If it was never a C corp
Or doesn’t sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years

91
Q

When and how is an S corp taxed on passive investment income?

A

35% on the lesser of:

Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts

PII does not include gain on sale of securities

92
Q

What is the basis limitation for an S corp shareholder?

A

Adjusted basis of stock
Add: direct loans TO corporation
Subtract: distributions

+/- current income or loss

93
Q

Does tax exempt interest increase S corp shareholder basis?

A

Yes!

94
Q

Are fringe benefits deductible?

A

Employees - yes

More than 2% shareholders - no, UNLESS included in W-2

95
Q

What increases and decreases AAA?

A

Increase:
Income and gains - EXCEPT tax-exempt income and life insurance proceeds

Decrease:
Expenses and losses
Non-deductible expenses - EXCEPT life insurance premiums
Distributions - not below $0

96
Q

How are distributions treated if an S corp has former C corp E&P?

A
  1. First to the extent of AAA - non taxable
  2. Second to the extent of E&P - dividend
  3. Third to the extent of stock basis - reduction
  4. Over basis - capital gain
97
Q

How can an S corp status be terminated?

A

Majority vote
Getting a corporate and/or foreign shareholder
Have more than 25% of gross receipt come from passive investment income while the corporation had C corp E&P all along

A re-election only in 5 years

98
Q

What is a 501(c)(1)?

A

US Instrumentality –> does NOT need an application

Federal credit union

99
Q

What is a 591(c)(2)?

A

A corporation organized solely to hold title to property, collect income from it and turn it over to an exempt organization.
Issues capital stock

Files Form 1024

100
Q

What is a 501(c)(3)?

Are there any prohibited transactions?

A

Plain vanilla nonprofit

Cannot:
Influence legislation
Political campaigns

101
Q

What is a section 509?

What isn’t a section 509?

A

Private foundation

NOT a PF:
1. Most charitable donees
2. Publicly supported organizations
More than third from members and public
Less than third from investment and UBI
3. Supporting organizations
4. Public safety testing organizations

102
Q

What if a 509 voluntarily terminates?

A

Subject to a termination tax payback of the lesser of:
Aggregate tax benefits
Net assets

OR distribute all assets to a 50% charity

OR operate as a charity for at least 5 years

103
Q

What it UBI?

A

Activity from trade or business
Regularly conducted
Not substantially related to exempt purposes

104
Q

What are the ownership rules in regard to UBI?

A

The foundation may own up to 20% of business enterprise

If there are third parties - may go up to 35%

105
Q

What is generally excluded from UBI?

A

Interest, dividends, royalties, annuities from noncontrolled organizations
Rents, if the property is OWNED (not debt-financed)
Gains and losses
Income from research
Allowed by state law - bingo!

106
Q

How to qualify for 990-EZ?

A

Total receipts less than 200K

Total assets less than 500K

107
Q

Who is not required to file 990?

A 
CHRIST 5000!                         Or CRIMC
5,000 or less gross receipts
Church
High school - religious
Religious orders
Internal support auxiliaries 
Societies that are missionary related
Tax exempt by Congress
108
Q

When and how is an S corp taxed on passive investment income?

A

35% on the lesser of:

Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts

PII does not include gain on sale of securities

REGULATION (4 decks)

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