R4 Flashcards
Which of the following forms of business can be formed with only one individual owning the business?
Sole Proprietorship
LLC
Which entity has the most flexibility in choosing an accounting period
C Corp generally has the same choice of accounting periods as do individual taxpayers
Note: the selection is made on the initial tax return by using the chosen method
Can an S Corp choose its accounting period?
No, an S Corp must adopt the calendar year unless a valid business purpose for a different taxable year is established
Note: same goes for partnerships and personal service corporations
What is a joint venture?
A pass-through entity (similar to and treated as a partnership) and does not pay federal income tax. It is a combination of two or more (tax) persons who jointly seek a profit from some business venture without designating themselves as an actual partnership or corporation.
(IRC Section 351) Shareholders contributing property including cash to a corporation have no gain or loss if
80% control immediately after the transaction (voting & nonvoting)
AND
no receipt of boot - transfer of property must be solely in exchange for stock
Note: a shareholder who contributes only services is not counted as part of the group. Also, if the shareholder merely bought shares for cash, no gain or loss recognized.
Corporations basis in property received
Greater of:
transferor/shareholder’s adjusted basis + any gain recognized by the shareholder
OR
the debt assumed by the corporation
Is the transfer of property taxable or nontaxable?
Nontaxable
In a corporate formation, the corporation’s basis in the transferred assets is
the carryover adjusted basis from the shareholder
Recognized gain is the lesser of
realized gain or boot received
If liabilities contributed are in excess of the basis of the property contributed,
the amount of the excess is a gain that must be recognized
A shareholder receiving common stock in exchange for services provided to the corporation must recognize compensation income equal to the
FMV of the stock received
As a general rule, how do contributions and distributions affect basis?
contributions increase basis and distributions decrease basis
When property is contributed to a corporation, gain realized is equal to
FMV of property contributed
- Adj. Basis in Property
When property is contributed to a corporation, gain recognized is equal to
Lesser of
-gain realized
-boot received
When property is contributed to a corporation, how do you calculate the shareholders basis in the corporations shares
Adjusted Basis of transferred property
+cash contributed
+FMV of services rendered
+gain recognized by shareholder
-cash received
-liabilities assumed by the corp
-FMV of nonmonetary boot received
When property is contributed to a corporation, how do you calculate the corporations basis
Greater of
-Adjusted basis of shareholder + any gain realized by shareholder
-Liabilities assumed
Debt is considered boot when
in excess of basis
When is the accrual basis method of accounting required?
the accounting purchase and sales of inventory (inventories must be maintained ) provided the business has greater than 27 million of average annual gross receipts for the three year years prior
tax shelters
certain farming corps provided they have greater than 27 million of average annual gross receipts for three prior periods
c corps, trusts with unrelated business income and partnerships having a c corp as a partner provided they have greater than 26 million of avg annual gross receipts for three prior periods
manufacturers
Personal service corporations are treated as
Individuals for purposes of the rules for accrual basis accounting, therefore they may use cash basis (accrual not required)
Advanced rental payments (prepaid rent) are taxable when
received
Note: they are not included in financial income
Cash received in advance of accrual GAAP income is taxed such as
interest income
rental income (non refundable deposits and lease cancellation payments are rental income when received)
royalty income
Some GAAP income items not included in taxable income are
interest income from municipal or state obligations/bonds
Certain proceeds from life insurance on the life of a corporate officer (key person policy) when the corporation is the beneficiary
federal income taxes are not tax deductible
Is a gain from an illegal activity includable in income?
Yes. To determine the gain, w deduction is permitted for cost of merchandise - it is the only permitted deduction.
Who is required to use the direct charge-off method for bad debts?
Corporations that are not small banks or thrift institutions
A deduction may be taken for expenses paid by what date
within 2.5 months after year end (by March 15th)
Expenses owed by an accrual basis corp to a cash basis shareholder who owns at least 50% of the corporations stock are deductible when
the expense is actually paid in cash to the shareholder
If the IRS determines that part of a shareholders 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 shareholders salary is taxed to the shareholder as a dividend, which is taxed at preferential rates (note: salary is taxed at ordinary rates)
A charitable deduction that exceeds the limit for deduction in one year can be
carried over to the succeeding five tax years…it canNOT be carried back
Organizational expenditures are limited to a max of what amount each year?
5,000 limitation
Note: phase out of $5000 dollar for dollar when expenses greater than 50,000
Two rules under which an accrual basis corporation can deduct an accrued contribution
it was authorized to a qualified charity by Board resolution before the end of the taxable year
it was paid by the 15th day of the 4th month after the end of the taxable year of accrual (April 15th)
Allowable costs in connection with corporate organization are
legal fees to obtain a corporate charter
necessary accounting services
expenses of temporary directors
incorporation fees paid to the state
On what amount is the charitable contributions deduction calculated
Taxable income before DRD, charitable contributions deduction and any capital loss carry back
Can you deduct the penalty for underpayment of federal estimated taxes
No, penalties and fines are nondeductible
which life insurance premium ARE deductible?
group-term life insurance premiums paid on employees lives with the employees dependents as owners and beneficiaries of the policies are considered to be a fringe benefit and would therefore be deductible by the corporation
beneficiary needs to be named by the insured employee (just not the corporation)
Note: employee owns the policy and so it is a fringe benefit
which life insurance premium are NOT deductible?
Premiums paid for insurance on an officers life where the corporation is the owner and beneficiary of the policy are not deductible
Note: corporation can be directly or indirect the beneficiary and still not deductible in either scenario
What is the maximum amount a publicly held corporation can deduct in compensation expenses for executive officers (CEO, CFO and 3 others)
$1,000,000
Are business losses or casualty losses related to a business deductible?
Yes, 100% deductible
For partially destroyed property, the casualty loss is limited to
lesser of:
decrease in FMV of property
the adjusted basis of the property immediately before the casualty
Note: once you pick the lesser amt, subtract any insurance proceeds to get the deductible loss
For fully destroyed property, what is the amount of the loss
the adjusted basis of the property before the casualty minus any insurance proceeds
What amount of business gifts are deductible?
a maximum deduction of $25 per recipient
You can only use LIFO for tax if you used what for GAAP
LIFO for GAAP
what is the carryforward & carry back rules for corporations?
Carry back 3 years or forward 5 years
A corporation can only use capital losses to offset what
capital gains
what is the minimum holding period to receive the corporate dividends received deduction?
45 days
what are the levels of DRD based on ownership
less than 20% ownership = 50% deduction (unrelated)
20% but less than 80% ownership = 65% deduction
80% or more ownership = 100% deduction
(consolidating)
UNICAP Rules
capitalize RM, DL, FOH as a part of inventory for tax purposes
ex. quality control expenditures
what are the limitations on the DRD
lesser of:
50% or 65% of dividends received
50% or 65% of taxable income without regard to the DRD and any NOL carryforward or carry back
Note: the limitation does not apply when taking the full (100%) DRD
Entities not eligible for the DRD
personal service corporations
personal holding companies
(personally taxed) S Corps
Note: DRD does not apply to dividends received from certain banks and savings institutions, RICs, REITs, public utilities, tax exempt corps, cooperatives of DISCs
Who is allowed 100% DRD?
Affiliated corps (80% or more ownership)
Small Business Investment Corps (SBICs)
What are some nondeductible expenses
entertainment expenses
penalties and illegal activities
payments made related to sexual harta same thing or sexual abuse
federal income taxes
lobbying and political expenditures
which taxes ARE deductible
federal payroll taxes
state income & payroll taxes
city income & payroll & real estate taxes
Org costs include
fees paid for:
legal services in drafting the corporate charter
bylaws
minutes of organization meetings
fees paid for accounting services
fees paid to the state of incorporation
Org costs exclude
costs of raising capital - costs of issuing and selling stock, commissions, underwriters fees and costs incurred in the transfer of assets to the corp
Can you take a charitable contributions deduction when negative TI?
No
Treatment of distributions from C Corp to shareholder
in this order:
ordinary (dividend income) to the extent of CEP/AEP
nontaxable R.O.C to the extent of basis
any excess is a capital gain
An individual shareholder will be taxed on dividends in
cash for the amount received and on dividends of property for the FMV of the property received
How is CEP & AEP allocated?
CEP based on in a pro data basis
AEP based on a first come first serve basis
Any dividend payment to a preferred shareholder is considered
a taxable dividend (ordinary)
How to calculate gain in stock surrender
Amount received - Adj Basis in stock surrendered
When property has depreciated in value is distributed, can the corporation recognize a loss?
No
What is the FMV of property distributed w a liability
If FMV < Liab assumed by shareholder - FMV is assumed to be the amount of the liability
A shareholder recognizes dividend income to the extent of
cash received + FMV of non cash property received
Property Dividends (taxable to the corporation paying)
FMV property - NBV (adjusted basis) = corp gain
The gain increases current E&P and then the dividend is taxable out of the new E&P
Does a mortgage affect the basis of land?
No
What is the result of a proportional stock redemption?
treated as a dividend (taxable dividend income) to the redeeming shareholder
Which stock redemptions are treated as an exchange of stock?
A complete redemption
Partial liquidation
Redemption not essentially equivalent to a dividend
Redemption to pay estate taxes or expenses
How to treat a disproportional (substantially disproportionate) stock redemption
taxable capital gain/loss to shareholder IF after redemption:
own less than 50%
ownership reduction was at least 20% (own less than 80% of prior holdings)
Calculating gain or loss from a liquidating distribution
FMV - Basis in corp stock
Parent/Subsidiary Liquidation
No gain/loss recognized by either the parent corp or the subsidiary corp when the parent who owns at least 80% liquidates it’s subsidiary. The parent assumes the basis of the subsidiary’s assets as well as any unused NOL or capital loss or charitable contribution carryovers
A qualifying corporate reorganization is tax free to
all corporations involved and their shareholders
Tax free reorganizations means
company survives but in a modified form
Examples of tax free reorganizations
Mergers or consolidations
The acquisition by one corporation of another corporations stock (stock for stock)
The acquisition by one corp of another corps assets (stock for assets)
Dividing of the corporation into separate operating corporations
Recapitalizations
A mere change in identity, form, or place of organization
Losses resulting from the sale, exchange or worthlessness of Section 1244 qualifying stock are treated as
ordinary losses (up to 50,000 in any tax year)
Note: this loss is available only to the original owners of the stock
What are the maximum ordinary loss deductions
Single: 50,000
MFJ: 100,000
