R3 M1 C. Corporation Overview

Question 1

Organizational cost -> capitalized and amortized. Business can be expensed up to $5,000 of organizational cost.

There is a dollar-for-dollar phase out if > $5,000

Organization cost that are not expensed are amortized straight line over 180 months.

What are organizational cost? —> Accounting fee and legal fees

Answer 1

Startup cost —> is the same process as organizational cost.

18,250 + 6,500 + 27,500 = 52,250 - 50,000
= 2,250 phase-out

5000 (immediate year allowable deduction) - 2,250 ( dollar-for-dollar phase out begins)
=$2750 remaining immediate your deduction.

52,250 - 2,750 = 49,500 remaining to be amortized over 180 months
/ 180 months
= 275 per month amortization

Year 1: $ 2,750 + ( 7 months) ($275/months) = $ 4,675

Question 2

200,000 of dividend received from 25% owned domestic corporation. Preliminary Taxable —> (20,000 NOL)

180,000 x 65% = 117,000

180,000 - 117,000 = $63,000

Question 3

Business interest expense deduction is limited to the sum of : *If your average business interest income is greater than 30 million than you use this rule

Business interest income
+30% of adjustment taxable income (ATI)
+ Floor plan financing interest expense
_____________________________________________________

• limitation applies only if average gross receipts for prior three years > $ 30 million. If your average gross receipts for prior three years does not equal $30 million no limitation applies, which means you can deduct all your business interest expense.Gross Revenue
• Depreciation
• Operation expense
  ____________________________
  Adjustment taxable income
  + business income
  x 30% limitation rule
  ____________________________
  = Max allowable Curr. year Deduction

Disallowed business interest expense can be carried forward indefinitely

Answer 3

Calculating year 4 Adj. taxable income
(ATI: exclude interest income and interest expense)

Year 4 – Gross revenue 21,000,000.00
Year 4 – Depreciation (1,000,000.00)
Year 4 – Other Oper exp (11,000,000.00)
______________________________________________________
Year 4 – Adj. Taxable Inc 9,000,000.00
x (limitation rule) 30.00%
_______________________________________________________
Max. Allow 2,700,000.00
+ Business Int. Inc 0
_______________________________________________________

Business interest expense for year 4 is 3,300,000

3,300,000
(2,700,000)
____________
600,000 carry forward to next year.