R3- M1- C Corporation Overview

Question 1

C Corporation

Answer 1

No special rates for Capital gain

Corporate capital gains are taxed the same rate as Ordinary corporate Income

No distinction of capital gain or loss as ST or LT

Capital loss can be carried back 3 years and forward 5 years

Question 2

COLI
Company owned Life Insurance Contracts

Life insurance for Key company officer where the beneficiary is the corporation

Answer 2

Rules for Life insurance contracts issued after 8/17/2006 is below:

Premiums are not deductible by the Corporation

Distributions up to the extent of the premium’s paid is TAX FREE
Any excess / earnings accumulate tax free and when distributed is Taxable income to the corporation

Exception to the above:

All including earnings are tax free if the beneficiary is the family of the key officer

Question 3

Generally we use cash basis of accounting for tax purposes - AVERAGE Annual Gross Receipts do not exceed 30 Million for the PRIOR 3 YEAR period

BUT

When is the ACCRUAL BASIS of Accounting REQUIRED for TAX PURPOSES?

Note Qualified Personal service corporations are Treated as individuals for Tax Purposes and permitted to use Cash basis of accounting

Answer 3

1. MANUFACTURER- The accounting purchase and sales of inventory (and inventories must be maintained) provided the business has OVER $30 million (2024) of average annual gross receipts for the three-year period ending with the prior tax year.
2. Tax shelters.
3. Certain farming corporations (other farming or tree-raising businesses may generally use the cash basis) provided the business has OVER $30 million (2024) of average annual gross receipts for the three-year period ending with the prior tax year.
4. C corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner provided the business has OVER $30 million (2024) of average annual gross receipts for the three-year period ending with the prior tax year.

Question 4

When does C corporation select the Accounting method to be used for TAX PURPOSES?

Answer 4

Is made on the INITIAL tax return by using the CHOSEN METHOD

Question 5

Trade or Business Deductions

(Ordinary and Necessary expenses )

Answer 5

PAID OR INCURRED FOR BUSINESS PURPOSE

Question 6

Executive Compensation Rules

Answer 6

A PUBLICLY HELD Corporation - NOTE PUBLICLY!

Max deduction for compensation is $ 1 Million for Covered employees

Covered employees
- CEO
- CFO
- 3 more other Highly compensated employees

Covered employees remain thereof for FUTURE YEARS

Question 7

Entertainment expenses for the ff:

Officers
Directors
10% or > Shareholders

Answer 7

Deductible up to the extent of that they are included in the Individual’s Gross Income.

Question 8

Compensation to Shareholder employee

Answer 8

IRS will determine the necessary reasonable compensation which will be deductible to the corporation and taxable as ordinary income subject to SSS and medicare to the employee

Any excess will be DISTRIBUTIONS not deductible as expense by the C Corporation and which will be taxed at a preferential rate on the individual’s employees tax return

Individual will have Schedule A Salaries W-2 taxed at Ordinary rates and Dividend income subject to preferential rates

Question 9

Life Insurance Premiums (expense)

Proceeds from insurance on the death of an officer where the corporation is the OWNER and BENEFICIARY are not includable in the taxable income of a corporation because the related premium payment was taxed (not deducted before)

Answer 9

1. C corp is the named beneficiary - Corp owned the Policy so not deductible expense on C corp so no tax benefit

Hence

Proceeds will be Tax exempt when received by the C Corp.

even if C corp distributes it to the family of the key officer afterwards, it be non taxable income on C corp’s books

unless the employer is a direct or indirect beneficiary.

2. Insured employee named as the Beneficiary- Fringe benefit to Employee

Deductible expense of C corp as an employee benefit

Not taxable up to extent coverage of $ 50k to the individual employee

Question 10

Bonus Accruals for
NON SHAREHOLDER EMPLOYEES

Answer 10

Paid by accrual basis

Deductible in the TAX YEAR

• When all events have occured that establish a LIABILITY with reasonable ACCURACY
• Paid within 2.5 MONTHS of the TaxPayer’s year end

Question 11

BAD DEBTS

Answer 11

Only allowed for ACCRUAL Basis
Deduction is SPECIFIC Charge off - Direct Write off

No Bad debt deduction for CASH BASIS except

uncollectible check that as been deposited and recorded as income

Question 12

Business Interest Expense

Answer 12

PAID OR ACCRUED are deductible generally

Prepaid interest expense must be allocated to the proper period to which it is related.

If TP’s average gross receipts is
30 Million and LESS

Then no limitation on the deductibility of Business Interest expense so full amount can be deducted.

Limits will apply if OVER 30M gross receipts

Deduction is limited to the

SUM of the following:

Interest Income

PLUS 30% X Adjusted Taxable Income (ATI)
- ATI = Taxable Business Income (without interest income and interest expense)

PLUS Floor plan Financing
- full amount of debt interest expense
- debt for motor vehicles for sale , debt secured by the inventory

DISALLOWED BUSINESS INTEREST EXPENSE CAN be carried forward INDEFINITELY

INTEREST on debt used to purchase tax free bonds are NOT DEDUCTIBLE

Question 13

BAD DEBT DEDUCT for a Corporation that is NOT A FINANCIAL INSTITUTION

Answer 13

A corporation is REQUIRED to use the direct charge-off method rather than the reserve method.

Question 14

Charitable Contribution Deduction

Answer 14

Subject to LESSER of

Actual contribution

OR

10% of ATI
ATI= Taxable business income
BEFORE deduction for
DRD, Charitable contributions, Capital loss carrybacks and Net operating loss carryback

Any disallowed contribution CAN be carried forward for 5 years (just like individuals)

Any accrual must be paid within 3.5 Months of the taxable year end to be DEDUCTIBLE

Paid within 15th day of the 4th month following the taxable year- end 4/15 so 3.5 months

The allowable 10% deduction applies first to the current year contribution and any excess carryover contribution from prior years- See MCQ-02150

Accrued charitable contributions not paid by the end of the year are deductible in the year of accrual if (i) the board of directors authorizes the contribution during the tax year and (ii) the accrual basis corporation pays the accrued amount by the 15th day of the fourth month (generally 3½ months) following the end of the tax year.

Any amount in excess of the “10 percent limitation” may be carried forward for five years.

Question 15

Expenses owed by an ACCRUAL BASIS corporation to a CASH BASIS Shareholder

Answer 15

Expenses owed by an ACCRUAL BASIS corporation

To a CASH BASIS shareholder who owns at least 50 percent of the corporation’s stock

ARE NON DEDUCTIBLE by the corporation until the UNTIL PAID IN CASH to Shareholders

Question 16

Dividends Received Deduction

Answer 16

Avoid Triple Taxation in Earnings

Generally - 50% of the DIVIDENDS received

As long as:
Owned for AT LEAST 46 days within the 91 day period starting on the date 45 days before ex dividend date of the stock to qualify for dividends received deduction

Depending on ownership of investee- here are the rates deduction:

0- 19% ownership- 50% example dividends from an unrelated corporation
20- 79% ownership - 65%
80% or more- 100%

100% DRD- not taxable technically
- Dividends from/ by afffiliated corp- 80% or more
- Dividends by a Small Business Investment corp. AN SBIC make equity and LT Credit to small businesses

This does not apply to Dividends received from Banks, savings institution, REITS, public utiliyies, TAX EXEMPT CORPORATIONS, Cooperatives ETC

Question 17

DRD Taxable Income Limitation

Above Limitation does not apply
IF resulting to a LOSS
Taxable income- Full dividends received deduction (amount that is multiplied to 50/65%) = NOL (Net operating Loss)

In this case the full DRD is allowable deduction- % x dividend income

Answer 17

Lesser between:

1. 50% (65%) x Dividends received

OR

2. 50% (65%) x Taxable income before
   DRD
   NOL Carryforward
   Capital Loss Carrybacks
   BUT AFTER Charitable contributions

The taxable income above is called
DRD Modified Taxable Income

Question 18

Business Losses or casualty Losses

Answer 18

Generally deductible as long as not compensated by insurace

Either ordinary or capital loss depending on the type of asset involved

Casualty Loss-Federally declared disaster area

1. Partially Destroyed.

LESSER between:

-Decline in Value (FMV)
-Adjusted Basis of the property immediately BEFORE the Casualty

F2. Fully Destroyed
- Adjusted basis of the property

Question 19

GAAP for Organizational and start up Costs

Answer 19

ALL are EXPENSED IMMEDIATELY

For Tax

Max 5k each subject to over $ 50k phase out

Any excess is capitalized over 180 months on the beginning of operations or active trade

O/C does not include cost of selling shares of stock, its a reduction in capital account

Question 20

DEPRECIATION and DEPLETION

Answer 20

C Corporation use the SAME rules as other Trade or Business

Question 21

Purchased Goodwill

Answer 21

Tax- amortize straight line over 15 years

GAAP- not amortized, test for Impairment

Question 22

Business Gifts
Business Meals
Business Entertainment expenses
Penalties for illegal activities
Payments related to Sexual Harassment or Abus

Answer 22

BG- $ 25 per recipient per year
BM- 50% Deductible

BEE- NOT deductible
PIA- NOT deductible
PMSHSA- NOT deductible if Non disclosure agreement

Question 23

Taxes

Answer 23

All state , local and federal payroll taxes are deductible but NOT FEDERAL INCOME TAX

Foreign income taxes can be used as credit

Question 24

Lobbying or Political contribution
NET Capital Loss - NO 3K

offset against Capital Gain 3 yrs back and 5 years forward

Answer 24

ALL ARE NON DEDUCTIBLE

Question 25

Illegal Activities Deduction allowed!

Note this! Tricky!

Answer 25

A gain from an illegal activity is includible in income.

COST OF MERCHANDISE can be deducted

Business expenses for operating an illegal business, other than the cost of merchandise, are NOT PERMITTED AS DEDUCTION

Question 26

Penalty of UNDERPAYMENT of FEDERAL taxes by a C corporation

Answer 26

In all circumstances are NOT DEDUCTIBLE

Question 27

Taxable income means= Gross Income+ Other income- Expenses- DRD, Charitable contributions etc

so always con

Question 28

Both
- PERSONAL SERVICE CORP
- PERSONAL HOLDING COMPANIES
-(personally taxed) S Corporation

must include 100% of the dividends received from unrelated taxable domestic corporations in gross income in computing regular taxable income.

Answer 28

No Dividends Received Deductions

Question 29

Change in Inventory Method

Answer 29

Is a change in Accounting Method and must be approved by IRS

Question 30

Basic Valuation Methods for INVENTORY

Answer 30

1. Cost method note prime cost and direct cost are not allowable for Tax purposes
2. Lower of Cost or Market- per item not aggregate value
3. Rolling Average- not allowed for longer holding period inventory
4. Retail Method- subtract markup to arrive at cost for Large volume items

Question 31

Inventory Identification Methods

Answer 31

1. FIFO- most common
2. LIFO- significant adjustments to valuations maybe required
3. UCR Uniform Capitalization rules

IRC Section 263A
Certain expense capitalized as part of Inventory for Tax purposes
M-1/ M-3 Adjustments on the tax return

TP Average Gross receipts of 30M or less not required on this and treat those items as SUPPLIES

4. Unsalable or Unusable Goods

valued as expected selling price (BONAFIDE sp) LESS cost to dispose

Question 32

Expenses owed by an accrual-basis corporation to a cash-basis shareholder who owns at least 50 percent of the corporation’s stock are not deductible by the corporation until the expense is actually paid in cash to the shareholder.