Sutdy Unit 12 Flashcards
Give examples of tax credits not allowable to corporations.
- Earned Income Credit
- Child and Dependent Care Credit
- Elderly and Disabled Credit
- Child and Other Dependents Tax Credit
- Adoption Credit
- American Opportunity Credit
- Lifetime Learning Credit
When may a consolidated return be filed?
A single federal income tax return (consolidated return) may be filed when a corporation directly owns stock in another corporation that represents both
- 80% or more of total voting power and - 80% or more of total value outstanding.
Are subsidiaries included in consolidated return required to adopt the same tax year?
Each subsidiary included in a consolidated return must adopt the parent’s tax year.
Are subsidiaries included in the consolidated return required to adopt the same accounting method?
Members of a group filing a consolidated return may adopt different accounting methods.
When are gains or losses on inter-company transactions accounted for in the consolidated return?
The single-entity approach is used. The consolidated gain or loss is recognized when
- The acquiring corporation claims depreciation - One of the members leaves the consolidated group - The property is disposed to a party outside of the consolidated group
How is the amount of recognized gain or loss in an inter-company transaction calculated?
When the Transaction is between Recognized gain or loss equals…
Members of an affiliated group Zero; no gain or loss is recognized
A member of an affiliated group Sales price to outside party -
And an outside party Adjusted basis of property (in transferor’s hand) in affiliated
group
How are net operating losses in the consolidated return calculated?
Taxable income (separate net taxable income) \+ Net capital gain - Section 1231 net loss - Charitable contribution deduction - Dividends-received deduction - Dividends-paid deduction = Consolidated net operating loss (NOL)
How are dividends distributed among members of affiliated groups accounted for in the consolidated return?
Inter-company dividends are eliminated, and the dividends-received deduction is not allowed for such dividends.
Compare the criteria for defining affiliated groups for consolidated tax returns and Parton-subsidiary controlled groups.
Affiliated group Parent-Subsidiary Controlled Group
When one corporation owns stock of another corporation that represents
80% or more of total voting 80% or more of total voting power
Power AND 80% or more OR 80% or more of total value
Of total value outstanding outstanding
When is an expenditure to a controlled group member deductible by the payee?
An expenditure to a controlled group member is deductible when included in the income of the payee.
When are the due dates of the estimated tax payments of corporations?
Estimated tax payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.
How is the amount of each quarterly estimated tax payment of a corporation determined?
Each quarterly estimated tax payment required is 25% of the lesser of
- 100% of the prior year’s tax (not for corporations with taxable income > $1 million),
- 100% of the current year’s tax, or
- 100% of the annualized income (for corporations with uneven income).
What is the penalty imposed on corporation for underpaying estimated tax payments?
Underpayment Amount of Penalty
< $100,000 Underpayment x (short-term rate + 3%)
> $100,000 Underpayment x (Short-term rate + 5%)
When is no penalty imposed on corporations for underpaying estimated tax payments?
No penalty is imposed if
- Tax liability is less than $500 - The IRS waives all or part of the penalty for good cause - The IRS withdraws an erroneous IRS notice to a large corporation
Give examples of positive adjustments to taxable income when calculating current earnings and profits.
Positive adjustments (additions to taxable income) include
- Interest from municipal bonds - Injury compensation - Life insurance proceeds - Dividends-received deduction - Capital loss and net operating loss carryover - Depreciation in excess of straight-line - Income per completed-contract method - Deferred income from an installment sale
Give examples of negative adjustments to taxable income when calculating current earnings and profits.
Negative adjustments (subtractions from taxable income) include
- Life insurance premiums - Penalties - Fines - Municipal bond expenses - Excessive compensation - Federal income taxes - Nondeductible meal expenses - Entertainment expenses - Charitable contributions in excess of the percentage of AGI limit - Prior-year installment sales
Give examples of items excluded from Beth taxable income and earnings and profits (E&P).
Excluded items included
- Unrealized gains and losses - Gifts - State tax refunds - Contributions to capital
How is the amount of a nonliquidating distribution by a C corporation calculated?
Money received \+ FMV of obligations received (e.g., bonds) \+ FMV of other property received - Liabilities the corporation assumed = Distribution amount
When a C Corporation makes a nonliquidating distribution of cash to its shareholders, what is the amount of gain or loss recognized by the corporation?
No gain or loss is recognized for nonliquidating cash distributions.
When a C corporation makes a nonliquidating distribution of noncash property to its shareholders, what is the amount of gain or loss recognized by the corporation?
Recognized gain = Greater of FMV or liability relief - AB of property
Recognized loss = 0
How does a nonliquidating distribution of noncash property to shareholders affect the earnings and profits (E&P) of a C corporation?
AB of Property vs. E&P
FMV > AB (gain realized Current E&P increases by recognized gain,
which increases the amount of dividends
that can be recognized
FMV < AB (loss realized) No effect
How are nonliquidating distributions from C corporations treated by the shareholder?
Distribution Amount Treatment by Shareholder
To the extent of current E&P Dividend income (taxable)
Then to the extent of accum E&P Dividend Income (taxable)
Then to the extent of basis in stock Return of capital (nontaxable)
Excess Gain on sale (taxable)
Do deficits in a C corporation’s accumulated earnings and profits (AE&P) result from distributions?
Deficits in AE&P never result from a distribution. They result from any aggregate excess of surrender E&P deficits over unused positive AE&P.
What is the shareholder’s basis in the property received in a nonliquidating distribution from a C corporation?
The basis is the grater of
- FMV of the property at the time of the distribution - Liability assumed or liabilities of property taken
Under what circumstances are nonliquidating stock distributions by C corporations taxable?
A distribution of stock by a C corporation is not taxable unless it is a
- Distribution in lieu of money - Disproportionate distribution - Distribution on preferred stock - distribution of convertible preferred stock - Distribution of common and preferred stock, resulting in receipt of preferred stock by some shareholders and common stock by other shareholders
Describe the accumulated earnings tax (AET).
A corporation is liable for the AET when it accumulates (does not distribute) earnings beyond the graduates of
- $250,000 - Reasonable business needs.
The tax equivalent 20% of accumulated (undistributed) taxable income.
Describe the personal holding company (PHC) tax.
The PHC tax is a 20% penalty tax imposed on the undistributed income of a corporation that meets the following two test.
- Stock ownership test - More than 50% by value is owned by 5 or fewer shareholders at any time during the last half of the year - Nature of income test - 60% or more of adjusted ordinary gross income is personal holding company income (e.g., taxable interest, dividends, royalties, net rental income, personal service income by a 25%-or-more owner)
