Special Deck-Corporate Taxation 2

Question 1

Would a business meals deduction be allowed in reconciling income per books to income per return? If so, why or why not?

Answer 1

Yes. The business deduction would be added back to books, but only 50% of the amount because that is all tha is allowed for tax purposes.

Question 2

Would a net capital loss deduction be allowed in reconciling income per books to income per return? If so, why or why not?

Answer 2

Net Captial losses are not allowed for tax purposes, so the net capital loss amount must be added back to the book amount of income.

Question 3

When a corporation is formed and property is exchanged for stock in a 351 tax-free exchange, what percentage ownership must the contributors have? What is the definition of property in a 351 exchange?

Answer 3

1. Percentage of ownership in a tax-free 351 exchange must be at least 80%
2. Property can be land, securities, or cash. Services performed ARE NOT INCLUDED.

Question 4

What are the carryback and carryforward limits for NOL?

Answer 4

Back 2 years, forward 20 years.

Question 5

What are the carryback/carryforward limits for capital gains/losses?

Answer 5

3 years back, 5 years forward as short-term captial losses to offset capital gains

Question 6

Define a personal service corporation.

GIve examples

Answer 6

A PSC is a C corporation where the principal activity is personal services substantially performed by owner-employees.

Examples include health, law, engineering, architecture, accounting, and consulting.

Question 7

Define organizational expenditures. Give examples

Answer 7

Organizational expenditures include:

1. fees for accounting and legal services necessary for incorporation (fees for drafting corp charter, bylaws, terms of stock certificates)
2. Expenses of organzational and temporary directors meetings
3. Incorporation fees paid to state

Question 8

Give examples of costs incurred in issuing and selling stock. ARe they tax dedcutible?

Answer 8

1. Professional fees to issue stock
2. printing costs
3. underwriting commissions

They are NOT tax deductible.

Question 9

In a recapitalization when a shareholder receives securities with boot, how is gain calculated?

Answer 9

Only up to the amount of boot received.

Question 10

In a corporate distribution of property to a shareholder, which basis is used?

Answer 10

FMV

Question 11

If an S corp has debt, such as a mortgage or a loan, is it passed through to the shareholder?

Answer 11

No, only negative amounts passed through to the shareholders would be capital losses.

Question 12

When an S-corp has a capital loss wht accounts are affected in what order: first, second, third, etc.

For example, if:

• owner’s basis $10,000
• Capital loss - $25,000

What is the balance, and what account is it in?

Answer 12

• Capital losses first reduce owners basis
• Amount left over is capital loss to individual

In example, Capital loss would reduce owners basis to zero, and bring it down from $25,000 to $15,000. The $15,000 would be a capital loss for the owner, and can be carried forward to decucted against basis for stock or debt to absorb it.

Question 13

What types of items cannot and can be passed through an S-Corp to the shareholder?

Answer 13

Items that occur in normal everyday business activites, like expenses, are not passed through.

Items of income, loss, deduction and credit are passed through to the shareholder.

Question 14

In a corporate distribution when a shareholder receives property which value is used for the tax basis?

Answer 14

FMV

Question 15

When a parent corp receives property from a 100% owned subsidiary corp is gain involved in the transfer?

Answer 15

No. Gain not recognized

Question 16

Are Life insurance proceeds collected on death of key corporate employees taxable? If not, why not?

Answer 16

No, income from life insurance proceeds on death of key employee are non-taxable because the life insurance premiums are not deductible for tax purposes.

Question 17

Property transfer from shareholder to corporation in a 351 exchange: is gain recognized? Is is taxable?

Answer 17

Gain not recognized; non-taxable.

Question 18

What is the accumulated adjustment account for an S Corp comprised of?

Answer 18

All the S Corps income sources minus all their expenses and distributions.

Question 19

When a corporation starts up in the first few years, what year-to-year requirements are there to stay exempt from AMT?

Answer 19

1st year- automatically exempt. 2nd year- yr 1 average gross receipts under $5 million. 3rd year- average gross receipts yr 1+yr 2 under 7.5 million. 4th year- years 1-3 average gross receipts under $7.5 million. Yr 5 and beyond- prior 3 year period less than $7.5 million average gross receipts.

Question 20

Name the DRD exception equation.

Answer 20

Div income* % < Pre-DRD income < Dividend income

Then you use % * Pre-DRD income

Question 21

Show how DRD is calculated

Answer 21

Gross business income

+ Dividend income

xxxxxxxxxxxx

• business deductions

Taxable income before DRD

• DRD(dividend inc * %)

Taxable income

Question 22

When an affiliated group of corporations choose to file a consolidated return, what percentage of dividend revenue should be reported?

Answer 22

None. Consolidated returns filed by affiliate corporations eliminate reporting of dividends

Question 23

In a non-liquidating distribution of property to a shareholder, does a corporation recognize gain or loss?

Answer 23

gain only. Loss is never recognized by a corp in a non-liquidating distribution.

Question 24

What types of corp reorganization are each of the following?:

1. Recapitalization
2. Mere change in identity
3. Statuatory merger
4. Stock Redemption

Answer 24

1. Type E
2. Type F
3. Type A
4. NOT a corporate reorganization.

Question 25

The amount of dividends received by a company’s shareholders is limited to what?

Answer 25

The company’s earnings and profits.

Question 26

When a company distributes property to a shareholder, does teh company ever pay taxes on it?

Answer 26

Only if the property has appreciated. Then the difference between basis and FMV is taxed.

Question 27

When receiving dividends what types of property are taxable to the shareholder.

Answer 27

Any kind. Cash or FMV of non cash property.

Question 28

List adjustments and preference for AMT computation

Answer 28

Mneumonic - A SLIM PILE

A SLIM is used in determining ACE, PILE used in arriving at pre-ACE adjustment AMTI

• Amortization of business expenses
• Seventy percent dividends received deduction
• Life Insurance proceeds
• Municipal Bond Interest
• Private activity bond interest
• Installment sales of inventory-difference between accrual and installment method when installment method used for tax purposes
• Long term construction contract method used must be %-of-completion
• Excess depreciation on personal property - when DDB (200%) was used, use 150% DB

Question 29

How does one compute Corporate AMT?

Answer 29

Regular Taxable income

+/- adjustments and preferences

= AMTI before ACE adjustment

+/- Adjusted Current Earnings (ACE) adjustment( SLIM x 75%)

=AMTI before exemption

- AMT Exemption($40,000 - 25%(AMTI before exemption-$150,000))

AMTI

x Tax Rate (20%)

= Tentative Minimum tax

- Regular tax

AMT

Question 30

What is the ACE adjustment actually comprised of?

Answer 30

ACE adjustent is comrsied of the following 4 items

Mneumonic - SLIM

• Seventy-five percent DRD deduction on dividends from unrelated companies(70% only)
• Life Insurance proceeds from death of key employee
• Municipal bond interest

75% of all these values comprise the ACE Adjustment. Or you can add all three values, then take 75% and that will be your ACE adjustment.

Question 31

What is the Adjusted Current Earnings (ACE) comprised of?

Answer 31

The total of AMTI before the ACE adjustment, and the items that comprise the adjustment itself (SLIM)

Question 32

What is amount of allowable deductible charitable contribution?

• gross receipts: $50,000
• drd deduction: 3,000 (included)
• Charitable deduction: 6,000 (not included)

What is the max amount of charitable deduction allowed?

Answer 32

$47,000 max charitable deduction allowed.

Question 33

Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan’s basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?

Answer 33

• Start with $2,000 basis.
• Add 40% of $200,000 income ($80,000). This increases his basis to $82,000.
• Then he receives 40% of $100,000 distribution ($40,000)
• This $40,000 will reduce his basis to $42,000.
• Most importantly, the $40,000 will be treated as a NONTAXABLE RETURN OF BASIS!!!!
• Talk about tax optimization!