R3 - Entity Tax Flashcards
Main revenue different between GAAP & TAX
GAAP: Revenue recognized when earned (ex. unearned income / def revenue)
TAX: income recognized when received (ex. gross income for tax)
Thresholds to use accrual basis of accounting for tax
$29 m avg last 3 years
Executive compensation deduction limitation for a year
$1 m
Business interest expense deduction:
- What qualifies?
- What happens to non qualifying amount?
- Formula?
- $29 m avg for last 3 years
- carried forward ind
- expense limited to business interest income + 30% ATI
ATI = TI with excluding interest inc and exp
corp charitable contribution:
- limit
-carry over years?
- 10% of TI (before charity ded., DRD, capital loss carrybacks)
- 5 years
Casualty Loss Deduction rule for corporations
PARTIALLY DESTROYED
Lessor of:
- Adjust basis
- Loss in FMV
minus insurance reim.
FULLY DESTROYED
- Adjusted basis
How different is the “org exp & Start up cost” deduction from individual example
NO CHANGE
How long are intangible items amortized?
15 years
Corporate life insurance policy deduction rule
If the corporation is a beneficiary (insurance policy on key employees) of the life insurance premium, then a deduction is note allowed. PERM DIF
- gift deduction rule for corp
- Meal?
- entertainment?
- $25 per recipients
- 50%, your portion of the meal
- not deductible
Capital loss rule for corp
Can only offset capital gains, carried back 3 years or carried forward 5 years
DRD Tiers & terms use for each
0%-20%: 50% (unrelated corp)
20%-80%: 65%
80% or more: 100%
-DRD limitation
-Exception
Lessor of:
- Tier % of the Dividends rec.
- Tier % of TI (without DRD, NOL carryforward, or cap loss carryback)
Limitation does not apply if deduction results in a NOL. In this case, take greater of two.
NOL rule for corp
2017 and earlier: CB 2 yr, CF 20
2018 - 2022: CB 5 yr, CF indef.
2021 and up: CB 0 yr, CF indef.
80% of future
What is on the M-1?
Who is the M-3 for?
- Reconciliation of Book income to Taxable income (but does not distinguish temps or perms)
- Large corp with assets of $10 m or more (this does distinguish)
When are the estimated tax payment dates?
What amount is used to assess underpayment of taxes?
- 15ths of the fourth, sixth, ninth, and twelfth of the companies tax year
- $500 or more (or if not paid on time)
What qualifies a large corporation?
What is the minimum estimated payments required?
What about a non large corporations?
$1m for last three years in ti or more
non LARGE corps: lessor of 100% of this year or last year tax
Corp: 100% of the current year Tax
What makes up the general business credit
Important: what is the limit?
What happens to unused portion?
- Investment credit
- work opportunity tax credit
- alternative fuels credit
- R&D tax credit
- low income house credit
- small employer pension plan start up costs credit
Limit:
Credit may not exceed “NET INCOME TAX” (regular tax - refundable tax credit) less 25% of net regular tax liability obove $25,000
CB 1 YR, CF 20 YR
What is the purpose of the foreign tax credit
- To get back some money when paying twice on foreign income (foreign and us tax)
How to calculate the foreign tax credit?
What happens to the unused portion?
Lessor of:
- Foreign taxes paid
- Foreign tax credit limitation
limitation formula on another card*
unused: CB 1 YR, CF 10 YR
IMPORTANT: unused portion is the difference between the two items above under “lesser of”
How to calculate the foreign tax credit limitation
WTI = worldwide taxable income
FI = Foreign Income
US. T = US tax rate
A. WTI X US. T = US Tax Liab
B. FI / WTF = Ratio fo FI to WTI
A X B = Foreign tax credit limitation
used to calc foreign tax credit*
What is the reason for the Accumulated Earnings Tax
Who qualifies?
How much is tax?
how to avoid?
- Prevent C corps from accumulating earnings withing issueing dividneds. basically the irs wants the double taxation to occur which wont if companies hold in retained earnings
- Applies to C corps with Retains earnings greater than $250,000
- Additional 20% on “accumulated taxable income” (long formula to get this)
- Present to the IRS a valid reason to not pay: buying a company, buy stock, etc
What is the purpose of a Personal Holding Company?
Who qualifies for the tax on it?
How much is the tax?
- To shelter personal investments in a c corp to reduce tax liability (21% corp tax rate instead of high ordinary individual tax rates
- Corp with more than 50% ownership owned by 5 or less people. And 60% of ordinary gross income consisting of (net rent, interest, royalties, dividends)
- 20% on PHC NI NOT DISTRIBUTED TO SH
What are the two additional taxes on corporations?
Which are required or not?
The Acculuated earnings tax and the personal holding company tax
Either nethier or One or the other but not both
C corp NOL RULES: Prior to 2018
- CB 2 years
- CF 20 Years
- Can offset 100% of future taxable income
C corp NOL RULES: Years 2018, 2019, and 2020
- CB 5 years
- CF indefinitely
- Can offset 100% of years 2018-2020 BUT can only offset 80% of TI for 2021 and future
C corp NOL RULES: After year 2021
- CB 0 years, no more
- CF Indefinitely
- Can offset 80% of 2021 and future
Can you use a capital carry forward to offset a capital gain in a year that you have an NOL?
Yes, since capital activity does not affect ordinary activity.
S Corp eligability:
- Demographic
- Shareholder limit
- Stock type
- Domestic Corp: us resident owners like individual, estates trust (not corps or partnerships)
- No more than 100
- Only one class can be outstanding, no pref
S corp Election calendar rule for election and termination
Based off of the passthrough tax date of March 15. If filed before that date, the s election takes into affect at the beginning of that year. If filed after that date, election takes affect the beginning of the following year.
- for termination: the same rule applies unless the s corp select a set date for terminating.
Can a new shareholder revoke the s corp status
What could?
- No, the election is already in affect
- but majority vote, a break in s corp eligibility or excess passive investment income may all terminate election
What are fringe benefits?
When are they and when are they not deductible by an S corporation
Exception to NOT deductible
- Supplemental benefit that employees may receive in addition to salary, incentive
- Deductible: fringe benefits for nonshareholder employees or shareholder employees owning less than 2% of s corp NonDeductible: shareholders owning over 2% of S corp
- Unless the corp includes the benefits in the employee/shareholders w-2
Main differences between s corp and partnership? 2
- s corp sh dont pay self employment tax
- partners run partnership but shareholders do not run corp
S CORP BASIS FORMULA
B: Initial Stock basis
A: + Additional Contributions
+ Income Items (ordinary, separately stated items, and tax exempt income)
S: - Distributions to SH
- Non Ded. Expenses
- Loss/Ded Items (same as top: Ord., sep,)
E: = ending
How does debt basis work for s corps?
unlike partnership, the s corp SH debt basis in the company is seperate from the normal basis. TAX BASIS is the technical term when talking about these two together (STOCK BASIS & DEBT BASIS)
THEY CAN NEVER GO BELLOW ZERO
Can S corp shareholders deduct a copmany loss on their return? Why or why not? are there any exceptions?
Yes, but only to the extent of their basis TAX BASIS (both stock and debt basis)
Loss are carrying over until basis is sufficient to be reinstated (debt basis first then stock basis)
What is a suspended loss?
When does this occur for an s corp?
Can you carry those losses forward?
What happens to the suspended loss if you never use them, you have no basis, and you sell your share in the s corp?
A loss not deductible
When there is not basis in the corp
Yes, forever
You lose the suspended losses
What is a AAA?
How can it increase or decrease?
important rule on distributions?
- Accumulated adjustment account - its an account for S corps that maintains excess cash
- Ordinary business inc/loss, seperetatly stated inc/losses, and a distribution (this decreases it)
- Cannot make the AAA become a negative number, only business activty can cause a negative AAA
Who needs to agree for an s corp election?
ALL SHAREHOLDERS
HOw many years must an s corp wait to renew status after gettign it elminated?
5 years
Are Guaranteed payments part of QBI
NO
What is the main difference between S cop and partnership basis?
Whats a major similarity?
Partnership basis is impacted by Liability (increase with more debt)
Basis can never go negative
What is a suspended loss in regards to partnership basis?
What can be done with the loss?
- When the partner has negative losses, the cannot deduct the losses and they are suspended for the current taxable year
- These losses can then be reinstated in the future (ex, suspended loss can be used as a deduction if the next year a positive basis exists)
differnce between GP and LP in regards to debt
GP has unlimited personal liability, LP or llc members only risk commitment
What do you call llc owners?
How are LLC’s taxed
Liability Ramifications
- members
- Partnership, corporation, or sole proprietorship
- Have limited liability and if it is formed like a partnership it does not require a general partner like a full on partnership
What does an incresae in PARTNERSHIP nonrecourse liability do to each partners basis?
What if it were a recourse liability?
- Increases each partner’s basis in proportion to their ownership percentage.
- Only increases the basis of their partners partnership interest if the partner has personal liability (economic risk) like a GP or if they had personally guaranteed the debt
Advantage of an LLC taxed as a partnership rather than an s corp
Tax free distribution of property without the need to recognize a gain on the property (regardless of appreciation)
Examples of Section 501(c)(3)
Organizations for the following purposes:
- religious
- charity
-science
-public safety
-literary
-education
-amateur sports (NCAA)
-children/animal cruelty prevention
two main requirements for private foundations
- distribute money annually and to not engage in excess business holdings
What three items trigger nexus?
Property, Payroll, and Sales within a state
What three things must occur for the federal limitation on state nexus to occur
- Business activity the state is solely for solicitation of orders for tangible personal property
- orders are out of state for acceptance or rejection
- Delivery occurring post acceptance
Who does not qualify for the federal limitation on state nexus? 3
- Residence of the state
- solicitation of sale for non tangible goods
- Corps incorporated under that state
Differentiate Allocation and Apportionment
Allocation: Assigning non business income entirely to its appropriate state (interest, dividends, cap gains, or rental income) usually the home state
Apportionment: Business income apportioned to business states of income
Apportionment Factor Formula
(Property and rent expense located within the state/total property) + (Payroll paid to employees within the state/total payroll) + (Sales from sources within the state/total sales)
Divide the sum of that by 3
