REG Study Unit 7

Question 1

Limited Liability Company (LLC)

Answer 1

Taxed as partnership.
May elect to be treated as corporation for tax purposes.
Allows limited liability of the owners and retain single taxation.
Owners allowed to participate in operations of the business.
No restrictions on the type of owners.

Question 2

General Classification of Entities

Answer 2

• No election and > 1 member=Partnership
• No election and 1 member=sole proprietorship.
• New foreign entity with limited liability= Association taxed as corporation.

Question 3

Mandatory Corporate Classification

Answer 3

Entities incorporated under state/federal law.
Associations
Joint stock companies
Insurance companies
Certain banks
State-owned organizations
Certain foreign organizations
Publicly traded partnerships

Question 4

C Corporations

Answer 4

Corporations other than S Corporations

Question 5

S Corporations

Answer 5

Pass-through entity that is not subject to the regular corporate income tax.
Must elect subchapter S status to be treated similarly to partnerships.

Question 6

Not treated as corporations

Answer 6

Partnerships, trusts, and estates

Question 7

Publicly traded partnerships

Answer 7

Ineligible entities and must generally be taxed as corporations

Question 8

Professional Association (PA)

Answer 8

Association of professionals
Treated as a corporation for tax purposes if organized under a state’s Professional Association Act and operated as a corporation.
One individual may be a PA

Question 9

Personal Service Corporation (PSC)

Answer 9

• Corporate rates do not apply.
• Taxed at a flat rate of 35%
• Principal activity is performing personal services by employee-owners
• Employee-owner owns more than 10% of the stock.
• IRS may allocate income, deductions, credits, exclusions, and other allowances between a PSC and its employee-owners if substantially all the services are performed for one other corporation, partnership, or entity, and the principal purpose is tax avoidance.

Question 10

Personal Holding Company (PHC)

Answer 10

Nonexempt closely held corporation.
Significant portion of income is passive in nature.
Subject to penalty tax on excess personal holding company income.

Question 11

Check-the-Box Regulations

Answer 11

• Permit entity to choose between taxation as corporation or partnership.
• Eligible entity allowed to elect to be taxed as a corporation or a partnership.
• Eligible entities are not required to be treated as a corporation under federal tax law.

Question 12

Single vs. Multi-Member Entities

Answer 12

• Single member can elect to be taxed as a corporation or disregarded entity from its owner (sole proprietorship).
• Two or members can elect to be taxed as either a partnership or a corporation.

Question 13

Tax year of Corporations

Answer 13

• Corporation may elect a calendar or fiscal tax year.
• PSC is required to use a calendar tax year. except a valid business purpose or makes “minimum distributions.”
• Corporate tax return is due on or before the 15th day of the 3rd month following the close of the tax year. file form 7004 and pays estimated unpaid tax is allowed an extension of up to 6 months.

Question 14

Cash Method of Corporations

Answer 14

Cash method may only be used by:
- PSCs
-S Corporatins
-Farming Corporations
-C corporations with average annual gross
receipts of up to $5 million for 3 prior tax
years

Question 15

Corporation Income Tax Formula

Answer 15

Income
-Exclustions
=Gross income
-Deductions
=Taxable Income
x Tax rate
=Gross regular tax liability
-Credits
=Net regular tax liability or refund receivable
\+AMT
\+FICA taxes
\+Special taxes
=Tax liability or refund receivalble

Question 16

Excluded Items Gross Income of a Corporation

Answer 16

-Capital Contributions such as gifts from nonshareholder, property other than money from a nonshareholder.
-Property assigned basis of zero.
-Pro Rata contribution-shareholder basis in
stock increases, corporation takes
transferred basis in property
-Treasury stock transactions no gain or loss is recognized on a sale or exchange of its own stock.

Question 17

Included items Gross Income of a Corporation

Answer 17

-Life insurance income proceeds due to death of the insured are generally excluded .
-Employer policy on employee is taxable to the extent proceeds exceed premiums paid.
-Policy transferred (secured debt) for consideration is taxable to the extent that proceeds exceed the consideration.
-Discharge of Debt from cancellation at less than outstanding carrying amount is excluded to extent corporation is insolvent.
Reduction of tax attributies dollar for dollar
in order:
NOLs and carryovers
General business credit
Capital loss carryovers
Basis in property
Foreign tax credit carryovers
-Bond Repurchase
Include the issue price minus the
repurchase price and any premium it has
already recognized.
-Sinking-fund income
Interest or other income from property to
satisfy an obligation.
-Unrestricted claim in the year of receipt
(prepaid rent)
-Refunds of state taxes to the extent that the
deduction in prior year generated a tax
benefit.

Question 18

Dividends-Received Deduction

Answer 18

Ownership

Question 19

DRD Taxable Income Computatiion

Answer 19

TI before any of the following:
  Dividends-received deduction
  Dividends-paid deduction
  NOL Deduction
  Capital loss carryback
  Certain extraordinary dividend adjustments

Ti limit does not apply if a current NOL exists or an NOL results from the DRD.

Question 20

Gifts deduction

Answer 20

Business gifts are deductible up to $25 per donee per year

Exception: No limit for signs/promotional materials under $4 with donor’s name

Question 21

Excessive Compensation limit

Answer 21

Maximum deduction of $1 million per employee, applies to top 5 officers

Limit does not include certain retirement benefits or performance-based bonuses.

Question 22

Stock Compensation

Answer 22

FMV is gross income to employee when not subject to substantial risk of forfeiture and value can be reasonably ascertained.

Question 23

Key employee life insurance

Answer 23

Premiums are not deductible if corporation is a beneficiary.

Interest expense on such policies also denied.

Question 24

Research & Experiment Expenditures Deduction

Answer 24

May be capitalized, amortized, or currently deducted.

Does not include market or sociological research or development of art, equipment purchases, or land purchases.

Question 25

Modified Deductions for Computing NOL

Answer 25

NOLs from other years and charitable contributions is not allowed in computing current NOL
Allowable depreciation may not create or increase an NOL.
Dividends-receied deduction (DRD) may product or increase an NOL and may disregard the limitations on a DRD when calculating an NOL. DRD would increase the NOL.

Question 26

Applying NOLs

Answer 26

Carried back 2 years/forward 20 years

May elect to forgo carryback

Must be applied to earliest tax year to which it can be carried

Question 27

Net Capital Gains

Answer 27

Excess of net long-term capital gains (NLCG) over net short-term capital lossesn(NSTCL)
Taxed as ordinary income
NSTCGs is treated as ordinary income unless offset by LTCLs.

Question 28

Capital losses

Answer 28

Deductible to extent of capital gains.
Net capital loss not deductible against ordinary income.
Carryback to each of the proceeding years and forward 5 succeeding years.
No election to forgo carryback
Treated as short-term capital loss in carryover year.
May not produce or increase NOL

Question 29

Reconciliation

Answer 29

M-1 Reconciles book income to tax income.

M-3 is required for corporations with total assets of $10 million or more.

Question 30

Increases to Book Income

Answer 30

Federal income tax expense
Excess of capital losses over capital gains
Income subject to tax not recorded on books
Expenses on books not deducted for tax

Question 31

Decreases to Book Income

Answer 31

Income recorded on books not subject to tax

Deductions on return not charged to book income.