R4. Corporate taxable income

Question 1

Crop Gross income

Answer 1

1) temp differences
- Cash received in advance - Taxable
interest income, rental income, royalty income
( accrued income are not income for GAAP)

***rent income - acrrual - add whatever is received + increase in AR

2) permanent differences
- interest income from municipal or state obligations/bonds are not taxed
- proceeds from life insurance ( life of a corporate officer: “key person” when corp is beneficiary)
- federal income taxes are not tax-deductible

Question 2

Cash basis vs. accrual basis

Answer 2

• can use cash basis if gross receipts do not exceed $26 million
• greater than $26 m - accrual method

Question 3

Trade/ biz deductions ( Ordinary and necessary expenses)

1) Executive compensation
2) Bonus Accruals
3) Bad debts
4) Business interest expenses

Answer 3

1) Executive compensation
- max $1m for officers ( CEO, CFO, and other three most compensated officers)

2) Bonus Accruals
- Non-shareholders / employees: can take it if paid by March 15
- shareholders: accrued bonus is deducted when paid

3) Bad debts
- Accrual basis: tax-deductible when specific AR is written off
- Cash basis: no tax-deduction ( it was never included in taxable income)

4) Business interest expenses
- Business: when incurred & paid
30% limit when gross receipts are over $26m

• Investment interest: up to taxable investment income
• prepaid interest: deduct next year when incurred

Question 4

Trade/ biz deductions ( Ordinary and necessary expenses)

(5) Charitable Contribution
6) Business Loss or Casualty loss related to biz
7) Organization and start-up cost

Answer 4

(5) Charitable Contribution
- 10% of Adjusted Taxable Income Limitation
- deductible is accrued and paid by April 15
- calculated before the deduction of:
a) any charitable contribution deduction
b) the dividends-received deduction, or
c) any capital loss carryback

6) Business Loss or Casualty loss related to biz
100% deductible
less: insurance proceeds

Partially destroyed:
Lessor of
-decrease FMV Or
-NBV

deduction

Fully destryoed:
NBV

deduction

7) Organization and start-up cost
Org:
5k + Excess over 180 months

Start-up
5k + Excess over 180 months
5k phase out if over $50k

Included cost: legal service, accounting service, fees paid to the state

Excluded cost: cost of raising capital, transfer of assets , commission paid to underwriters

Question 5

Trade/ biz deductions ( Ordinary and necessary expenses)

8) Amortization, depreciation, and depletion
9) Life insurance premiums ( expenses)
10) Business Gifts
11) Business Meals
12) Business entertainment expense:
13) Penalties and illegal activities:
14) payments made related to sexual harassment or sexual abuse, related to non-disclosure agreement:
15) Taxes
16) Capital loss
17) Inventory valuation method

Answer 5

8) Amortization, depreciation and depltion
- Goodwill is amortized straight-line basis over 15 years period ( tax rule)
- in GAAP goodwill is impaired

9) Life insurance premiums ( expenses)
- corporation named as beneficiary - corporation owns the policy ( key person): NOT tax-deductible

• insured employee names as beneficiary - employee own the policy ( fringe benefit) = Tax deductible

10) Business Gifts
$25 per person, per year

11) Business Meals = 50% deductible
12) Business entertainment expense: NOT tax-deductible
13) Penalties and illegal activities: NOT tax-deductible

14) payments made related to sexual harassment or sexual abuse, related to non-disclosure agreement:
NOT tax-deductible

15) Taxes: 
Allowed 
- federal payroll taxes 
- state income and payroll taxes 
- city income and payroll and real estate taxes 

Disallowed
- federal income tax

16) Capital loss: Not allowed ( only used to offset the capital gain)
- excess carryback 3, carryforward 5

17) Inventory Valuation methods
- cash method allowed for a company with a gross receipt of $26m or less

Question 6

Uniform Capitalization rule

Answer 6

• capitalize RM, DL, and FOH

- unless gross recepeit is $26m or less during the three preceding years - then don’t have to capitalize

Question 7

Dividends-received deduction

Answer 7

Lesser of 
0-20% ownership - 50%   unrelated parties
20-80% ownership - 65% 
80-100% ownership - 100%  consolidated 
OR 
(50) or 65% of taxable income 

** Losers don’t follow the rules - no taxable limitation if taking dividend- received deduction results in net operating loss

Entities not eligible for the DRD

• personal service corporation
• personal holding company
• personally taxed S corp