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CPA REG (in Progress) > REG 2 - Corporate Taxation > Flashcards

REG 2 - Corporate Taxation Flashcards

1
Q

C Corporation

A

Created formally through the Articles of Incorporation

  • Limited Liability
  • Taxpaying Entity (Form 1120) – this distinguishes it from a S corporation (flow through entity)
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2
Q

C Corporation Tax Return Due Date

A

03/15 (3 and ½ months after calendar year or fiscal year end, which is n when the first tax return is filed)

  • must be filed each year in operation (even if it has no taxable income)
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3
Q

52/53-Week Tax Year

A

fiscal year that varies from 52 to 53 weeks & ends on the same day (but does not have to end on the last day of a month)

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4
Q

Tax Treatment if property is transferred to a corporation solely in exchange for stock

A

No Gain or Loss recognized IF transferors are in control of the corporation immediately after (80% or more in aggregate)

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5
Q

Tax Treatment if contributors of cash and property have or immediately gain 80% or more of stock after a contribution

A

Tax-Free

Carryover basis (if liability transferred, it reduces the basis in stock)

Carryover holding period

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6
Q

Tax Treatment if services are provided to a corporation solely in exchange for stock

A
  • Service Provider: Taxable as ordinary income at FMV of stock
  • Wage expense for corporation
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7
Q

Tax treatment if contributors have less than 80% of control immediately after the contribution

A
  • Taxable to all parties
  • FMV of stock
  • Wage expense for the corporation
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8
Q

What is the valuation for a contribution of property to a corporation in exchange for stock?

A

Two approaches

  1. Tax Basis of the property to the shareholder (tax-free but must have 80%+ control by cash or property contributors)

Or

  1. FMV at the date of contribution (if less than 80% control)
    - Contributor: treats the contribution as a sale of property (gain on sale reported on individual tax return = FMV – Tax Basis)
    - Corporation: tax basis = FMV
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9
Q

What is the valuation for a transfer of cash to a corporation in exchange for stock?

A

The amount of cash paid by the shareholder

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10
Q

Proprietorship or Partnership be formed into a corporation (incorporation)

A

if Previous owners are given 80% or more of the voting stock of the new corporation, the assets and liabilities transferred are treated as property… Therefore, the transfer is tax-free (keeping original tax basis)

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11
Q

What is the tax treatment if a shareholder receives cash or other property in addition to stock for their contribution? (80% or more Control)

A

Gain is recognized for the additional cash and other property (includes securities, for this purpose)

  • Shareholder Basis in the Stock = Adjusted Basis of Property Transferred + Gain – Cash Received
  • Corporation’s Basis in the Property = Transferor’s Basis + Gain Recognized by Transferor
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12
Q

What is the shareholder’s basis in the stock if the shareholder contributes property subject to liabilities? (80% or more Control)

  1. Liabilities < S/H’s Basis in Property

&

  1. Liabilities > S/H’s Basis in Property
A
  1. If L < Property Basis: Shareholder’s basis in the stock received is REDUCED by the amount of liability Relief
  2. if L > Property Basis: (1) GAIN is recognized on the excess amount & (2) Shareholder’s Basis is ZERO
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13
Q

Full Formula for Shareholder’s Basis in Stock Received (80% or more Control)

A

Shareholder’s Basis =

+ Adjusted Basis of Property Transferred

+ Recognized Gain

+ Cash Paid

+ Liabilities Assumed

+ Transaction Costs & Fees

- Cash received

  • FMV of property Received
  • Liabilities Transferred
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14
Q

Full Formula for Corporation’s Basis in property received (80% or more Control)

A

Corporation’s Basis =

+ Adjusted Basis in property in hands of the transferor

+ Gain recognized by the transferor

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15
Q

Examples of Reorganizations That Qualify for tax-free status (transfer of assets & liabilities)

A

All parties providing the consideration (except for services) must have at least 80% or more control

  • Changes in place of organization (NY to Florida charter)
  • Mergers & consolidations of businesses
  • Absorption of subsidiaries (controlled subsidiary to parent company)
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16
Q

80% or more control

A
  • standard of control for tax purposes
  • minimum ownership level required to ID an invested company as a control subsidiary
  • min. ownership level to allow the preparation of consolidated tax returns (optional)

*** DO NOT CONFUSE this with GAAP 50%+ majority rule

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17
Q

What is the tax treatment if a shareholder (control exists) transfers additional property to the corporation but there is no issuance of stock in exchange?

A

Shareholder: No Gain or Loss recognized & increases the tax basis in existing stock by the tax basis in property transferred

Corporation: carries over Shareholder’s Tax Basis of Property

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18
Q

Form 1120

A

Corporate Income Tax Return

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19
Q

Corporate Income Tax Return (1120) Formula

A

Gross Income (worldwide)

=Income before “Special Deductions”

= Taxable Income***** (can subtract Foreign Tax Credit in full from T.I.)

X Tax Rate

= Gross Tax Liability

=Net Regular Tax Liability

+ Personal Holding Company (PHC) Tax

+ Accumulated Earnings Tax (AET)

+ Alternative Minimum Tax (AMT)

= Total Tax Liability

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20
Q

Which corporate revenues are recognized at the EARLIER of when earned or collected?

A
  • Rental income received in advance
  • Interest income received in advance (not municipal bond interest)
  • Royalty Income received in advance
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21
Q

If the corporation is the beneficiary of a life insurance policy on a key employee, what is the tax treatment for the premiums paid?

A

Premiums paid are NOT deductible (& proceeds are not taxable)

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22
Q

If the employee’s family is the beneficiary of a life insurance policy on a key employee, what is the tax treatment for the premiums paid?

A

Premiums paid are DEDUCTIBLE

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23
Q

Company-Owned Life Insurance (COLI)

A

beneficiary may exclude from gross income benefits received up to the total amount of premiums & other amounts paid by the policyholder for the contract, excess is taxable.

Certain exceptions apply (i.e. director or highly compensated employee)

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24
Q

What are the requirements for an accrual basis taxpayer to accrue an expense?

A

Can accrue an expense if the transaction meet both:

  1. All events test: Liability exists & amount can be determined with reasonable accuracy

&

  1. Economic Performance Test: property or services are actually provided
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25
Q

What are the expenses that may be deducted if paid within 2.5 months (corporate tax day)?

A
  • Wages ($1M limit for highest paid exec’s)
  • Bonuses
  • Vacation Pay
  • Charitable Contributions
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26
Q

What is the tax treatment for business start-up and organization costs (state incorporation fees)?

A

(includes legal and accounting fees related to the incorporation)

2 Options for treatment:

  1. Corporation may elect to deduct up to $5,000 for organization costs & $5,000 for start-up costs (in the year of organization)
    - $5k is reduced by the amount the total costs exceeds $50,000 (for each $5,000)
    - Any unused amount is amortized over 180 months (15 years), beginning with the month in which the active trade or business begins
  2. If option #1 is not elected, the costs are capitalized & remain until the entity is liquidated

**** in 2010 ONLY, start-up expenses limit = $10k max & total costs limit = $60,000

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27
Q

What is considered to be “start-up costs”?

A

Start-up costs include any amounts:

  • paid or incurred in connection with creating an active trade or business

Or

  • investigating the creation or acquisition of an active trade or business.
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28
Q

What is considered to be “organizational costs”?

A

Organizational costs include the costs of creating a corporation. (costs of issuing, printing, & selling STOCK – including legal/accounting fees related to offering securities – is NOT considered organizational costs)

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29
Q

What is the tax treatment for a corporation’s compensation expense (wages, salary, payroll taxes, fringe benefits) ?

A
  • Deduct up to $1M for EACH of the highest paid executive officers of a PUBLIC corporation (1125-E)

——- ($500k limit under TARP)

  • Entertainment expenses for officers, directors, & 10%+ owners may be deducted to the extent they are included in the individual’s gross income (amount the individual includes in their own gross income may be deducted by the corporation)
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30
Q

What is the tax treatment for a corporation’s estimated losses?

A

NOT DEDUCTIBLE until actually occurs

  • bad debts expense deductible when actually written off (direct write off method)
  • Warranty expense deductible when repairs actually made
  • contingent liabilities when actually PAID (even if probable & estimable)
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31
Q

What is the tax treatment for interest expense?

A

deductible unless the loan was used for tax-exempt investments (i.e. municipal bonds)

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32
Q

What is the tax treatment for reimbursed employee expenses?

A

Deductible with some exceptions

  • Meals & entertainment: 50% deductible
  • Luxury Skybox deductible limited to the most expensive NON-luxury seat in the venue (only applies if for more than 1 event at the same area)

—- if it was just one event at the arena, it is fully deductible

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33
Q

What is the tax treatment for casualty losses?

A

Deductible with the business property adjusted basis to immediately before the casualty

  • insurance reimbursements deducted from loss

*** there is no $100 floor & 10% of AGI limitation (individual limits)

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34
Q

What is the tax treatment for a corporation’s GW, franchises, & trademarks?

A

Amortized over 15 years (book: annual test for impairment)

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35
Q

What 8 corporate expenditures are never deductible?

A
  1. government fines, fees, & penalties (includes interest penalties)
  2. Federal Income taxes (considered an offset to tax due….but state & local taxes are deductible)
  3. Costs of issuing stock (considered adjustments to proceeds of sale aka PnL)
  4. Lobbying Costs
  5. Compensation over $1m to top executive officers of a public corp. (no limitation for pay to other employees)
  6. Club Dues (too personal in nature to qualify as business expense)
  7. 50% of meals & entertainment (other reimbursed employee expenses are FULLY deductible)
  8. Estimated costs BEFORE they are paid (deductible when paid, eg. Bad debts, warranties, lawsuits, marketable securities, inventory declines)
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36
Q

What is the tax treatment for R&D costs?

A

deductible immediately OR over a minimum of 60 months (5 years)

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37
Q

What is the tax treatment for dividend income from other taxable domestic corporations?

A
  • reported fully in Gross Income
  • Deductible with the DRD (dividends received deduction) – to avoid triple taxation on dividends
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38
Q

What disqualifies an investor corporation for DRD ?

A
  • Dividends from a foreign corporation
  • Borrowed the $$$ to buy the investment (interest expense)
  • Dividends received from a tax exempt organization (muni-bond interest is tax-exempt)

Or

  • Investment owned for less than 46 days (minimum holding period)
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39
Q

Dividends Received Deduction (DRD) Formula

A

DRD% * Dividend

***Exception: DRD = DRD% * Income Before DRD if [Dividend > Income Before DRD > (Dividend x DRD%)]

—– exception ONLY applies to less than 80% ownership ( which qualifies for 80% or 70% DRD)

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40
Q

Dividends Received Deduction (DRD)

Allowed DRD% & Ownership

A

< 20% Ownership…. 70% (unaffiliated co.) Allowed DRD

20% - 80% Ownership… 80% Allowed DRD

80%or more Ownership… 100% Allowed DRD (control)

*** 80%or more —- can file consolidated tax return & eliminate interco. Dividends (same effect as DRD)

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41
Q

Tax treatment for Charitable Contributions by a corporation

A
  • limited to 10% of ATI (income before claiming deduction)
  • unused amount carried forward 5 years (same as individual)
  • PLEDGE: may be accrued (& deducted) if paid within 2 ½ months (by corporate tax day)
  • claimed after all others except “special deductions” (charity, DRD, NOL carry back, & net capital loss carry back)

** individual: 50% of AGI max

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42
Q

Adjusted Taxable Income (ATI)

A

ATI is Net Income adjusted for:

  • Charity
  • DRD
  • NOL Carry back (back 2, fwd 20)
  • Capital Loss Carry Back (back 3, fwd 5)
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43
Q

What is the tax treatment when a corporation sells assets that are held for investment (capital assets)?

A

Proceeds – Tax Basis = Capital Gains or Losses (not deductible but can offset to net = zero)

44
Q

What is the tax treatment when a corporation sells non current assets used in trade or business?

A

Considered section 1231 property

  • if held for 1 year or less: Gains and Losses = Ordinary Income or Losses (can deduct against ordinary income)
  • if held for more than 1 year:

— Losses = Ordinary Losses

— Gains = LT Capital Gains (not deductible, can only offset to net = 0)

45
Q

What is the tax treatment for Capital Losses for corporations?

A
  • Not deductible to corporations but may OFFSET capital gains (Net = 0… “no net capital loss”)
  • Unused amount: carry back 3 years & carry forward 5 years
  • ALL carry back & carry forwards are considered SHORT TERM
46
Q

Foreign Tax Credit Formula

A

Foreign Tax Credit Limit = US Gross Tax Liability * (Foreign Income / Worldwide Income)

*** Tax Credit may never exceed ACTUAL foreign taxes paid

47
Q

What reduces the calculated Gross Tax Liability for corporations?

A

Tax Credits

48
Q

Foreign Tax Credit is available to…

A
  • available to US corporations for income taxes paid to foreign counties on income that is also reported on the US tax return
49
Q

Foreign Tax Credit (Carry back & forward)

A

Back: 1 Year

Forward: 10 years

50
Q

What is the tax treatment for a corporation’s Foreign Income Tax that is also reported on the US tax return?

A

2 Options

  1. Tax Credit, which reduces the calculated Gross Tax Liability (limited to the portion of GTL that is applicable to foreign income)

or

  1. Deductible from Taxable Income in FULL (before being multiplied by tax rate)
51
Q

The Purpose for Accumulated Earnings Tax (AET)

A

to penalize corporations that accumulate earnings (hoard cash) beyond reasonable needs for expansion, retirement of debt, & working capital needs

52
Q

Things to Know about Accumulated Earnings Tax

A
  • Excessive RE is judged by the IRS
  • Not self-assessed (by Audit) (PHC is self assessed)
  • 20% Tax on Undistributed Income only
  • Reduce/Eliminated by Dividend, Consent Dividend, or Paid PHC tax
  • Minimum Accumulated Earnings Credit = Safe Harbor ($250k – mfg & $150k - personal svc corps) + Federal Income Taxes Payable
53
Q

What is the penalty tax for AET?

A

20% tax on undistributed income only

54
Q

How can a a corporation reduce or eliminate an accumulated earnings tax (20%)?

A
  • Actual Dividend***
  • Consent Dividend (hypothetical dividends you pay taxes on but do not actually distribute)***
  • Already Paid PHC Tax

*** If Dividend = (Taxable Income - Min Accum. Earnings Credit)pr more…. no liability for penalty

55
Q

Safe Harbor (AET)

A

$250k for Mfg companies

$150k for personal service corporations

56
Q

Minimum Accumulated Earnings Credit

A

+ Safe Harbor ($250k mfg or $150k personal service)

+ Additional sums retained for paying Federal Income taxes

= Minimum Accumulated Earnings Credit: amount allowed to accumulate

57
Q

Maximum Amount that might be subject to the AET penalty (20%)

A

Max Amount = Taxable Income – Minimum Accumulated Earnings Cred

*** dividend against the total max amount will avoid the penalty

58
Q

Purpose of a Personal Holding Company (PHC) Tax

A

to discourage individuals from sheltering certain types of passive income in corporations (benefiting from lower corporate tax rates)

59
Q

What are the conditions met to be considered a PHC? What is the penalty?

A

Both conditions must be met:

  1. 5 or less individuals own MORE than 50% of the stock
  2. 60% or more of revenue is from passive sources (taxable interest, dividends, rental & royalty income)

20% tax on Undistributed Personal Holding Company Income (UPHCI) (UI - Corporate taxes – Net LT capital gains)

60
Q

Form 1120 PHC

A

Self-assessment as a Personal Holding Company (filing form with tax return)

61
Q

How can a corporation avoid paying the 20% PHC tax?

A
  1. Actual Dividend

Or

  1. Consent Dividend (hypothetical; pay taxes on the dividend but don’t actually distribute) which the individual shareholders end up paying taxes on the dividends received
62
Q

Undistributed Personal Holding Company Income (UPHCI)

A

Undistributed Income of the Corporation - Corporate Taxes - Net LT Capital Gains

63
Q

M-1 Schedule

A

Reconciles Book Income to Taxable Income (before special deductions: DRD, Charity, & NOL Deduction)

  • prepared by the corporation
  • supplementary schedule (1 of 3)
  • purpose is to ID amounts reported differently between GAAP & Tax
  • Temporary Differences (reverse): bad debt expense, warranty expense, depreciation differences
  • Permanent difference (no reversal): muni-bond interest, 50% meals & entertainment, fines, penalties, premiums paid on key person life insurance
64
Q

Examples of Temporary Differences (M-1 & M-3)

A

Bad Debt Expense

Warranty Expense

Depreciation

65
Q

Examples of Permanent Differences

(M-1 & M-3)

A
  • Muni-bond interest
  • 50% meals & entertainment
  • Fines & Penalties
  • Premiums paid on key person life insurance
66
Q

M-2 Schedule

A

Reconciliation of Unappropriated Beg RE to End RE

  • prepared by the corporation
  • supplementary schedule (1 of 3)
  • IRS examines it to determine if any prior period adjustments might require amending returns of earlier years
67
Q

M-3 Schedule

A

reconciliation of Financial Accounting Income with Taxable Income

  • for corporations with TOTAL ASSETS of $10m or more
  • prepared by the corporation INSTEAD OF M-1 (no M-1)
  • more detailed version of M-1 with:

—- income & expense differences separately reported as temporary or permanent differences

  • Also reconciles worldwide consolidated Net Income (loss) per the I/S to NI per the I/S of the includible corporations

—- Income/Loss reconciliation items are shown as single line items

68
Q

Form 1120-ES

A

the quarterly estimated tax payment form required for corporations (4 equal installments)

69
Q

Quarterly Estimated Tax Payments

A
  • applies to corporations
  • paid in 4 equal installments
  • Due on: 15th day of the 4th, 6th, 9th, & 12th months of its taxable year
  • interest applies if not fully paid
  • underpayment applies ($500 limit + more exceptions)
70
Q

What are the exceptions to the underpayment penalties for corporations?

A

If any of the following are met, no penalty:

  • Small Balance (less than $500)
  • Annualized Income: Installments each quarter cover the tax on the income to date
  • CY: estimated tax payments equal at least 100% of CY tax liability
  • PY: estimated tax payments equal at least 100% of PY tax liability (exceptions apply)***

*** PY may not be an excuse if either:

  • no tax liability in PY

Or

  • Taxable Income > $1m in any of the preceding 3 tax years
71
Q

What are the exceptions to using the “PY” condition to escape underpayment penalty for a corporation?

A
  • no tax liability in PY

Or

  • Taxable Income > $1m in any of the preceding 3 tax years

(PY: estimated tax payments is at least 100% of PY tax liability)

72
Q

Under what condition(s) does a corporation need to file a tax return?

A

The corporation is in operation (due 3/15)

** zero taxable income still needs a tax return

73
Q

When is a monthly delinquency penalty applied to a corporation?

A

If the amount paid by the original tax return due date is LESS THAN 90% of the Total Tax Liability (owe more than 10% of Total Tax Liability)

*** this is in addition to interest charges

74
Q

What is the time limit to claim a refund by a taxpayer (1120X)?

A

the LATER of:

  1. 3 years after the original return was due (including extensions)

or

  1. 2 years after the payment of tax
75
Q

What is the difference between the corporation & individual statute of limitation?

A

If part of tax underpayment is a result of fraud (intentional misreporting of TI with specific purpose of evading tax believed to be owing):

75% PENALTY of the portion of the underpayment attributable to fraud (at this point, total penalty is interest + underpayment penalty + fraud)

76
Q

Tax treatment for corporate distributions to its shareholders

A

Taxable as DIVIDENDS to the extent (limited by) Earnings & Profits (E&P)

*** need to figure out how to allocate between Distribution (Taxable) & Return of Capital (Non-Taxable)

77
Q

Current Earnings & Profits (CEP)

A

CY Net Income

+ tax-exempt income

+ DRD

  • Federal taxes
  • Net Capital Losses

= CEP

78
Q

Accumulated Earnings & Profits (AEP)

A

Sum of all previous years E&P (similar to Beg RE)

79
Q

Appreciated Property as a Dividend (Dividend In Kind)

A

Corporation:

  • Capital Gain as if property was sold at FMV (FMV – Basis), which increases TOTAL E&P (not CEP b/c already included)
  • Losses (FMV < Basis) only deductible in complete liquidation (ordinary loss as if sold)
  • No Gain or Loss when subsidiary liquidates into parent (absorption, merge, etc)

Shareholder:

  • Recognized at the FMV (same E&P limits: higher of the of CEP & Total EP)

— Ordinary Income up to E&P (taxable as dividend income)

— ROI (non-taxable) is the excess over E&P limit

80
Q

What is the shareholder’s tax treatment when a corporation distributes cash to its shareholder?

(Total Distributions < CEP)

A
  1. TAXABLE: Dividend Income is limited to HIGHER of:
    (a) CEP or
    (b) Total E&P (CEP & AEP before distribution)
  2. NON-TAXABLE (ROI): Remaining dividends REDUCE basis of investor’s shares

**** If both CEP & AEP are negative amounts, all is Non-taxable (reduce basis)

81
Q

What is the tax treatment if the total distributions during the year EXCEED Current Earnings & Profits?

A

CEP must be prorated proportionately to each distribution

Ratio = CEP / Total Distributions

  • ratio is applied to each distribution received throughout the year
82
Q

Stock Redemption

A

Corporation repurchases shares from a shareholder

83
Q

What is the tax treatment for a Stock Redemption?

A

treated as exchanges - capital gain or loss treatment to the shareholder if at least one apply:

(constructive ownership rules generally apply in each case)

  • Redemption is not necessarily equivalent to a dividend
  • Redemption is substantially disproportionate (reduces ownership percentage)
  • All of the shareholder’s stock is redeemed
  • Redemption is from a non-corporate shareholder in a partial liquidation
  • Distribution is a redemption of stock to pay death taxes under section 303
84
Q

Liquidating Distribution

A

corporation discontinues operations and distributes all its assets

85
Q

Tax Treatment for a liquidating distribution (shareholder & corporation)

A

Corporation: gains & losses are ORDINARY (capital if stock)

Shareholder: Capital gain or loss for difference of (Proceeds – Basis = Gain/Loss)

*** NO E&P limit application

86
Q

What is the tax treatment of a corporation distributing an asset that subject to a liability to a shareholder?

(FMV > Liability)

A

Shareholder: the liability reduces the amount of distribution (FMV – Liability)

  • Distribution is then subject to E&P limit (taxable then excess is non-taxable)

Corporation: treated as a Capital Gain on Sale (FMV – Basis)

87
Q

What is the tax treatment of a corporation distributing an asset that subject to a liability to a shareholder?

(FMV < Liability)

A

Shareholder: FMV is ordinary income up to E&P limit (remaining is non-taxable)

Corporation: TOTAL GAIN = Gain on Sale + Excess = (FMV – Basis) + (Liability – FMV) = (Liability - Basis)

  • must include excess of liability over basis (corporation is relieved of a liability)
  • Total gain increases TOTAL E&P
88
Q

What is the corporation’s tax treatment for a complete liquidation (all assets & liabilities)?

A

Corporation reports Gains and Losses in FULL as if all assets had been SOLD

  • Ordinary Income (capital gain if stock) & Loss

*** may DEDUCT all expenses associated with the corporation

*** only exception is if liquidation is a reorganization in which all A & L retain their tax bases (tax free)

89
Q

What is the tax treatment for a reorganization?

A

All assets & liabilities retain their tax bases in the new corporation (tax-free)

90
Q

What is the corporation’s tax treatment if the corporation distributes a depreciated property to shareholder (dividend in kind)?

(FMV < Tax Basis)

A

Corporation CANNOT deduct the loss (unless the distribution is in connection with a complete liquidation)

91
Q

What is the shareholder’s tax treatment when a corporation’s distribution is NON-LIQUIDATING (regular)?

A

Taxable as Ordinary Income, which is Limited to higher of CEP or Total EP

  • remaining is return of capital (or ROI) which is NOT TAXABLE

*** Loss is not applicable (being given items…. at minimum, all is non-taxable)

92
Q

What is the non-corporate shareholder’s tax treatment when a corporation’s distribution is LIQUIDATING ?

A

Treated as a Sale of Stock: Gain or Loss on Redemption = Capital Gain or Capital Loss

** except when liquidating into the parent company (merger, absorption, etc) – Section 368

93
Q

Types of Reorganizations

A

Type A – Type G

(learn them if you have time)

94
Q

Affiliated Group of Corporations

A

one or more chains of includible corporations connected through stock ownership

  • have common parent corporation owning at least 80% of the voting stock & total value of stock in at least one other includible corporation

** may ELECT to file a consolidated tax return (need to eliminate interco. Profits, dividends, & interest)

** C corporations & S corporations may NOT consolidate together

95
Q

Section 1244 Stock (shareholder treatment)

A

small, domestic corporation stock that was sold directly to individual shareholders

  • must qualify (first $1m, 5 years - less than 50% passive income, original purchaser, individual or partnership = shareholder, US corp stock, exch. For $ or property) not services)
    1. Loss on Sale (value depreciated)
  • Deductible as ORDINARY LOSSES – FORM 4797 LT Business Property (vs. capital losses)
  • Deductible limit up to $50k ($100k MFJ)
  • any unused amount of the losses are treated as capital losses ($3k per year limit)
    2. Gain on Sale (Value appreciated)
  • gain = Capital Gain (Schedule D)
96
Q

How does a shareholder qualify for Section 1244 stock treatment?

A

Any Stock can qualify (P/S, C/S, voting, non-voting)

To qualify:

  1. Aggregate Capital must be LESS THAN $1m @ date of stock issuance (only applies to first $1m of stock)
  2. in the 5 most recent tax years, Corporation earned less than 50% of its revenue from passive sources (royalties, rents, dividends, interest, annuities, & sales/exchanges of stock/securities)
  3. the Stock must be sold by original purchaser
  4. Stock issued by US corp (domestic) to an individual or partnership in exchange for $$ or property (other than stock/securities), not for services
97
Q

Corporate AMT

A

Regular Taxable Income

+/- Adjustments & Preferences: PILE

= AMTI before ACE adjustment (& exemption)

+/- ACE adjustment: SLIM*75%

= AMTI before Exemption

  • Exemption = $40k – 25%(AMTI before Exemption - $150k)

= AMTI

X Tax Rate (20%)

= Tentative Minimum Tax (TMT)

  • Regular Tax

=AMT

98
Q

PILE

A

Adjustments & Preferences for a corporation (increases or decreases Regular Taxable Income in calculating corporate AMT)

P – Private activity bond interest income (form of muni-bond)

I – Installment sales of inventory [excess between installment method (reg) vs. accrual accounting (AMT)]

L – Long term contract income (% of completion method required)

E – Excess of depreciation on personal property over 150% declining balance (reg = 200%)

99
Q

Adjustments & Preferences for a corporation

A

increases or decreases Regular Taxable Income in calculating corporate AMT

PILE

P – Private activity bond interest income (form of muni-bond)

I – Installment sales of inventory [excess between installment method (reg) vs. accrual accounting (AMT)]

L – Long term contract income (% of completion method required)

E – Excess of depreciation on personal property over 150% declining balance (reg = 200%)

100
Q

Adjusted Current Earnings (ACE) Adjustment

A

increases AMTI before ACE adjustment @ 75% of amount

SLIM: 3 items not deductible for AMT, but are deductible for regular tax purposes

S – 70% DRD (20% or less ownership) added back (75% not deductible)

L & I – Life Insurance proceeds on the death of a key employee added back (75% not deductible)

M – Municipal Bond Interest (except private activity bond interest) added back (75% not deductible)

101
Q

SLIM

A

Adjusted Current Earnings (ACE) Adjustment

SLIM: 3 items (@ 75%) not deductible for AMT, but are deductible for regular tax purposes

S – 70% DRD (20% or less ownership) added back (not deductible)

L & I – Life Insurance proceeds on the death of a key employee added back (not deductible)

M – Municipal Bond Interest (except private activity bond interest) added back (not deductible)

102
Q

Treatment for the ACE adjustment to AMT

A

SLIM is added back to AMTI at 75%

If amount is negative, it is limited to cumulative ACE adjustment increases (cumulative net cannot go below zero)

103
Q

Corporate AMT Exemption (formula)

A

Exemption = $40,000 – 25% (AMTI Before Exemption - $150,000)

*Exemption is $40,000 with phase-out ($310k AMTI = $0 exemption)

104
Q

What is the implication when:

Tentative Minimum Tax > Regular Tax

A

Excess amount is AMT

Or (TMT – Regular Tax = AMT)

105
Q

What is the implication when:

Tentative Minimum Tax < Regular Tax

A

No AMT for the tax year

106
Q

When is AMT not applicable to the tax year?

A

When either:

  • Tentative Min Tax < Regular Tax: Regular Tax Due is Higher (no AMT due)

or

  • AMT Exempt in First year, regardless of income

Or

  • AMT Exempt in the second year IF 1st year’s gross receipts do not exceed $5m
107
Q

What is the tax treatment for a corporation’s distribution of cash & appreciated property to a shareholder?

A

Corporation: treats as Gain on Sale of property (FMV – Basis), which increases TOTAL EP (not CEP b/c included already)

Shareholder: Taxable as dividend (ordinary) income to extent of E&P limit (higher of CEP or Total EP)

  1. Cash received

——- Ordinary Income: up to E&P limit

——- Non-Taxable = excess above E&P limit

+

  1. Property Received is taxable @ FMV

——- Ordinary Income: up to E&P limit

——- Non-Taxable = excess above E&P limit

CPA REG (in Progress) (2 decks)

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