R4

Question 1

What is an S Corp?

Answer 1

a corporation that passes their income, losses, deductions, and credits to their shareholders to avoid double taxation (like in C Corps)

Question 2

Which entity must pay federal income tax?

Answer 2

C Corps (not pass-through entities)

Question 3

What is the corporation’s basis in the transfer of assets?

Answer 3

cash + adjusted basis

Question 4

Under the 80% rule, if someone had bought shares for cash, do they have a gain?

Answer 4

no

Question 5

What is the general rule for the basis of the property received from the transferor/shareholder?

Answer 5

the greater of:
1) adjusted NBV (often the purchase price) of the transferor/shareholder + any gain recognized by the transferor/shareholder
or
2) debt assumed by the corporation

Question 6

How would you calculate a gain on contributed property?

Answer 6

liability assumed - basis of the asset

Question 7

What is the general rule with shareholders who contribute property?

Answer 7

a shareholder who contributes property to a corporation in exchange for common stock will not recognize a gain or loss if immediately after the transaction, the transferring shareholders hold at least 80% of the corporation AND the shareholder does not receive any boot

Question 8

T/F: 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.

Answer 8

true

Question 9

How is the selection of an accounting method made for tax purposes?

Answer 9

it’s made on the initial tax return by using the chosen method

note: it does NOT need to be approved by the BOD and it does NOT need to be disclosed in the organizing documents

Question 10

When is the accrual basis of accounting required?

Answer 10

1. the accounting purchase and sale of inventory when the business has greater than $29M of average annual gross receipts for the 3-yr period ending with the prior tax year
2. tax shelters
3. certain farming corporations when the business has greater than $29M of average annual gross receipts for the 3-yr period ending with the prior tax year
4. C corps, trusts with unrelated trade or business income, and partnerships having a C Corp as a partner when the business has greater than $29M of average annual gross receipts for the 3-yr period ending with the prior tax year
5. manufacturers

Question 11

T/F: Payments for cancelling a lease are rental income in the year paid.

Answer 11

true

Question 12

What is the appropriate tax treatment for advertising costs?

Answer 12

deduct the costs currently as ordinary and necessary business expenses

note: they are expensed, not amortized
further note that no selling expenses can ever be amortized

Question 13

T/F: Corporations that are not small banks or thrift institutions are required to use the direct charge-off method rather than the reserve method.

Answer 13

true

Question 14

How should you treat gains for illegal activities?

Answer 14

-included in income
-a deduction is permitted for the cost of merchandise

Question 15

What should you do with the excess of a corporation’s charitable contributions that exceed the limit for deductibility in a particular year?

Answer 15

carry it forward for a maximum of 5 years

note: cannot be carried back

Question 16

How should you treat organization costs?

Answer 16

may be amortized over a period of at least 180 months (even if these costs are capitalized on the Company’s books)

up to $5,000 is deductible in the first year

Question 17

What is the maximum deduction for charitable contributions for C Corps?

Answer 17

taxable income
+ dividends received deduction, if any
+ charitable contributions deducted, if any
+ net operating loss carryback, if any
+ net capital loss carryback, if any
* 10%

Question 18

What is the maximum deduction for charitable contributions for C Corps in regards to matching contributions and board approval of contributions?

Answer 18

deductions are allowed if:
1) it was authorized to a qualified charity by Board resolution before the end of the taxable year
2) it was paid by the 15th day of the 4th month (April 15) after the end of the taxable year

Question 19

How do you calculate the amortization expense for organizational costs?

Answer 19

(total organizational costs - $5,000 limit) / 180 months x # of months + $5,000

Question 20

What would be included under organizational costs that you can amortize?

Answer 20

legal fees to obtain the corporate charter
necessary accounting services
expenses of temporary directors
incorporations fees paid to the state

Question 21

What percentage of business meals are deductible?

Answer 21

50%

Question 22

How do you determine the amount deductible for business gifts?

Answer 22

multiply the # of items by the lesser of the price of the gift or $25 (maximum)

Question 23

When would life insurance premiums be deductible?

Answer 23

group term life insurance premiums paid on employees’ lives are considered to be a fringe benefit and would be deductible

life insurance premiums paid for an officer’s life where the corporation (not the dependent) is the owner and beneficiary of the policy are NOT deductible

Question 24

Unlike individuals, how should corporations treat capital losses in excess of capital gains?

Answer 24

corporations may not deduct any capital losses in excess of capital gains

any excess capital losses may be carried back 3 years and carried forward 5 years and can only be offset against capital gains

Question 25

What is the holding requirement for a corporate dividends-received deduction?

Answer 25

The corporate dividends-received deduction is affected by a requirement that the investor corporations must own the investee's stock for a specified minimum holding period of more than 45 days.

Question 26

__________ expenditures are subject to the Uniform Capitalization Rules of Code Sec. 263A.

Answer 26

quality control

Question 27

T/F: When you're calculating taxable income using dividends-received deductions, add dividend income to gross income (if not already included) and then subtract operating expenses and the dividends-received deduction.

Answer 27

true

Question 28

If a corporation owns less than 20% of the investee's stock, what percentage of the dividends-received deduction can be taken for an unrelated taxable corporation?

Answer 28

50% (and it's 65% for over 20% owned) note: if this % is unknown, take 50% of the taxable income before the dividends-received deduction note: the dividend will be from stock investments, NOT a subsidiary (b/c that would be intercompany)

Question 29

How is income before special deductions calculated?

Answer 29

sales - cogs + dividends received

Question 30

How are tax returns affected by bad debt expenses?

Answer 30

temporary difference --- tax deductions exceed book deductions b/c the direct write-off method is used (as opposed to the accrual method) for tax purposes

Question 31

What is used to recognize the book and tax differences?

Answer 31

Schedule M-1 of Form 1120

Question 32

M-1 reconciliation:

Answer 32

Book income + federal taxes + charitable contributions - depreciation higher on the tax return + rent higher on the tax return + nondeductible bad debt expense + interest incurred on debt for municipal bonds + political expenses + penalties + life insurance premiums for officers + excess capital losses over capital gains - excess of tax amortization over book impairment of goodwill - municipal bond income - dividends-received deduction + half of meals expense if the full amount was included = taxable income - (10% x taxable income) for charitable contributions limit *note that anything added is added back because it's not deductible

Question 33

Should state franchise tax refunds be included in taxable income?

Answer 33

yes

Question 34

How do you calculate excess of tax amortization over book impairment of goodwill?

Answer 34

goodwill / 15 years - book impairment = excess of tax amortization over book impairment of goodwill

Question 35

What is the required annual estimated tax payment for a C Corp?

Answer 35

the least of: 1) 100% of the tax liability of the prior year's return 2) 100% of the current year tax liability 3) 100% of the estimated current year tax liability using the annualized income method

Question 36

T/F: You cannot use 100% of the tax liability of the prior year's return if you had a net loss (not net income) in the prior year and thus didn't pay income taxes.

Answer 36

true

Question 37

No underpayment of estimated tax penalty will be imposed if the total underpayment of tax for the year is less than _____.

Answer 37

$500

Question 38

T/F: The accumulated earnings tax can be imposed regardless of the number of stockholders in a corporation.

Answer 38

true

Question 39

Reminder: the federal income tax paid is never going to be included as a deduction

Answer 39

noted

Question 40

What are two ways to eliminate or reduce any accumulated earnings tax?

Answer 40

1. demonstrate that the "reasonable needs" of its business require the retention of all or part of the current year's accumulated taxable income 2. pay dividends by April 15 of the next year

Question 41

What is the minimum accumulated earnings credit for manufacturing companies?

Answer 41

$250,000 (to be subtracted from taxable income and federal income taxes)

Question 42

How can you determine whether a company is a personal holding company?

Answer 42

1. income test: the company's income for a given taxable year is at least 60% of adjusted ordinary gross income 2. stock ownership test: more than 50% of the stock must be owned by 5 or fewer individuals

Question 43

The dividends paid deduction taken to arrive at personal holding company income includes what two things?

Answer 43

1. actual dividends paid 2. consent dividends (hypothetical distribution made by agreement with the shareholders)

Question 44

Who may elect to file a consolidated corporate return?

Answer 44

members of an affiliated group (taxed as a single unit, eliminating intercompany gains/losses)

Question 45

What defines an affiliated group and qualifies as "control"?

Answer 45

a common parent owns: 1) 80% or more of the voting power of all outstanding stock 2) 80% or more of the value of all outstanding stock of each corporation

Question 46

T/F: Operating losses of one group member may be used to offset operating profits of the other members included in the consolidated return.

Answer 46

true

Question 47

T/F: 100% of cash dividends paid by the subsidiary to the parent are tax-free on a consolidated tax return.

Answer 47

true; you wouldn't have dividend income on a consolidated tax return

Question 48

T/F: Net operating losses occurring in the tax years 2018, 2019, and 2020 can be carried back for 5 years and carried forward indefinitely to offset taxable income in other years.

Answer 48

true

Question 49

T/F: A net capital loss is carried back for 3 years and carried forward 5 years (limited to taxable income) to offset net capital gains in other years.

Answer 49

true

Question 50

How much of a distribution from a C Corp be treated as a taxable dividend?

Answer 50

to the extent of the total amount of positive current earnings and profits (first) + then positive accumulated earnings and profits you can only pay with what you have note: any remaining amount of the distribution is a nontaxable return of capital to the shareholder and then is later taxed as a capital gain

Question 51

How would you calculate ending accumulated earnings and profits?

Answer 51

beg. accumulated earnings and profits + current year earnings and profits - current year distribution = ending accumulated earnings and profits

Question 52

T/F: Someone's tax basis in stock is reduced by nontaxable return of capital.

Answer 52

true

Question 53

T/F: An individual taxpayer will be taxed on dividends in cash for the amount received and on dividends of the FMV of the property received.

Answer 53

true

Question 54

What do you do if there are multiple cash distributions in relation to dividend income?

Answer 54

Distribution #1 - (distribution #1 / total distributions) * current E&P - accumulated E&P Distribution #2 - (distribution #2 / total distributions) * current E&P - accumulated E&P (if any remaining) if none remaining, dividend amount = (distribution #2 / total distributions) * current E&P

Question 55

How would you calculate a gain on a distribution involving property received?

Answer 55

FMV of property received - adjusted basis = gain

Question 56

How would you calculate income received from a stock surrender?

Answer 56

amount of cash received (in exchange of the stock surrendered) - adjusted basis of the stock *this would be considered a capital gain

Question 57

T/F: Losses on a distribution involving property received are not deductible.

Answer 57

true

Question 58

How would a corporation recognize a gain if the FMV of the property received is less than the liability assumed?

Answer 58

the FMV of the property is assumed to now be the amount of the liability (which you would compare against the adjusted basis for determination of the capital gain)

Question 59

T/F: Gains on property received are added to current E&P in determination of taxable dividend income.

Answer 59

true

Question 60

T/F: The FMV of property received is the taxable amount of a property dividend AND the recipient's basis in the property.

Answer 60

true

Question 61

How do you determine the gain or loss on property distributed to shareholders?

Answer 61

FMV when distributed - adj. basis = gain/loss

Question 62

T/F: You cannot record capital gains and losses on inventory, just land, property/buildings, stock, installment notes receivable, and marketable securities.

Answer 62

true

Question 63

T/F: No gain or loss is recognized by either the parent or the subsidiary corporation when the parent, who owns at least 80% of the stock, liquidates its subsidiary.

Answer 63

true instead, the parent corporation would record the asset at its carryover basis (purchase price)

Question 64

When a corporation liquidates and distributes assets to shareholders, a gain is recognized to the extent that the fair market value of assets distributed to a shareholder exceeds ______.

Answer 64

the shareholder's basis in the corporation's stock

Question 65

T/F: A qualifying corporate reorganization is tax-free to all corporations involved and to their shareholders.

Answer 65

true; this is when the purpose of the reorganization is to acquire interest in another company solely for their stock

Question 66

What is true about Section 1244 losses?

Answer 66

1. the maximum Section 1244 loss that can be deducted in any year is $50,000 for a single taxpayer (and $100,000 for married taxpayers) 2. all losses designated as Section 1244 losses are ordinary by definition

Question 67

T/F: You should only deduct an amount for bad debt expense (for tax purposes) if an event took place, ex. a write-off.

Answer 67

true - do NOT deduct estimated bad debt expense (that's for financial purposes)

Question 68

T/F: For a cash basis tax payer, there is no such thing as a bad debt deduction.

Answer 68

true

Question 69

How do you calculate the charitable contributions deduction?

Answer 69

10% * taxable income (add back: dividends-received deduction) NOTE: this is limited to: amount paid during the year + carryover contributions from PY = total allowable deduction

Question 70

T/F: A corporation generally deducts liquidation expenses (ex. filing fees, professional fees) on its final tax return.

Answer 70

true

Question 71

T/F: S Corporations and foreign corporations cannot file a consolidated return or be grouped with other corporations who can.

Answer 71

true