REG Chapter 3

Question 1

What entities are subject to double taxation?

Answer 1

Only C Corporations (Form 1120)

Tax due on 04/15

Question 2

Corporation - Formation Tax Consequences

Answer 2

General rule is that there is no Gain or Loss recognized when issuing stock in exchange of property during:

Formation
Reacquisition
Resale

Question 3

Corporation Basis of property when it is formed

Answer 3

The basis of the property received from transferor/shareholder is the greater of:

• Adjusted Basis
  or
• Debt assumed by corporation

Question 4

Shareholder Tax Consequences when forming corporation

Answer 4

If contributing property (not services) in exchange for common stock will not have a gain or loss if meeting the two conditions:

1. 80% control
2. Boot not involved

Shareholder who contributed only services is not counted as part of 80% control. This SH recognized FMV as ordinary income

If boot is involved, then SH recognizes gain to the lesser of cash received or realized gain

Question 5

Shareholder forming corporation and receiving cancellation of debt - what happens?

Answer 5

If the cancellation of debt exceeds adjusted basis of assets then
- transferred is considered boot

If the cancellation of debt is < than adjusted basis of asset then
- no gain recognized

Question 6

Shareholder basis when forming corporation

Answer 6

Cash
+ Property adj. basis reduced by debt assumed by corporation
+ gain recog. by shareholder (when debt exceeds asset adj basis)

Question 7

A shareholder contributes his services to forming a corporation- what happens?

Answer 7

Shareholder recognized ordinary income at FMV

Question 8

Schedule M-1 and Schedule M-3

CONFUSED ABOUT THESE

Answer 8

Schedule M-1 reconciles permanent and temporary differences. M-1 does not distinguish between temporary and permanent differences. Schedule M-3 does.

Temporary differences: interest, rental, and royalty income received in advance - taxed when received

Permanent differences: interest income from municipal or state bond, proceeds from life insurance, federal income taxes

Interest exp. to carry municipal bond, + to acg income
Interest - to acg income
Bad debt exp., + to acg income (only write off allowed)
Municipal bond income, - to acg income

M-3: Corporation with assets greater than $10M

Question 9

Trade or business deductions of a corporation - are they deductible?

Answer 9

Ordinary and necessary expenses paid or incurred during the year are deductible!

Example: reasonable salaries, office rentals, office supplies, traveling expenses

Question 10

Domestic production deduction of a corporation

Answer 10

Made and sold in america gets deduction

Question 11

Can a corporation deduct bonus accrual?

Answer 11

Yes - for non shareholder employees and paid by 04/15

Question 12

Corporation charitable contribution

Answer 12

Maximum of 10% of adjusted taxable income
Carry forward the excess for 5 years - accrued and paid by 04/15.

(individual has a limit of 50% cash and 30% FMV of property)

Use taxable income BEFORE DRD

Question 13

Corporation business losses or casualty losses

Answer 13

100% deductible

No $100 deduction like individual
No 10% AGI reduction like individual

Question 14

Corporation organizational expenditures and start up costs

Answer 14

5K of organizational expenditures and 5K of start-up costs

Excess is amortized over 15 years

Example: legal services, drafting corporate charter, bylaws, minutes of meetings, accounting services, fees to the state of incorporation

Question 15

Treatment of goodwill

Answer 15

Tax: amortize over 15 years
GAAP: not amortized, just test for impairment

Question 16

Life insurance premiums - are they deductible by the corporation?

Answer 16

If Corp is beneficiary NO

If employee is beneficiary then YES

Question 17

Corporation business gift

Answer 17

25 per person

Question 18

Corporation business meals and entertainement

Answer 18

50% deductible

Question 19

Corporation capital gains and losses

Answer 19

Capital losses not allowed, they only offset capital gain (for individuals it is $3K deduction and forever)

Capital loss carryover back 3 years, forward 5 as SHORT term

Capital gain are taxed as ordinary income - same tax rate

NOL- same as individual - 2 back and 20 forward

Question 20

Corporation - General Business Credit

Answer 20

Credit may no exceed net income tax minus

25% of tax liability above $25K
or
Tentative minimum tax for the year

Question 21

Corporation Dividend Received Deduction

Answer 21

0 % - < 20 % 70% deduction - take lesser of 70% taxable income before DRD or 70% of dividend)

20% - < 80% 80% deduction
80% or more 100% deduction

does not apply to personal service corporations
personal holding companies
personally taxed S corporations

Question 22

When is a C corporation required to use accrual of accounting?

Answer 22

Purchases and sales of inventory
Tax shelters
Certain farming corporations
C corporations with average annual gross receipts of $5M or more for the last 3 years

Question 23

Estimated payments of corporate tax for a C corporation?

Answer 23

Small Corporation: 100% of the taxed for the CY or 100% of the tax for the PY

Large Corporation: taxable income of $1M or more in any of the 3 proceeding years - must pay 100% of tax shown on CY return

Question 24

C Corporation consolidated tax returns

as such, S corporations cannot consolidate, same goes for foreign corporations, insurance companies, others

Answer 24

Take 100% DRD

Consolidate return when the affiliated party 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

If one individual owns more than 80% then they cant file together

Question 25

Corporations - accumulated earnings tax

Answer 25

Imposed for retaining earnings instead of distributing dividends. Imposed if earnings in excess of $250,000, taxed at 20%

To avoid the corporation may show that the $ is needed to conduct their regular course of business or the corporation may also pay dividends by 03/15 of the following year

Question 26

Corporations - Personal holding company

Answer 26

When more than 50% is owned by 5 or fewer individuals AND having 60% of adjusted ordinary gross income that consists of:

N - net rent
I - interest that is taxable
R - royalties
D - dividends

These corps are taxed at 20% more on personal holding income not distributed. This tax is paid in addition to AMT.

Question 27

Liquidation

Corporation sells assets and distributes cash to shareholders

Corporation distributes assets to shareholders

(Double taxation for both!!)

ALSO CHECK PRINTED QUESTION

Answer 27

Corporation recognizes a gain/loss
Sales Price - Basis

Shareholder recognizes a capital gain/loss
Proceeds - Basis

Corporation distributes assets recognize gain/loss
FMV - Basis

Shareholder receives asset recognize capital gain/loss
Sales Price - Stock Basis

Question 28

Worthless Stock Section 1244

small business

Answer 28

If the stock is sold or becomes worthless, the original stockholder can claim an ordinary loss (fully tax deductible) instead of a capital loss up to $50K if single, or $100K if MFJ.

The loss in excess of this amount is a capital loss which offsets capital gains and then a maximum of $1,500, or $3,00 if MFJ, will be deductible per year

Question 29

Treatment of state income taxes, city income taxes, federal payroll taxes

Answer 29

All of these taxes are deductible when incurred on property or income relating to the business

FEDERAL income taxes are not deductible

FOREIGN income taxes may be used as a credit

Question 30

Distributions to shareholders from current earnings vs accumulated earnings and in excess of these two

Answer 30

Distribution first comes from current earnings and then from accumulated. Both of these are considered dividends.

Once these two are used up, the remainder that is distributed is considered return of capital

If the corporation makes multiple distributions during the year, current E&P is allocated on pro rata basis. Then accumulated E&P is applied in chronological order.

Question 31

Non-liquidating distribution of property to a SH

INCOMPLETE - NEED HELP FROM ROMAN

Bc there is also a gain of 50k
You take current accumulated plus the gain of 50k
Comes out to 230k but you can only tax up to 200 bc 30 is a capital gain to shareholder

Answer 31

Taxable to individual at FMV but not exceeding current and accumulated earnings

If the corporation distributes property, the corporation pretends it sold the property to the SH, so it will recognize a gain calculated by FMV - Adusted Basis

Question 32

S Corporation Election

Answer 32

Pass through entity where eligible shareholders are:

• individual
• state
• certain types of trusts
• can’t be a corporation or partnership

100 SH limit and only one class of stock, so preferred stock is not permitted

Election is effective as of 01/01 if made by 03/15 and all SH must consent to the election

12/31 is required year end

Benefit over C corp: S corp’s capital losses can be claimed by SH as they flow through (net ST & LT)

Question 33

Computing SH Basis in S Corporation

BASE

Answer 33

Initial Basis
\+ income - includes tax free income
\+ additional SH investment in corporation stock
- distribution to SH
- loss or expense items

SH can deduct a pro rata share of S corporation loss limited to:
Basis + direct SH loans - distributions

@ year end, SH basis is increased by SH’s share of taxable income

Question 34

Taxability of Distributions to SH

Answer 34

S corp WITH NO C corporation E&P

• distribution decreases SH basis and is not taxable to the extent there is basis
• if there is no basis then tax as capital gain distribution

S corp WITH C Corporation E&P

Allocation of income is based on per-share per-day basis

Question 35

How and when is an S corporation terminated?

Answer 35

• Majority of SH decided (voting and non-voting are treated equally)
• Corp fails to meet eligibility requirement (corp or foreign owner)
• +25% passive investments in 3 consecutive years (3 strikes you are out)

If S election is terminated/revoked a new election can’t make for 5 years unless IRS gives you permission

Question 36

Unrelated Business Income (UBI)

Answer 36

• comes from activity that constitutes trade of business
• regularly carried on
• not substantially related to tax-exempt purpose (if done by handicap people it is tax exempt)

Entity must make estimated tax payments on UBI
Only UBI exceeding $1K is taxable

Question 37

Organizations Exempt from Tax
and
Unrelated Business Income (UBI)

Answer 37

• comes from activity that constitutes trade of business
• regularly carried on
• not substantially related to tax-exempt purpose (if done by handicap people it is tax exempt)

Entity must make estimated tax payments on UBI
Only UBI exceeding $1K is taxable

Tax due May 15 - no need to file if
$50,000 or less gross receipt
C - churches
H - high school religious
R - religious orders
I - internal support auxiliaries
S - societies - missionary related
T - Tax exempt - organized by congress