REG 3

Question 1

C Corporations, Depreciation, and MACRS - For assets acquired after 1986, what is the recovery method for 3-, 5-. 7-, and 10-year property (MACRS)?

Answer 1

200% Declining Balance - Estimated salvage value is not considered. Notes: *Taxpayer may choose straight-kline depreciation *20-year property uses the 150% declining balance method.

Question 2

C Corporations, Depreciation, and MACRS - What is the half-year convention?

Answer 2

Six months of depreciation is taken in the year of acquisition and the year of disposal. Note: When straight-line depreciation is elected, the half-year convention is still applicable. The method of depreciation used must be used for ALL personal property acquired that year in a given property class.

Question 3

C Corporations, Depreciation, and MACRS - What is the mid-quarter convention?

Answer 3

Mid-quarter convention replaces the half-year convention if greater than 40% of a taxpayer’s property (other than real property) is placed in service druing the last three months of a tax year. This mid-quarter convention treats all property placed in service during any quarter of the tax year as being placed in service on the mid-point of the quarter.

Question 4

C Corporations, Depreciation, and MACRS - What is the mid-month convention?

Answer 4

Mid-month convention is used for calculating depreciation of real property (27.5-year residential rental real estate and 39-year nonresidential real property). The real property is treated as placed in service in the middle of the month of acquisition.

Question 5

C Corporations, Depreciation, and MACRS - What is the expense deduction (Section 179) in lieu of depreciation?

Answer 5

A $125,000 (for 2012; $25,000 for post-2012 years) of acquisition cost of personal property used in a trade or business may be deducted in any one year. Limitations: (1) Deduced for $1 for each $1 of qualifying property placed in service in excess of $500,000 (for 2012; $200,000 for post-2012 years). (2) Deduction is not permitted when a net loss exists or if the deduction would create a net loss (limited to taxpayer’s taxable income from trade or business.)

Question 6

C Corporations, Depreciation, and MACRS - What are Section 1231 assets?

Answer 6

Generally, deprciable or real property used in a trade or business and held over 12 months. *Net all Section 1231 gains and looses. *If Gains> losses, treat the net amount as long-term capital gain. *If looses> gains, treat the net amount as ordinary loss.

Question 7

C Corporations, Depreciation, and MACRS - What is the tax treatment of Section 1245 assets?

Answer 7

Generally depreciable personal property or amortizable personal property (patents, copyrights, leaseholds, and professional sports contracts) used in a business over one year. Nonresidential real property acquired after 1980 but before 1987 if ACRS depreciation was claimed. *Recapture all accumulated depreciation as ordinary income under Section 1245. *Any excess gain is Section 1231 gain.

Question 8

C Corporations, Depreciation, and MACRS - Identify the tax treatment give Section 1250 assets.

Answer 8

Genterlly, real property used in a business and held for more than one year. *Gain/loss is treated (“recaptured”) as ordinary income to the extent of the excess of accelerated depreciation over straight-line depreciation. *Note that, because MACRS uses straight-line depreciation for real property, there is no Section 1250 recapture on disposition of real property plavced in service after 1986 and depreciated under the MACRS rules.

Question 9

S Corporations - What are the eligibility requirements for an S corporation election?

Answer 9

A. Domestic corporation *One class of stock (differences in common stock voting rights are allowed) *Eligible sharholders must be individuals (no nonresident alien shareholders), estates, or certain types of trusts (not corporations or partnerships) *One hundred shareholder limit.

Question 10

S Corporations - Describe the two requirements for election of S corporation status

Answer 10

A. All shareholders must consent. *Election must be made either at any time diring the year immediately preceding the year for which the election will be effective or on or before the 15th day of the third month of the election year (and the election will be retroactive to the first day of the election year).

Question 11

S Corporations - How can S corporation status be terminated?

Answer 11

S corporation status will terminate as a result of the following: *Holders of a majority of the stock consent to a coluntary termination. *The corporation fails to meet any or all of the eligibility requirements. *More than 25% of the cororation’s gross receipts come from pasive activities for three consecutive years and the corporation had C corporation earnings and profits at the end of each year.

Question 12

S Corporations - What tax year must an S corporation adopt?

Answer 12

An S corporation must adopt a calendar year unless a valid business purpose for a different tax year (fiscal year) is established.

Question 13

S Corporations - When does an unrealized built-in gain result?

Answer 13

An unrealized built-in gain results when a C corporation elects S corporation status and the FMV of corporate assets at the elction date.

Question 14

S Corporations - When is an S corporation exempt from a tax on built-in gains?

Answer 14

A. The sale or transfer does not occur within 10 years of the first day of the first year that the S corporation election is made. *S corporation was never a C corporation. *S corporation can demonstrate that the distributed asset was acquired after the S election. *S corporation can demonstrate that the appreciation occurred after the S election. *The net unrealized built in gain has been completely recognized in prior tax years.

Question 15

S Corporations - How is the tax on built-in gains calculated?

Answer 15

Built-gains tax is 35% (the highest corporate tax rate) times the lesser of the following. *Net recognized built-in gains for current year, or *Taxable income of X cororation as if the corporation were a C corporation.

Question 16

S Corporations - That items must be separately listed on an S corporation tax return (Schedule K)?

Answer 16

Some items that must be separatley listed on an S corporation tax return include the following: *Ordinary income *Rental income/loss *Portfolio income (including interest, dividends, royalites, and all capital gains [losses]) *Section 1231 gains and losses *Charitable contributions *Section 179 deduction *Depreciation *Foreign taxes *Tax-exempt interest

Question 17

C Corporations - When does a shareholder contributing property in exchange for corporate common stock have no gain or loss recognized?

Answer 17

The following two conditions must be met: * Transferors/shareholders own at least 80% of the voting and nonvoting stock; and * Boot (cash or other property) or cancellation of debt is not involved

Question 18

C Corportaions - Generally, what is the basis of common stock received by the shareholder?

Answer 18

Basis of common stock reveived: *Cash - amount contributed *Property contributed - asjusted basis (NBV) Services - fair value **Plus any gain recognized by the shareholder.

Question 19

C Corporations - For corporations, are bad debts deductible?

Answer 19

For taxpayers in general (including corporations), bad debts are deductible to the extent the bad debts were previously included in income. The charge-off method (not allowance method) must be used.

Question 20

C Corporations - How are charitable contributions treated by corporations?

Answer 20

The maximum deduction is up to 10% of taxable income before the deduction of the following deduction: the charitable contribution, the dividends received deduction, any NOL carryback, any capital loss carryback, and the US production activities deduction.

Question 21

C Corporations - When are life insurance premiums deductible?

Answer 21

Policies on key employees are not deductible when the corporation is directly or indeirectly the beneficiary. If insured employees name the benficiaries, premiums are deductible as an employee benefit. Note: If life insurance coverage exceeds $50,000, payment of premiums may represent income to the employees.

Question 22

C Corporations - Identify the corporate tax treatment of capital gains/losses.

Answer 22

A. Capital gains are taxed the same as ordinary corporate income. *Corporations may not deduct any capital losses from ordinary income. *Capital losses are deductible to the extent of capital gains. *Net capital losses may be carried back 3 years and forward 5 years as a short-term capital loss.

Question 23

C Corporations - State the general NOL carryforward/carryback rules.

Answer 23

Net operating losses can be carried back 2 years and/or forward 20 years.

Question 24

C Corporations - Name some nondeductible trade or business expenses.

Answer 24

A. Bad debts, allowance method (only specific write-off method is deductible) *Illegal activities (bribes, penalties) *Business gifts exceeding $25 per person per year *Business meals and entertainment are limithed to 50% of total expenses *Political contributions *Club dues *Executive compensation in excess of $1 million per year for each of top five executives in publicly held corporation, unless compensation is performance based.

Question 25

C Corporations - Identify the three levels of the dividends revceived deduction.

Answer 25

A. (1) 70% - Less than 20% ownership; 70% of dividends received are deducted from taxable income up to a limit of 70% of taxable income. (2) 80% - 20%-

Question 26

C Corporations - What are the requirements to file a consolidated return?

Answer 26

All corporations in group: *Must have een members of an affiliated group at some time during the tax year. *Each member must file a consent (act of filing a consolidated return is considered consent). Affiliated group: Common parent owns 80% or more of the voting power of all outstanding stock and 80% or more of the value of all outstanding stock of each corporation.

Question 27

C Corporations - Identify the advantages of filing a consolidated return.

Answer 27

A. *Capital losses of one corporation offset capital gains of another corporation *Operating losses of one corporation offset profits of another corporation. *Elimination of tax on intercompany transactions * Use of excess foreign tax credit by the corporate group *Designation of paret company as agent for the group

Question 28

C Corporations - Describe the corporate AMT

Answer 28

A. *AMT rate of 20% on AMTI *Exemption is $40,000 less 25% X (AMTI-$150,000) *Exemption is completely eliminated at AMTI of $310,000 *Calculated similarly to individual AMT

Question 29

C Corporations - Name some corporate AMT preferences

Answer 29

A. *Percentage depletion *Private activity bonds *Pre-1987 ACRS depreciation

Question 30

C Corporations - What is the adjusted current earning (ACE) adjustment MIND

Answer 30

A. 75% of the difference (positive or negative) between ACE and AMTI before this adjustment and the alternative tax NOL deduction. *Municipal bond interest income other than interest income from private activity bonds issued after 1986 *Increase in life insurance cash surrender value *Non-straight-line depreciation after 1989 vs ADS * Dividends received deduction (less than 20% ownership/70% deduction)

Question 31

C Corporations - What is the accumulated earnings tax?

Answer 31

The accumulated earnings tax is a tax on accumulated earnings beyond the reasonable needs of the business. Corporations can accumulate up to $250,000 or an amount reasonable to the needs of the business without penalty. For personal service corporations, the amount is up to $150,000. Tax is a falt 15% of the unreasonalbe accumulated earnings.

Question 32

C Corporations - Define a personal holding company

Answer 32

A personal holding company must meet BOTH of the following: *At any time during the last half of the taxable year, more than 50% of the value of the corporation’s outstandind stock is owned by five or fewer individuals, and *At least 60% of the corporation’s adjusted ordinary gross income consists of personal holding company income (dividends, rents, royalties, annuities, interest, adjusted rental income, and certain oterh investment income sournces). (NIRD) The penalty tax is 15% of the undistributed personal holding company income. The company is given a 90-day grave period to pay a deficiency dividend.

Question 33

C Corporations - What is a personal service corporation? What is the tax rate?

Answer 33

A personal service corporation is a corporation primarity involved in the performance of one of the following fields: Accounting, law, consulting, engineering, architecture, health, and actuarial science. Tax rate is a flat 35%.

Question 34

C Corporations - What are the tax implications of a tax-free reorganization?

Answer 34

A tax-free reorganization is a nontaxable transaction except to the extent of boot received.

Question 35

Exempt Organizations - Other than for a 501(C)(1) corporation, which is created through an act of Congress, what are the general requirements for a corporation to obtain tax-exempt status?

Answer 35

Other than for a 501(C)(1) corporation, which is created through an act of Congress, the general requirements for a corporation to obtain tax-exempt status are listed below: *Mae a written application for exempt status *Be approved by the IRS *Become incorporated under the standard procedures *Issue capital stock * Include in the Articles of Organization the fact that the articles limit the purpose of the entity to the charitable/exempt purpose

Question 36

Exempt Organizations - What are the general requirements for a 501C(3) corporation to maintain its tax-exempt status?

Answer 36

The general requirements for a corporation to maintain its tax-exempt status are as follows: *No part of the net earnings may insure to the benefit of any private foundation or individual. *No substantial part of the activities (eg, propaganda or influencing legislation) * The organization may not directly participate or intervene in any political campaign. NOTE: The organization must also file the required annual information tax forms (if applicable). If the organization fails to file for three consecutive years the tax-exempt status will be revoked

Question 37

Exempt Organizations - When does a private foundation terminate involuntarily?

Answer 37

A private foundation terminates involuntarily when either of the following occurs: *It becomes a public charity (i.e., it cannot be both). *It commits repeated violations or a willful and flagrant violation of any of the private foundation provisions.

Question 38

Exempt Organizations - What are the categories of private foundations that are excluded from the provisions of Section 509 (i.e., they are deemed “public organizations”)?

Answer 38

The categories of organizations that are excluded from the provisions of Cection 509 are the following: *Maximum (50%-type) charitable donees *Broadly publicly supposted organizations reveiving more than one-third of their annual support from members of the public and less than one-third from investment income and unrelated business income *Supporting organizations *Public safety testing organizations

Question 39

Exempt Organizations - What is the definition of “unrelated business income” (UBI)

Answer 39

Unrelated business income (UBI) is gross income from any unrelated trade or business “regularly” carried on, minus business deductions connected therewith. UBI is: *Derived from an activity that constitutes a trade or business; *Regularly carried on; and * Not substantially related to the organization’s tax-exempt purposes.

Question 40

Exempt Organizations - How is UBI taxed for an exempt organization?

Answer 40

Although an organization may have tax-exempt status, the organization may become subject to regular corporate income tax on its unrelated business income (UBI). *The organization is allowed a $1,000 specific deduction from UBI; thus, only UBI in excess of $1,000 is subject to tax. *Further, there are other types of income that are specifically excluded from tax.

Question 41

Exempt Organizations - What are some items of income (other than the $1,000 that is specifically excluded from tax) that are excluded from tax for the exempt organization?

Answer 41

Items of income that ar specifically excluded from tax for the exempt organization include: *Royalties, dividend, interest, and most annuities *Rents from real property and rents from personal property leased with real property (subject to limitations), other than income from debt-financed property *Gains and losses from the sale/exchange of property not held primarily for sale to customers *Income from research of a college or hospital *Income from redearch of a college or hospital *income from labor unions used to establish excludive-use faciiities *Activies limited to exempt organizations by state law *Income from the exchange or rental of membership lists

Question 42

Exempt Organizations - What are the three types of exempt organizations that do not have an annual filing requirement of an information return with the IRS?

Answer 42

The three types of organizations that do not have and annual filing requirement of an information return with the IRS are listed below: *Churches and exclusively religious activities of a religious order or internally supported auxiliaries; *Certain organizations (educational organizations, religious organizations, public-type charities fraternal organizations, and those organized to prevent cruelty to children or animals) That normally have less than $5,000 in annual gross receipts; and *Organizations that normally have less than $50,000 in annual gross receipts.