Special Corporate Deductions

Question 1

What is the corporate tax formula?

Answer 1

Gross income
- deductions, including carryforwads (EXCEPT charitable, dividends received, domestic production deduction, NOL carryback, capital loss carryback).
= Taxable income for charitable limitation
- charitable contribution (limited to 10% of above income)
= Taxable incoem for div. rcvd deduction (NOL carryforward are not allowed for computing DRD limit).
- Div. received deduction
= Taxable income before carrybacks
- domestic production, NOL carryback and STCL carryback
= Taxable income.

Question 2

Charitable contribution rule is similar to what? Limit?

Answer 2

Rules for individuals.

10% of taxable income after initial deductions.

Question 3

Charitable contribution exception? How is the value determined?

Answer 3

*When donating inventory to charities that would use them solely for the care of the ill, needy, or infants.
*The deduction is the lower of;
AB of property + 50% x (appreciation: FMV-AB) or 2 x AB.

Question 4

Charitable contribution: when can accrued contributions be elected to be deducted in the current year?

Answer 4

If contributions are actually paid in first 3 and 1/2 months following the year-end.

Question 5

What happens to excess charitable contribution that is above 10% of income?

Answer 5

Carryforward 5 yrs.

No carryback.

Question 6

What are 2 criteria for the dividends-received deduction (DRD)?

Answer 6

Must be domestic dividends.

Must have hold the stock for at least 46 days.

Question 7

What’s the DRD % when the corporation owns less than 20% of the stock of another corporation?

Answer 7

70% of dividends received.

Question 8

What’s the DRD % when the corporation owns 80% or more of the stock of another corporation?

Answer 8

100%.

Question 9

What’s the DRD % when the corporation owns between 20% and 80% of the stock of another corporation?

Answer 9

80%.

Question 10

What is DRD limitation? Exception to this rule?

Answer 10

Limited to taxable income multiplied by the same % used to compute the DRD.
Exception: if the full dividends-received deduction would create or add to a net operating loss, this rule does not apply.

Question 11

Question:
Domestic dividend 5% interest: $100,000.
Loss from operation: ($10,000).
What is DRD?

Answer 11

Taxable income: 100,000-10,000=90,000.

• Full DRD: 100,000x70%=70,000
• Limited DRD: 90,000x70%=63,000

DRD is lesser of two choice above unless deducting the full DRD results in a net operating loss (NOL). If so, then the full DRD is used. Therefore, DRD is 63,000.

Question 12

What are typical organizational expenses?

Answer 12

Legal services, incident to organization, accounting services, organizational meetings of directors and shareholders, and fees paid to incorporate.

Question 13

Organization expenses: How much of these expenses can be deducted?

Answer 13

$5,000, but it will be reduced by the amount of expenditures incurred that exceed $50,000.

Question 14

Organization expenses: what happens to expenses not deducted?

Answer 14

Must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations (unless an election is made not to do so).

Question 15

Organization expenses: what is the criteria in order for the rules (deducted, expensed or amortized) to apply?

Answer 15

Must incur before the end of the taxable year that business begins (but they don’t have to be paid, even if on the cash basis).

Question 16

Organization expenses: If expenses incur after the end of the taxable year, what is the treatment?

Answer 16

Capitalized.

Question 17

Organization expenses: what is syndication expenses? What is the treatment?

Answer 17

Cost of issuing and selling stock (this is not marketing).

Must be capitalized. Can not be amortized.

Question 18

Question:
A corporation began July 1. incurred; legal fees $40,000, commission paid to underwriter 25,000, other stock issue costs $10,000.
Wants to amortize. What is the amount the corporations can deduct for organizational expenses?

Answer 18

25,000 and 10,000 are syndication costs and must be capitalized.

40,000 - 5,000 allowed deduction = 35,000.
35,000/180mo=$194x6mo=$1,167.

Total expense: 5,000+1,167=6,167.

Question 19

What is start-up cost?

Answer 19

Expenditures that would be deductible as trade or business expenses (ordinary and reasonable) except that corporation has not yet started its trade or business operation.

Question 20

How is start-up cost treated?

Answer 20

Same as organization expenses.

Question 21

Who qualifies for domestic production deduction?

Answer 21

Corporations engaged in production activities whithin the US.

Question 22

Domestic production deduction: how much?

Answer 22

9% times the lower of;

Qualified production activity income or taxable income.

Question 23

Domestic production deduction: Limit?

Answer 23

not exceed 50% of the wages allocable to domestic production income.

Question 24

Domestic production deduction: Formula for qualified production activity?

Answer 24

Gross receipts from domestic production

• COGS
• Direct expenses allocated to this income, including wages
• A prorated share of indirect expenses allocated to this income.

Question 25

Insurance premiums: when can they be deducted? Examples?

Answer 25

When they are ordinary and necessary, reasonable.
Casualty insurance, employee health or accident insurance, and life insurance coverage for its employees and beneficiaries.

Question 26

Insurance premiums: when are they not deductible?

Answer 26

Premiums paid on life insurance policies in which the corporation itself is the beneficiary.

Question 27

DRD: can it be taken from qualified dividend?

Answer 27

Yes.