R3 Entity Taxation

Question 1

DRD - Dividend Received Deduction

Ownership Less Than 20%

Answer 1

It can deduct 50% of the dividends received

Question 2

DRD - Dividend Received Deduction

Ownership Between 20% and 80%

Answer 2

It can deduct 65% of the dividend received

Question 3

DRD - Dividend Received Deduction

Ownership More than 80%

Answer 3

If can deduct 100% of the dividend received

Question 4

Entities that must include in gross income 100% of dividends received from unrelated taxable domestic corporations

Answer 4

Both a personal service corporation and a personal holding company
must include 100% of the dividends received from unrelated taxable domestic corporations in gross income in computing regular taxable income

Question 5

Under the LIFO method

Answer 5

Inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.

Question 6

Accrual-Basis Corporations

Answer 6

Required to determine bad debt expense based on the Allowance Method
BUT
For tax purposes Bad Debt deduction is based on the Direct Write - Off Method

Question 7

A Charitable deduction for a Corporations

Answer 7

Is limited to the amount paid during the year or by the 15th day of the 4 month after the taxpayer year ends

Allowed deduction of 10% of their taxable income

Question 8

Corporations are allowed to deduct reasonable compensation paid to shareholder-employees

Answer 8

If IRS determines that part of a shareholder’s salary is unreasonable, it may reclassify part of the salary as a dividend.

This decreases the corporations deductible salary expense and increases the corporations nondeductible dividends.

The reclassified portion of the shareholder’s salary is taxed to the shareholder as a dividend, which is taxed at preferential tax rates, rather than as salary, which is taxed at ordinary tax rates

Question 9

PHC - PERSONAL HOLDING COMPANY

Answer 9

1. More than 50% of stock must be owned by 5 or fewer ind
2. 60% of ordinary gross income must come from Investment income like interest and dividends

Question 10

PHC - PERSONAL HOLDING COMPANY

Answer 10

Deducts Federal Income tax

Deducts net long-term capital gains - federal income tax

Deducts Dividends paid - Includes Consent Dividends

Question 11

Foreign Income Taxes

Answer 11

Option of the Corporations to take

A deduction or a credit

Question 12

Accumulated Earnings Tax

Answer 12

Is a penalty tax for C Corporations for not taking enough dividends distribution

Earnings excess of $250k and improperly retained

Tax Rate 20%

Personal Service Corporations are entitled to only $150k of (lifetime) accumulated earnings

Question 13

Accumulated Earnings Tax

is NOT imposed on

Answer 13

Personal Holding Companies (PHC)
Tax-Exempt Corporations
Passive foreign investment corporations

Question 14

C Corporations

Estimated Tax Payment

Answer 14

100% of Tax Liability of the prior’s year’s return
100% of CY tax liability
100% Estimated CY tax liability according to annualized income method

Question 15

PHC is a Personal Holding Company if

Answer 15

Gross income consists of
Dividends
Taxable Interest
Royalties, but not mineral, oil, gas or copyright royalties
Net rent, if less than 50% of ordinary gross income

Question 16

NOL Rule before 2018
(2017 and earlier)

Answer 16

Carried-back 2 years &
Carried forward 20 years

Carry-Forwards can offset 100% of future taxable income

Question 17

NOL Rule for 2018, 2019, 2020

Answer 17

Carried-back 5 years
Carried forward forever

Offset TI:
100% of TI for 2018, 2019 & 2020
80% of TI for 2021 & Future years after deducting pre - 2018 NOL Carryforwards

Question 18

NOL Rule for 2021

Answer 18

NOLs cannot be carried back
Never get a refund
Carry forward forever
Only offset 80% of TI for 2021 and future once 2018 carry forwards first

Question 19

Separately Stated Items

Answer 19

Real estate income or loss
Interest Income
Dividend Income
Royalties
Net Short-term Capital Gain or loss
Net Long-term Capital Gain or loss
net Section 1231 gain or loss
Charitable Contributions
Sec 179 expense deduction

Question 20

Basis for Partnership

Answer 20

Beginning Basis - Contributions
Addition % of All Income (Ordinary business Income, Separately stated income and gains, Tax-exempt income

• ( Subtract ) All losses and deductions ( Ordinary business loss, Separately stated losses and deductions, Nondeductible expenses
• (Subtract) Distributions

Ending Capital Account
+ % of Partnership Liabilities

Ending Tax Basis in
Partnership Interest

Question 21

DRD modified taxable income is calculated as

Answer 21

Taxable income before the dividends-received deduction
+Any NOL deduction,
AND
Capital loss carryback deduction.

Question 22

A distributive share of partnership income

Answer 22

is partnership income taxable

Question 23

Shareholder’s Stock in an S Corporation

Answer 23

is increased by any item of income and decreased by any item of loss or deduction that passes through to the shareholder

Question 24

FRINGE BENEFITS

such as Health Insurance

Answer 24

Is included in Shareholders of S Corp IF they own more than 2% of the S Corporations Stock

Question 25

Owner’s Basis in a S Corp

Answer 25

Is increased by owner’s share of profits
AND
Decreased by the corporation

S Corp shareholder only has debt basis in direct loans made to the Corporation by the owner

Question 26

for DRD Dividend Reduction Deduction

Answer 26

When a loss exists, the income limitations does not apply and the full DRD is allowed

So calculate it according to % of ownership and take the full DRD

Question 27

C Corporation

Answer 27

Taxable income includes operation income
Can be reduced by Charitable Contributions but only 10% of income
Carry forward whats left 5 years

Any capital loss can be carried back 3 years or forward 5 years to hit capital gains ONLY

Question 28

NO TAX PENALTY WILL BE IMPOSED IF

(Corporations)

Answer 28

Total underpayment of tax for the year is less than $500

(Corporations)

Question 29

Partnership Income

Answer 29

A partner must include their share of partnership income (even if not received) on tax return

Withdrawals/Distributions are not a taxable event, yet will decrease the partners basis

Question 30

CANNOT USE 100% OF PRECEDING TAX YEAR METHOD

Answer 30

If Corp did not have to pay income tax

Question 31

FOR S-CORP

Answer 31

Both taxable and tax-exempt and separately and non-separately stated items (stated on the Schedule K-1) of income or loss affect a shareholder’s basis.

Question 32

Shareholder’s basis of stock in an S corporation is

Answer 32

Increased by:

additional contributions
income or gain items (taxable and tax-exempt)

Decreased by:

distributions to shareholders
nondeductible expenses
loss or deduction items

Question 33

S-Corp owner taxable income

Answer 33

Is the % of interest of the individual X Operating Income

Question 34

C - Corporation

Paying estimated taxes so that no penalty for underpayment

Answer 34

1. 100% of the tax liability of the prior year’s return
2. 100% of CY tax liability
3. 100% of estimated CY tax liability according to the annualized income method

Question 35

Accumulated Earnings Tax

to determine Accumulated Taxable Income

Answer 35

Taxable Income - Federal Income Tax - Min Accumulated Earnings Credit ($250k for manufacturing companies) = Accumulated Taxable Income

Question 36

Apportionment Tax

Answer 36

Calculation of Apportionment Tax
Property and Rent Expense in State / Total Property
+
Payroll in State / Total Payroll
+
Sales in State / Total Sales
/
3 (Property and Rent Exp, Payroll and Sales)

Question 37

Investment Income from a Political Organization

Answer 37

Is completely taxable and NOT exempt

Question 38

Amount of Partnership income taxable

Answer 38

The Share of Partnership Income