REG - Tax - Corporation

Question 1

How much loss can each shareholder claim on income tax return for the year? Example - S corp with 2 sh. Sh invested 5k in CS and 15k loan. Corp has 60k loan in year and 90k operating loss.

Answer 1

An S corp loss is passed through to shareholders and is deductible to the extent of a shareholder’s basis for stock plus the basis for any debt owed the shareholder by the corp. Here each sh allocated loss of 45k is deductible to the extent of 20k. The remainder 25k can be carried forward indefinitely by each shareholder and deducted when there is basis for stock or debt to absorb it.

Question 2

How can corp avoid penalty for underpmt of federal estimated taxes?

Answer 2

To avoid a penalty for underpmt of estimated taxes, a corp’s quarterly pmts must be at least equal to the least of 1 - 100% of the tax shown on the current year’s tax return, 2 - 100% of the tax that would be due by placing income for specified monthly periods on an annualized basis OR 3 - 100% of the tax shown on the corp’s return for the preceding year, provided the preceding year showed a positive tax liability and consisted of 12 months.

Question 3

Two people for a corp. One gives land and bldg with 120k basis and 200 FMV to corp with mortgage of 60k which corp assumes. What is basis of land and bldg to corp?

Answer 3

120k. The land and bldg were transferred in a nontaxable sec 351 transfer to a controlled corp. The basis of the land and bldg to Corp would be the same as the person, increased by any gain recognized by the person. Since he did not receive any boot, no gain is recognized.

Question 4

What tax year ends can the following have - C corp, S corp, trusts

Answer 4

A C corp can adopt a calendar year or any fiscal year that it chooses.
On the other hand, restrictions apply to the adoption of a taxable year by S corp, limited liability companies, and trusts in order to prevent the deferral of income to owners and beneficiaries that could otherwise be achieved.
An S corp’s income is generally passed through to shareholders at the end of the S corp year. An S corp generally must adopt a calendar year, and can request permission to adopt a fiscal year only if the corp establishes a business purpose.

Question 5

What tax years can limited liability corp have?

Answer 5

A LLC that does not elect to be taxed as an association is a PS for tax purposes and is subject to the same restrictions regarding the adoption of a taxable year that apply to other PSs. An LLC must adopt the same taxable year as used by its one ore more owners who have an aggregate interest in LLC profits and capital exceeding 50%.

Question 6

What tax years can trusts have?

Answer 6

Distributions from trusts are taxed to beneficiaries in the beneficiaries’ tax year in which the trust’s year ends. As a result, trusts are generally required to adopt a calendar year.

Question 7

How does a corp go from book income to taxable income?

Given book income, meals and ent exp, and federal income tax exp

Answer 7

Add back only 50% of business meals and ent as deductible for tax purposes, and all federal income tax expense is not tax deductible and has to be added back to book income.

Question 8

How do you calculate gross income and stock basis change to individual from S corp? Example: Person A has 40% interest in B, an S corp. A’s basis is 2k. B distributed 100k and reported operating income of 200k. What is A’s gross income? What is ending stock basis?

Answer 8

An S corp is a pass through entity and its items of income pass through to be reported on shareholder returns. A must include in gross income his share of S corp’s operating income = 80k.
This passthrough of 80k increases his stock basis to 82k and permits the 40k cash received to be treated as a nontaxable return of stock basis. The ending stock basis would be 42k.

Question 9

What happens when a partnership incorporates? Example: transfer all assets and liabilities to corp for all shares

Answer 9

No gain or loss is recognized if property is transferred to a corp solely in exchange for stock, if immediately after the transfer, the transferor is in control of the corp. For purposes of determining whether consideration other than stock (boot) has been received, the assumption of liabilities by the transferee corp is not to be treated as the receipt of money or other property by the transferor.
Thus, no gain or loss is recognized on transfer or A and L for all corp’s stock, on dist of corps stock to its partners in liquidation, and when the partners receive the stock in liquidation of their PS interests.

Question 10

How much is allowed as an exemption to compute AMTI - alternative minimum taxable income? Example - AMTI before exemption is 250k.

Answer 10

A corp is allowed an exemption of 40k in computing its AMTI. However, the 40k is reduced by 25% of the corporation’s AMTI in excess of 150k.
Example - amount of exemption is 40 - [(250-150)X25%]=15k

Question 11

How do you calculate net operating loss (NOL)?

Given gross income, expenses, charitable contrib and carryover contrib from prior year, NOL carryover

Answer 11

A dedn for a NOL carryover is not allowed in computing NOL.
A dedn for charitable contributions is generally not allowed since the charitable contrib dedn is limited to 10% of TI before the charitable contrib and dividends received dedn for the year (can apply carryover contrib from prior year)
NOL = gross income less expenses (not including the charitable contrib)

Question 12

How do you calculate ACE adjustment and AMT exemption?

Given, reported adjusted current earnings (ACE) of 500k. AMTI before adj is 200k. What is AMTI after exemption?

Answer 12

The pre-ACE AMTI of 200k is increased by an ACE adj of 225k. ((500-200)X75%) This results in an AMTI of 425k. No AMT exemption is available as the 40k exemption is reduced to 0 by 25% of AMTI in excess of 150k.

Question 13

What amount should be included as gross income for receipt of samples? In example, samples were received to Corp and donated to q qualified exempt org and deducted their FMV as a charitable contrib.

Answer 13

When unsolicited samples of items that are normally inventoried and sold in the ordinary course of business are received from a supplier, and later donated as a charitable contrib, the FMV of the items received must be included in gross income. The taxpayer is then allowed a charitable contrib equal to the FMV of the items donated.

Question 14

How much of dividend between parent and subsidiary is taxable on consolidated return?

Answer 14

A dividend distribution from one member to another member of an affiliated group during a consolidated return year is eliminated in determining consolidated taxable income.
If a consolidated return is not filed, dividends received from an affiliated corp (80% or more ownership) are eligible for a 100% dividend received dedn.

Question 15

How are gains or losses recognized if stock is exchanged solely for stock in a corp that is a party to the reorg?

Answer 15

No gain or loss is recognized if stock is exchanged solely for stock in a corp that is a party to the reorg. The basis would stay the same even if the FMV was different.

Question 16

How does corp go from book income to taxable income? Given charitable contrib 8k and 3k in cash dividends on OS cumulative PS? BI is 60k

Answer 16

BI + add back charitable contrib - contrib dedn (10% of TI before contrib dedn, 68k) = Taxable income of 61.2k
The cash dividends paid on PS were not deducted because dividends paid do not affect taxable income.

Question 17

How do you calculate the amount in the reconciliation schedule M2 of form 1120 as unappropriated retained earnings? Given start of year unappropriated RE is 500k,NI per books is 204k after deducting 96k fed income tax, contingency reserve in year of 112k and 30k in cash dividends.

Answer 17

Take the beginning balance of 500k + NI for the year 204k - less contingency reserve (112k) - less cash dividends (30k) = Balance of 562k at YE
This would appear on sched M2 of form 1120 as corp’s RE at YE.

Question 18

How do you determine consolidated net operating loss?

Answer 18

An advantage of filing a consolidated tax return is the ability of an affiliated group to offset one member’s current NOL against the taxable income of other group members. If these losses cause the affiliated group to report a consolidated NOL, the NOL may be carried back or forward to other consolidated return years of the affiliated group. To calculate add the taxable income and losses of parent and subs together.

Question 19

Who can file consolidated tax returns?

Answer 19

The election to file consolidated tax returns is limited to affiliated corps - parent-sub corps that are connected through stock ownership wherein at least 80% of the combined voting power and value of all stock (except the common parent’s) is directly owned by other includable corps.
Brother sister corps are not affiliated corps.

Question 20

How do corporate tax credits and alternative minimum tax affect the computation of a corp’s federal income tax?

Answer 20

A corp must make estimated income tax pmts unless its tax liability can reasonably be expected to be less than $500. A corp’s estimated tax is its expected tax liability (including the alternative minimum tax) less its allowable tax credits.

Question 21

How do you calculate the tax basis for land received in a corp distribution? Example, A has basis in B corp of 60k. B distributes land to A with basis of 30k, FMV of 38k, and mortgage of 3k.

Answer 21

A shareholder’s tax basis for property received in a corp distribution will be the property’s FMV (38k). The shareholder’s tax basis is unaffected by the mortgage.
The shareholder will be taxed on a dividend of 35k BUT will have a tax basis for the land of 38k.

Question 22

What type of loss is recognized when corp makes a pro rate dist of securities in redemption of its stock in a complete liquidation during 2011? Securities were purchased in 2006 for 80k and had FMV of 40k on distribution.

Answer 22

40k LTCG.
A corp will recognize gain or loss on the dist of its property in complete liquidation just as if the property were sold to the distributee for its FMV. Since the marketable securities were a capital asset held for more than one year, it is a LTCG.

Question 23

How does C corporation reports distribution to its shareholders? Example - corp has deficit of 160k, NI book income 80k, and cash dividends on CS of 40k

Answer 23

Corp dist to shareholders on their stock are taxed as dividends to the extent of current and/or accumulated earnings and profits. Since the corp had current earnings of 80k, the cash of 40k paid is treated as ordinary dividends 100%.

Question 24

Who recognizes what gain and when for parent and sub?
Example: P and S file consol returns. In Jan 2010, S sold land used in operations to P for 75k. S’s basis was 45k. P held land for sale in ordinary course of business. In July 2011, P sold land to unrelated party for 90k.

Answer 24

The 30k gain for S is deferred until 2011 when the land is sold to unrelated party. S would have gain of 30k and P gain of 15k in 2011.

Question 25

What income should be separately stated from business income on the S corps Form 1120-S Schedule K, shareholders’ shares of income, dedns, credits, etc?
Given gross receipts, dividend income from investments, supplies exp, utilities exp

Answer 25

As a pass through entity, an S corp’s items must be divided in to 1) nonseparately stated income or loss from trade or business activities, and 2) items of income, loss, dedn, and credit the separate treatment of which could affect the tax liability of any shareholder.
Gross receipts, supplies and utilities exp are ordinary income and netted to get nonseparately stated busines income. The dividend income is separately stated and passed through to shareholders in order to preserve its characteristic as an item of portfolio income.

Question 26

When is the dividends received dedn (DRD) used and not allowed?

Answer 26

The DRD is not available to S corps.
A 70% DRD applied to dividends from less than 20% owned, while a 100% DRD applies to dividends from corps that are at leas 80% owned when a consolidated tax return is not filed.
To qualify for a DRD, the investor corp must own the investee’s stock for more than 45 days (more than 90 days for preferred stock if dividends received are in arrears for more than 1 year).
DRD may be limited to the applicable % of investor corp’s taxable income.

Question 27

If services are rendered for stock , what taxable income is report and basis is 10k?

Answer 27

Services are excluded from the definition of property, so it is a taxable exchange. The 10k is reported as taxable income.

Question 28

What is the period of carryover allowed for charitable contributions?

Answer 28

Charitable contributions in excess of the 10% limit are carried forward to a max of 5 succeeding years. The contributions actually made during a later year plus any carryforwards are also subject to a 10% limit. Contributions actually made during a later year are deducted before carryforwards.

Question 29

What amount is reported at LTCG under a plan of complete liquidation? Purchased for 100k in 2008 and market value of 120k in 2011

Answer 29

A corporation will generally recognize gain or loss on the distribution of its property in liquidation just as if the property were sold to the distributee at its FMV. Since the marketable securities were held for more than 12 months, their distribution results in a LTCG of 20k.

Question 30

What should be included on Schedule M1 of form 1120 to reconcile a corp’s book income to taxable income?

Answer 30

Sched M1 includes items whose treatment for computing book income differs from their treatment in computing taxable income such as the premiums paid on a key person life insurance policy would be deducted per books but not for tax as it is an expense of producing tax exempt income (life insurance proceeds). Premium is added back to book income to get tax income on M1.
Cash distributions to shareholders and corp bond interest are included in book and tax. Ending bal of RE is excluded from both.

Question 31

How are NOL dedns calculated?
Given corp started in 2006 and had the following taxable income (loss) before NOL dedn:
2006 15k
2007 -20k
2009 10k
2009 30k
2010 -75k
2011 80k

Answer 31

A NOL is generally carried back 2 years and forward 20 years. The 2007 NOL of 20k offsets the 2006 15k and 5k from 2008. The 2010 NOL of 75k offsets the remaining 5k of 2008 and the 30k 2009, leaving 40k as a NOL dedn for 2011.

Question 32

How is adjusted current earning (ACE) calculated?
2009 ace 200k, amti 100k
2010 ace 200k, amti 240k
2011 ace 200k, amti 350k
What is alternative min tax ACE adj for 2011?

Answer 32

The ACE adjustment is equal to 75% of the difference between adjusted current earnings (ACE) and pre ACE alternative min taxable income.
The ACE adj can be positive or negative, but a negative ACE adj is limited in amount to prior years’ net positive ACE adjustments.
For 2011, the ACE is less than its preACE AMTI leading to a tentative negative ACE adj of (200-305)X75% = 112.5k
However, this negative ACE adj is allowed only to the extent of 45k, the amount of net positive adj for prior years. (75k in 2009 - 30k 2010 ACE adj)

Question 33

What % must be owned for tax free incorporation?

Answer 33

No gain or loss is recognized if property is transferred to a corp solely in exchange for stock, and the transferor are in control of the corp immediately after the exchange. For this purpose the term control means the ownership of at least 80% of the combined voting power of stock entitled to vote, and at least 80% of each class of nonvoting stock.

Question 34

What is the stockholder’s basis for their investment after distributions are made?
Example - A has profits in first year of 22k and distributed cash of 10k and land with FMV of 25k. Before the shareholder’s tax basis was 76k.

Answer 34

The amount of a distribution is the amount of cash plus the fair value of other property distributed. The total dist to shareholder is 35k and is treated as a dividend to the shareholders to the extent of the corp’s profits 22k, while the remaining 13k is considered a nontaxable return of stock basis and as such results in a reduction of the shareholder’s stock basis to 63k (76-13).

Question 35

How can consolidated tax returns be filed and what is not reported on them?

Answer 35

An affiliated group of corps (corps connected through 80% of more stock ownership) can elect to file a consolidated tax return, instead of filing separate tax returns. If a consolidated tax return is filed, dividends received from affiliated group members are eliminated in the consol process, and are not reported.

Question 36

What qualifies as deductible life insurance premiums?

Answer 36

Group term life insurance premiums paid by an employer from policies on the lives of its employees, with the employee’s dependents as beneficiaries are always deductible by the employer.
Life insurance premiums on the life of a corporate officer are nondeductible when the corp is the beneficiary. The premiums are nondeductible because the proceeds paid to the corp upon the death of the officer will be nontaxable.

Question 37

What is the tax basis of land contributed to corp?
A gave 50k
B gave land worth 70k (basis 40k) and got back 20k from corp. Both get 50% of corp stock.

Answer 37

Sec 351 applies to the formation of the corp, as both A and B transferred property to corp in exchange for stock, and in aggregate owned more than 80% of corp after exchange.
B’s realized gain on the transfer of land 30k is recognized only to the extent of the 20k cash boot received. A transferee corp’s basis for property acquired in a sec 351 transaction is equal to the transferor’s basis, increased by any gain recognized by the transferor. The basis would be the 40k increased by 20k gain recognized by B, for a total of 60k.

Question 38

Corp has deficit at beg of year. Current year profits are 25k. Corp makes 20k div dist to PS and 10k to CS.How is this reported?

Answer 38

When current earnings are less than the total amount distributed to PS and CS shareholders, current profits must first be allocated to PS, with only the remainder available to tax distributions to CS. 20k is taxable as a dividend to PS. For CS, 5k is taxable as dividend and remaining 5k is a nontaxable return of stock basis.

Question 39

Calculate DRD for 2011. Given gross business income of 160k, div income of 100k from unaffiliated domestic corps that are 20% owned. Business dedns are 170k.

Answer 39

The DRD is normally 80% of dividends from unaffiliated corps 20% owned, may be limited to 80% of TI before the DRD, except when the full 80% DRD creates or increases a NOL.
Gross income + div income less dedns = taxable income before DRD of 90k
DRD would be 90kX80% = 72k to get taxable income of 18k. Since the full dedn of 80%X100k would not create a NOL, the limit applies and DRD is 80% X taxable income.

Question 40

What happens if corp instead of paying off bondholders in cash, issues them preferred shares? What is the gain reported by individual?

Answer 40

The issuance of PS in exchange for bonds is a nontaxable Type E reorg (a recapitalization). Since individual did not receive any boot, no part of the realized gain is recognized.

Question 41

What happens if an S corp distributions are in excess of each shareholder’s stock basis?

Answer 41

Since corp has been an S corp since inception, it does not have any earnings and profits and its distributions will not be taxed as dividends. Instead, all distributions will be treated as a nontaxable return of stock basis for each shareholder until the shareholder’s stock basis is fully recovered. Thereafter, distributions in excess of stock basis will be taxed as capital gain, just as if the shareholder has sold the stock.

Question 42

How do you calculate alternative min tax liability? Given AMTI (after exemption) of 110k, AMT foreign tax credit of 5k, and regular federal income tax (net of foreign tax credit) if 4.5k

Answer 42

The corp’s tentative min tax (110kX20%) = 22k would be reduced by the 5k amt foreign tax credit and 4.5k of regular federal income tax, resulting in an AMT liability of 12.5k.

Question 43

What are the tests for a redemption qualifying for exchange treatment?

Answer 43

A corporate stock redemption is treated as an exchange, generally resulting in a capital gain or loss treatment to a shareholder if it meets any of the 5 tests.
1 - redemption is not essentially equivalent to dividend
2- redemption that is substantially disproportionate
3 - redemption that completely terminates shareholder’s interest
4-a redemption of a noncorp shareholder in a partial liquidation
5- redemption to pay death taxes
If none of the 5 tests are met, the redemption proceeds are generally treated as a dividend.

Question 44

A of A corp gives bldg to B. Bldg has basis of 35k and FMV of 100k in exchange for 40k cash and 60k FMV CS of A corp. What amount of gain is recognized by A?

Answer 44

No gain or loss is recognized if property is transferred to a corp solely in exchange for stock if the transferor is in control of the corp immediately after exchange.
If consideration other than stock is received, a realized gain must be recognized to the extent of the boot received. Here A realizes a gain of (40k + 60k stock)-35k basis = 65k on the transfer of the bldg and must recognize the gain to the extent of the 40k cash received.

Question 45

How are gains and losses recognized on the nonliquidating distribution of property to shareholders?

Answer 45

Although a gain would be recognized if the property has appreciated, no loss can be recognized on nonliquidating corp distributions to shareholders.

Question 46

What is the gain recognized when due to a recapitalization, A exchanges shares costing 95k for new stock woth 109k and bonds with FMV of 10.5k?

Answer 46

Since a recap is a reorg, a realized gain is recognized only to the extent that consideration other than stock or securities is received, including the FMV of an excess of the principal amount of securities received over the principal amount of securities surrendered.
In example, no securities are surrendered, the excess principal of securities received is 10k and the realized gain of 23.5k is recognized to the extent of the 10.5k FMV of the excess principal amount of securities received.

Question 47

What is the flexibility that the different types of corps have in choosing an accounting period?

Answer 47

C corp has most flexibility since it can elect to use calendar or any fiscal year. Partnership must generally use the same tax year used by its partners to prevent deferral of income to partners. S corps and personal service corps must generally adopt a calendar year unless they can establish a business purpose for having a different tax year.

Question 48

How is the accumulated earnings tax imposed?

Answer 48

The AET is imposed on a corp’s retention of earnings in excess of reasonable business needs, but may be mitigated by sufficient dividend distributions.
It does not depend on a stock ownership test, nor is the tax self assessing.

Question 49

When a corp files form to elect S corp status, all stockholders consent, what date is it recognized as S corp?

Answer 49

Depends when it is filed, if filed on or before the 15th day of the third month of a corp’s taxable year, it is generally effective as of the beginning of the taxable year in which filed. If after, it is effective as of first day of corp’s next taxable year.