R4 Flashcards
What is an S Corp?
a corporation that passes their income, losses, deductions, and credits to their shareholders to avoid double taxation (like in C Corps)
Which entity must pay federal income tax?
C Corps (not pass-through entities)
What is the corporation’s basis in the transfer of assets?
cash + adjusted basis
Under the 80% rule, if someone had bought shares for cash, do they have a gain?
no
What is the general rule for the basis of the property received from the transferor/shareholder?
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
How would you calculate a gain on contributed property?
liability assumed - basis of the asset
What is the general rule with shareholders who contribute property?
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
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.
true
How is the selection of an accounting method made for tax purposes?
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
When is the accrual basis of accounting required?
- 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
- tax shelters
- 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
- 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
- manufacturers
T/F: Payments for cancelling a lease are rental income in the year paid.
true
What is the appropriate tax treatment for advertising costs?
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
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.
true
How should you treat gains for illegal activities?
-included in income
-a deduction is permitted for the cost of merchandise
What should you do with the excess of a corporation’s charitable contributions that exceed the limit for deductibility in a particular year?
carry it forward for a maximum of 5 years
note: cannot be carried back
How should you treat organization costs?
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
What is the maximum deduction for charitable contributions for C Corps?
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%
What is the maximum deduction for charitable contributions for C Corps in regards to matching contributions and board approval of contributions?
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
How do you calculate the amortization expense for organizational costs?
(total organizational costs - $5,000 limit) / 180 months x # of months + $5,000
What would be included under organizational costs that you can amortize?
legal fees to obtain the corporate charter
necessary accounting services
expenses of temporary directors
incorporations fees paid to the state
What percentage of business meals are deductible?
50%
How do you determine the amount deductible for business gifts?
multiply the # of items by the lesser of the price of the gift or $25 (maximum)
When would life insurance premiums be deductible?
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
Unlike individuals, how should corporations treat capital losses in excess of capital gains?
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
What is the holding requirement for a corporate dividends-received deduction?
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.
__________ expenditures are subject to the Uniform Capitalization Rules of Code Sec. 263A.
quality control
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.
true
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?
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)
How is income before special deductions calculated?
sales - cogs + dividends received
How are tax returns affected by bad debt expenses?
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
What is used to recognize the book and tax differences?
Schedule M-1 of Form 1120
M-1 reconciliation:
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
Should state franchise tax refunds be included in taxable income?
yes
How do you calculate excess of tax amortization over book impairment of goodwill?
goodwill / 15 years
- book impairment
= excess of tax amortization over book impairment of goodwill
What is the required annual estimated tax payment for a C Corp?
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
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.
true
No underpayment of estimated tax penalty will be imposed if the total underpayment of tax for the year is less than _____.
$500
T/F: The accumulated earnings tax can be imposed regardless of the number of stockholders in a corporation.
true
Reminder: the federal income tax paid is never going to be included as a deduction
noted
What are two ways to eliminate or reduce any accumulated earnings tax?
- demonstrate that the “reasonable needs” of its business require the retention of all or part of the current year’s accumulated taxable income
- pay dividends by April 15 of the next year
What is the minimum accumulated earnings credit for manufacturing companies?
$250,000
(to be subtracted from taxable income and federal income taxes)
How can you determine whether a company is a personal holding company?
- income test: the company’s income for a given taxable year is at least 60% of adjusted ordinary gross income
- stock ownership test: more than 50% of the stock must be owned by 5 or fewer individuals
The dividends paid deduction taken to arrive at personal holding company income includes what two things?
- actual dividends paid
- consent dividends (hypothetical distribution made by agreement with the shareholders)
Who may elect to file a consolidated corporate return?
members of an affiliated group (taxed as a single unit, eliminating intercompany gains/losses)
What defines an affiliated group and qualifies as “control”?
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
T/F: Operating losses of one group member may be used to offset operating profits of the other members included in the consolidated return.
true
T/F: 100% of cash dividends paid by the subsidiary to the parent are tax-free on a consolidated tax return.
true; you wouldn’t have dividend income on a consolidated tax return
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.
true
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.
true
How much of a distribution from a C Corp be treated as a taxable dividend?
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
How would you calculate ending accumulated earnings and profits?
beg. accumulated earnings and profits
+ current year earnings and profits
- current year distribution
= ending accumulated earnings and profits
T/F: Someone’s tax basis in stock is reduced by nontaxable return of capital.
true
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.
true
What do you do if there are multiple cash distributions in relation to dividend income?
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
How would you calculate a gain on a distribution involving property received?
FMV of property received - adjusted basis = gain
How would you calculate income received from a stock surrender?
amount of cash received (in exchange of the stock surrendered) - adjusted basis of the stock
*this would be considered a capital gain
T/F: Losses on a distribution involving property received are not deductible.
true
How would a corporation recognize a gain if the FMV of the property received is less than the liability assumed?
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)
T/F: Gains on property received are added to current E&P in determination of taxable dividend income.
true
T/F: The FMV of property received is the taxable amount of a property dividend AND the recipient’s basis in the property.
true
How do you determine the gain or loss on property distributed to shareholders?
FMV when distributed
- adj. basis
= gain/loss
T/F: You cannot record capital gains and losses on inventory, just land, property/buildings, stock, installment notes receivable, and marketable securities.
true
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.
true
instead, the parent corporation would record the asset at its carryover basis (purchase price)
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 ______.
the shareholder’s basis in the corporation’s stock
T/F: A qualifying corporate reorganization is tax-free to all corporations involved and to their shareholders.
true; this is when the purpose of the reorganization is to acquire interest in another company solely for their stock
What is true about Section 1244 losses?
- 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)
- all losses designated as Section 1244 losses are ordinary by definition
T/F: You should only deduct an amount for bad debt expense (for tax purposes) if an event took place, ex. a write-off.
true - do NOT deduct estimated bad debt expense (that’s for financial purposes)
T/F: For a cash basis tax payer, there is no such thing as a bad debt deduction.
true
How do you calculate the charitable contributions deduction?
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
T/F: A corporation generally deducts liquidation expenses (ex. filing fees, professional fees) on its final tax return.
true
T/F: S Corporations and foreign corporations cannot file a consolidated return or be grouped with other corporations who can.
true
