R4

Question 1

Formation of C Corporation

Nontaxable event

Answer 1

• Earnings are subject to double taxation
• No gain or loss recognized when issuing stock for formation, reacquisition, resale
• Basis is greater of:
  a. Adjusted basis (NBV) + any gain recognized by transferor
  b. Debt assumed by corporation

Question 2

Shareholder Tax Consequence

Answer 2

No gain or loss recognized if:

a. shareholder owns at least 80% control of the voting and nonvoting stock and
b. receives no boot

Boot may be triggered by:

• cash withdrawn, receipt of debt securities (bonds)
• Excess of liabilities exceeding the adjusted basis is not boot but generates gain

NBV-Liabilities = Excess of Liability - Gain

Question 3

Basis of Common Stock (to Shareholder)

Answer 3

Cash Amount contributed
Property: Adjusted Basis (NBV) Nontaxable event
Services: FMV (Taxable event)

Adjusted Basis of Transferred Property (cash included)
\+ FMV of services rendered
\+ Gain recognized by shareholder 
- Cash received
- Liabilities assumed by corporation
- FMV of non money boot received
= Basis of Common Stock

Question 4

Corporate Taxable Income

Answer 4

Cash received in advance in accrual GAAP is taxed (i.e interest income, rental income, royalty income)

Exception:

• Interest income in Municipal and state obligations/bonds
• Life insurance proceeds on the life of an officer, corporation is the beneficiary

Question 5

Trade or Business Deductions

Answer 5

All of ordinary and necessary expense paid or incurred during a taxable year in carrying on a business are deductible

Question 6

Companies involved in Domestic Production

Manufactured
Produced
Grown
Extracted
Constructed
Engineering Services
Architectural Services

Answer 6

-Must be located in US or part of U.S
- May deduct qualified production activities income limited to 50% of W-2 wages paid by corps for the year
- 9% of the lesser of:
Qualified Production Act. Income or
Taxable Income(disregarding the QPAI deduction)

         Domestic Production Gross Receipts
  -      COGS
  -      Other Direct Allocable Expenses or Losses
  -      Proper Share of Other Deductions
  =     Qualified Production Activities Income

Question 7

Bad Debt for Accrual Basis and Cash Basis

Answer 7

Accrual Basis: Not Allowed as a tax deduction

Cash Basis: Not deductible, unless there is an uncollectible check deposited & recorded as income.

Question 8

Business Interest Expense

Answer 8

Interest paid or accrued are deductible.

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

Question 9

Charitable Contributions

Answer 9

Maximum Deduction is 10% of taxable income,

Disallowed excess of charitable contribution is carried forward for 5 years

Question 10

Business Losses & Casualty Losses related to Business

Answer 10

Any loss not compensated by an insurance is deductible. May be treated as ordinary loss or capital loss. Difference between business casualty loss and individual casualty loss are:

a. No $100 reduction
b. No 10% of AGI

Question 11

Partially Destroyed Property Vs. Fully Destroyed (NBV)

Answer 11

Partial Loss is limited to the lesser of:

a. Decline in value of property
b. NBV of property before casualty

Fully destroyed property will recognize the NBV of property as the loss

Question 12

Organizational Expenditures & Start-Up Costs

Answer 12

Deduct $5000 of organizational expenditures & $5000 for start-up costs. Each amount is reduced when costs exceed $50,000.
Excluded cost include all costs related to the issuance of stock

Question 13

Business Taxes

Answer 13

State and Local taxes, and federal payroll taxes are deductible when incurred on property or business expenses. Foreign Income may be used as credit

Federal Income Taxes are NOT DEDUCTIBLE

Question 14

Lobbying and Political Expenditures

Answer 14

Expenses to attempt to influence state or federal legislation is NOT DEDUCTIBLE.

Direct-type of lobbying expenses in at a local level ARE DEDUCTIBLE.

Question 15

Uniform Capitalization Rules

Answer 15

Certain cost that would normally be expensed be capitalized for inventory tax purposes.

Question 16

Dividend-Received Deduction

Answer 16

Domestic corps are allowed to receive a dividends-received deduction. Amount of DRD is dependent of the investee ownership in corporation. Must own stock at least 46 days during a 91 day period.

Ownership % Dividend-Received Deduction
0% to < 20% 70%
20% to < 80% 80%
80% or more 100%

Question 17

Dividend-Received Deduction Taxable Income Limitation

Answer 17

The lesser of:

a. 70% (or 80%) dividends received; or
b. 70% (or 80%) taxable income excluding DRD, any NOL deduction, Capital Loss Carryback, or Domestic Production Deduction

** Taxable income limitation doesn’t apply if taking full DRD will result in a net operating loss (NOL)

Does not apply to: Personal Services Corps, Personal Holding Comp. or S Corps, certain banks & savings inst, public utilities, tax exempt corps, cooperatives.

Question 18

Schedule M-1 Differences b/w Book & Taxable Income

Answer 18

Financial Statements
Income-Expenses=Net Income b4 Tax - Tax Exp= Net Income after Tax PLUS Discontinued Operations Income-Expenses -Tax) to arrive at the final Net Income

Tax Return
Gross Income - Deductions = Results - Charity Deduction=Results - Dividend Received Deduction = Taxable Income

Question 19

Temporary Differences

Answer 19

Items of Income or Expense recognized in period for books, and a different period for tax.

Royalty Income per Tax (when Received)
- Royalty Income per Book (when Earned)
= Difference

Straight-line Depreciation Expense
- MACRS Depreciation Expense
= Difference

Question 20

Permanent Differences

Answer 20

Municipal Bonds Interest (recognized for tax)
- Municipal Bonds Interest (recognized for book)
= Difference

Question 21

Differences Schedules M-1 & M-3

Answer 21

IRS requires a company reconcile M1 & M3 schedules if :
- Total assets of the company exceeds $10 million

M-1 doesn’t distinguish between temporary difference and permanent differences
M-3 breaks out items of book income/expense in more detail.

Question 22

Corporations Tax Credits

Answer 22

General Business Credit consist of a combination of any of the following:

• Investment credit
• Work opportunity extended to December 31st, 2019
• Low-Income housing

Formula: Can’t exceed net income tax less the greater of:

a. 25% of regular tax liability above $25000, or
b. Tentative minimum tax for the year.

Question 23

Unused Corporations General Business Credit

Answer 23

Carried back 1 year, Forward 20 years

Question 24

Research & Development Tax Credit

Answer 24

Part of General Business Credit

GR: 20% of the increase in qualified research expenditures over a defined base amount

Question 25

Foreign Tax Credit

Answer 25

May be used as credit or deduction

Step 1: Determine qualified foreign income taxes paid or accrued
Step 2: Compute tax credit limitation. Multiply pre-credit U.S tax paid by the ratio of foreign source taxable income earned to income from both foreign and domestic sources.
Step 3: Determine the lesser of qualified foreign taxes in Step 1 or Foreign tax credit limitation in Step 2.

Any unused foreign tax credit can be carried back 1 year/ 10 year forward.

Question 26

Accumulated Earnings Tax (Retained Earnings)

Answer 26

Penalty imposed on C corporations on retained earnings in excess of $250,000.

Regular corporations are entitled a lifetime of $250,000 accumulated earnings

Personal Service are entitled to $150,000

Additional tax rate of 20%

Question 27

Avoid Unreasonable Accumulation of Earnings

Answer 27

a. Demonstrate a definite plan for use of retained earnings

b. A need to redeem the corporate stock

Question 28

Calculation of Accumulated Earnings Tax

Answer 28

Taxable Income
- All Charity
- All Capital Losses
- Taxes
- Dividends Paid
= Accumulated Taxable Income
- Remaining Credit
= Current Accm. Taxable Income
x 20%
= Accumulated Earnings Tax

Question 29

Personal Holding Company Tax (PHCs)

Taxed at an additional 20% on PHCs undistributed net income

Answer 29

Corps. set up by high tax brackets to channel their investments into a small corporation and shelter the income by paying low tax (15-25%) of the corporation

PHCs are corporations that owns more than 50% owned by 5 or fewer individuals (directly or indirectly) during the the last 1/2 of the year and having 60% adjustment of ordinary gross income from investment-type income:

a. Net rent ( if less than 50%)
b. Interest that is taxable (nontaxable is excluded)
c. Royalties (not natural resources or copyright royalties)
d. Dividends from an unrelated domestic corporation

Question 30

Personal Service Corporations

Answer 30

Are taxed at a flat 35% tax rate

Question 31

Corporate AMT

Answer 31

Corps are subject to a minimum 20% on alternative taxable income

Question 32

Corporations Exempt from AMT

KNOW The AMT CALCULATION

Answer 32

If annual average gross profit from the previous 3 years are $7.5 million or less;

$5 million for C Corporations (first 3 years of existence)
C corps are exempt of AMT in its first year.

A corporation must have been treated as a small corporation exempt for all prior years (after 1997)

Question 33

Adjusted Current Earnings (ACE)

Answer 33

Ensures that corporations don’t report a profit for financial statements but pay little or no income tax
Calculation
Step 1. Determine adjusted current earnings = unadjusted AMTI

+ Municipal bond interest
+ any deduction related to organizational exp. and amortization
+ Life insurance proceeds on key employees
+/- Difference between AMT depreciation and ACE depreciation (given)
+ 70% Dividend-Received Deduction

Step 2. Adjusted Current Earnings (ACE) = 75% of the difference of between ACE & AMTI “BEFORE” this adjustment and the alternative tax NOL deduction

Question 34

Negative Adjusted Current Earnings (-ACE)

Answer 34

The negative adjustment can’t exceed the cumulative net positive ACE adjustments (prior positive adjustments less prior positive adjustments)

Question 35

Alternative Tax Net Operating Loss Deduction (ATNOLD)

Answer 35

AMT allows a deduction for net operating loss (excess of deductions allowed for AMTI over income allowed in computing AMTI)

Limited to 90% of AMTI

Question 36

AMT Exemption

Answer 36

Exemption subtracted from taxpayer’s AMTI

Exemption is 40,000 less 25% of AMTI in excess of $150,000.

The exemption is completely eliminated if AMTI exceeds $310,000.

Question 37

Corporation Minimum Tax Rate

Answer 37

Alternative minimum taxable income at 20%

Question 38

AMT Foreign Tax Credit

Answer 38

Only credit allowed against tentative minimum tax

Question 39

Minimum Tax Credit (MTC)

Answer 39

A corporation that pays AMT one year may use AMT as credit in future years.

Unused MTC may be carried forwards indefinitely, but not carried back.

Question 40

Consolidated Tax Returns - Advantages

Answer 40

• Capital Losses of one corporation offset capital gain of another
• Operating losses of one corp offset operating gains of another
• Dividends received are 100% eliminated in consolidation
• Certain tax deductions work better as a consolidated group rather than an individul
• Corporation’s NOL carryover may applied against income of the consolidated group
• Income from certain intercompany sales may be deferred

Question 41

Consolidated Tax Returns - Disadvantages

Answer 41

• Mandatory compliance with complex regulations
• First consolidated F/S may double count inventory
• Losses from intercompany transactions may be deferred
• Use the same tax year as the parent, and file short year tax return when it merges.
• Tax credits may be limited to operation losses of other members
• Election to file consolidated is binding unless disbanding
• Many states don’t allow consolidated filing, thus companies file consolidated for federal income tax purposes, and a separate tax return for state purposes incurring more time and additional expense.

Question 42

Consolidated Taxable Income Calculation

Answer 42

Step 1. Calculate the taxable income for each member of the group
Step2. Adjustments are made to taxable income
- Gains and losses deferred on intracompany sales
- Inventory adjustments may be required for intracompany sales
- Dividends received by one member from another are excluded

Step 3. Gains, losses and deductions are removed

• Capital gains and losses
• Section 1231 gains and losses
• Net Operating Loss
• Charitable contribution deduction
• Dividends-Received deduction
• Domestic production deduction (Section 199)

Step 4. Each member’s resulting taxable income is then combined to create the group’s taxable income.

Step 5. Group’s combined taxable income is adjusted for items determined at the consolidated level.

Question 43

Net Operating Loss

Answer 43

Carryback 2 years/ carry forward 20 years.

A corporation may forego the carryback period and only carry NOL forward.

• no charitable contribution is allowed when calculating NOL
• domestic production deduction Section 199 is not allowed
• NOL deduction for an NOL carrybark or carryover from another year is not allowed in determining current year
• a corporation may deduct a capital loss carryover from a current year capital gain, but can’t deduct a capital loss carryover.