REG 4 - Corporate Taxation

Question 1

Basis of property corporation receives

Answer 1

Greater of:

1) the transferors adjusted basis (NBV) of the property (plus any recognized gains) or
2) The debt assumed by a corporation

*If the aggregate adjusted basis of property contributed to a corporation by each transferor in a tax-free incorporation exceeds the aggregate FMV, the basis is limited to the FMV

Question 2

Shareholder tax consequences when exchanging property for corporation common stock

Answer 2

No gain or loss if:

1) 80% control by total shareholders
2) No receipt of boot

Question 3

Liabilities assumed in excess of basis

Answer 3

Generates gain.
NBV assets
(liabilities)
=Gain

Question 4

Computation of basis to shareholder (of common stock received from corporation)

Answer 4

Adjusted basis of transferred property
\+FMV of services rendered
\+Gain recognized by shareholder
-Cash received
-Liabilities assumed by the corporation
-FMV of nonmoney boot received

Question 5

Deductible executive compensation max

Answer 5

$1,000,000 for CEO, CFO, +3

Question 6

Interest Expense deductions (corporations)

Answer 6

1) Business interest = incurred and paid = Tax deductible up to 30% of business income
2) Investment interest = deductible up to taxable investment income
3) Prepaid interest = Deduct next year when incurred

Question 7

Charitable contributions deduction (corporations)

Answer 7

10% of adjusted taxable income before dividend-received deduction or any capital loss carryback
*Must be accrued and paid by April 15th

Question 8

Business losses or Casualty losses (corporations)

Answer 8

100% deductible

*Partially destroyed property is limited to the lesser of the change in FMV or NBV

Question 9

Organizational and Start up costs deductions (corporations)

Answer 9

$5,000 + Excess divided over 180 months

*Phase out if over 50,000

Question 10

Organizational and start-up costs included and excluded

Answer 10

INCLUDED:
-legal services
-accounting services
-fees paid to the state
EXCLUDED:
-cost of raising capital (selling stock, transferring assets to corporation, etc)
-commissions to underwriter

Question 11

Business gifts deduction (coporations)

Answer 11

$25 per person, per year

Question 12

Life insurance expense deduction (corporations)

Answer 12

DEDUCTIBLE:
-Insured employee named as beneficiary, employee owns the policy
NOT DEDUCTIBLE:
-Corporation named as beneficiary, corporation owns the policy
*proceeds from the death of an officer are not includable in taxable income however

Question 13

Dividend Received Deduction %s

Answer 13

0% to 20% = 50% deduction (“unrelated”)
20% to 80% = 65% deduction
80% or more = 100% deduction

Question 14

DRD taxable income limitation

Answer 14

DRD equals the lesser of:

1) 50/65% of dividends received or
2) 50/65% of taxable income
* minimum holding period of more than 45 days

Question 15

Exception to DRD taxable income limitation

Answer 15

The limitation does not apply if the full DRD results in a net operating loss

Question 16

Corporate Taxable income steps

Answer 16

Gross income
(deductions)
=A
(Charitable contributions deduction)
=B
(Dividends received deduction)
= Taxable income or loss

Question 17

Schedule M-1 and M-3

Answer 17

Reconcile net income to taxable income. M-1 does not distinguish between temporary and permanent differences while M-3 does

Question 18

Estimated payments of corporate tax

Answer 18

Corporations are required to pay 1/4th of their estimated tax on the 15th day of the 4th, 6th, 9th and 12th months of the year

Question 19

Small corporation estimated payments

Answer 19

Required to pay the lesser of:

1) 100% of the tax shown on the return for the current year or
2) 100% of the tax shown on the return for the preceding year
* Cannot be used if the corporation owed no tax in the preceding year

Question 20

Large corporation estimated payments

Answer 20

Any corporation with $1million or more income must pay 100% of the tax shown on the current year return

Question 21

General Business tax credit

Answer 21

Total credit
(25,000)
(remaining credit allowed *25%)
=general business credit allowed
*Carry back 1 year and forward 20

Question 22

Foreign tax credit

Answer 22

Step 1: Determine the qualified foreign income taxes paid
Step 2: Compute the foreign tax credit limitation by multiplying the pre-credit US tax paid by the ratio of foreign source taxable income to income from both foreign and domestic sources
Step 3: Take the lesser of the two
*Carry back 1 year and forward 10

Question 23

Foreign tax credit example

Answer 23

Worldwide taxable income: $20 million
Income from foreign sources: $5 million
Qualified foreign taxes: $2.5 million
Tax rate: 21%

Step 1: $2.5 million
Step 2: 
20 mill x 21% = 4.2 mill
5 mil / 20 mil = 25%
4.2 x 25% = 1,050,000
Step 3: 1,050,000 is the foreign tax credit. the difference between steps 1 and 2 can be carried back 1 year and forward 10

Question 24

Accumulated Earnings Tax

Answer 24

Paid in addition to regular tax. 20% flat tax on improperly retained earnings if in excess of $250,000

Question 25

Personal Holding Company Tax

Answer 25

Paid in addition to regular tax. 20% tax on income not distributed. Personal holding companies are defined as corporations more than 50% owned by 5 or fewer individuals and having 60% adjusted ordinary gross income consisting of:

• Net rent
• Interest that is taxable
• Royalties
• Dividends from an unrelated domestic corporation

Question 26

Consolidated tax return %

Answer 26

80%-100% of voting power or value of all outstanding stock (aka affiliated group)

Question 27

Brother-Sister Corporation

Answer 27

An individual owns 80%+ of the stock of two or more corporations. May NOT file a consolidated return

Question 28

Advantages of filing a consolidated return

Answer 28

• Capital losses can be offset against capital gains of another corporation
• Dividends received are 100% eliminated because they are IC dividends

Question 29

NOL pre 2018

Answer 29

Carryback 2 years, carryforward 20

Question 30

NOL 2018-2020

Answer 30

Carryback 5 years, carryforward indefinitely

Question 31

NOL 2021+

Answer 31

No carryback, carryforward indefinitely (NOLs being carried forward can only offset 80% of taxable income)

Question 32

Corporate net capital loss

Answer 32

Carryback 3 years, carryforward 5

Question 33

Individual net capital loss

Answer 33

$3,000 max, carryforward indefinitely

Question 34

Order of distribution allocation

Answer 34

Current E&P before accumulated E&P. Any excess distribution over the both combined is a nontaxable reduction of the stock basis. Anything over that is considered a capital gain

Question 35

Multiple distributions throughout the year (current vs. accumulated E&P)

Answer 35

Current E&P is allocated on a pro rata basis

Accumulated E&P is applied in chronological order

Question 36

Property dividends

Answer 36

Unlike most dividends, if property appreciates then you recognize gain and tax it to the extent of E&P from gain

Question 37

Corporate liquidation

Answer 37

Liquidation results in double taxation. The corporation and shareholders generally have to recognize gain or loss

Question 38

Reorganizations

Answer 38

Tax-Free as long as the company survives

Question 39

Worthless stock: section 1244 stock

Answer 39

can be treated as an ordinary loss instead of a capital loss, up to 50,000 (100,000 for MFJ)

Question 40

Qualified small business stock

Answer 40

An individual who owns QSBS for more than 5 years may exclude 100% of the gain limited to the greater of:

1) 10 times the taxpayers basis or
2) $10 million

Question 41

Stock redemption / surrender

Answer 41

If proportional: taxable dividend income
If disproportional: taxable capital gain/loss
*disproportional when: 
1) Must now own less than 50% 
2) ownership reduction was at least 20%