TAX - Corporate Taxation

Question 1

How is shareholder basis calculated for a new interest in a Corporation?

Answer 1

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

Question 2

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

Answer 2

Transferor’s basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

Question 3

What basis do shareholders and Corporations use for property?

Answer 3

They both use ADJUSTED BASIS, NOT FMV of property.

Question 4

Describe how loss is taken on Section 1244 small business Corporation stock?

Answer 4

A loss on worthless stock is an ordinary loss.

Question 5

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

Answer 5

Taxpayer must be original stock owner, and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

Both common and preferred stock is allowed

Question 6

What are the basic rules for filing a form 1120?

Answer 6

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

Question 7

When are Corporate federal tax estimated payments required, and how are they calculated?

Answer 7

Required if more than $500 in tax liability expected, or

100% current year liability

100% previous year liability

Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.

Question 8

Describe the AMT calculation for C-Corporations

Answer 8

Taxable Income
\+Tax Preference Items
\+/- Adjustments
= Pre-ACE
\+/- ACE Adjustments
= AMTI
- 40,000 Exemption
= Tax Base
x 20%
= Tentative Minimum Tax
- Regular Tax Liability
= AMT

Question 9

What are the pre-ACE adjustments for C-Corporation tax AMT calculations?

Answer 9

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS, not 200%

Construction must use % completion method

Question 10

What are the ACE adjustments in the C-Corporation AMT tax calculation?

Answer 10

Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized

Note: AMT paid gets carried forward indefinitely, but never carried back

Question 11

When are C-Corporations exempt from AMT?

Answer 11

In year one

In year two, if year one gross receipts were less than $5 Million

In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

Question 12

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

Answer 12

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

Question 13

How are Corporate organization costs handled?

Answer 13

Amortization of costs begin the month the Corporation commences business activity

If the Corporation doesn’t amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

Question 14

How are a C-Corporation’s deductible charitable contributions calculated?

Answer 14

Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions

Question 15

How are excess charitable contributions treated in a C-Corporations?

Answer 15

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

Question 16

When can a board of directors authorize charitable contributions for a tax year?

Answer 16

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

Question 17

How is the dividends received deduction (DRD) calculated, and what are the limitations?

Answer 17

80% Interest = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

Question 18

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

Answer 18

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation, then you can take the full DRD

If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

Question 19

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

Answer 19

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

Question 20

How are capital losses handled in a C-Corporation?

Answer 20

Capital Losses are deductible only to the extent of Capital Gains

Question 21

How are net short term capital gains taxed in a C-Corporation?

Answer 21

Net Short Term Capital Gains are taxed at ordinary income rates

Question 22

How are Corporate losses carried back/forward?

Answer 22

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

Question 23

How are bad debt losses handled in a Corporation?

Answer 23

Bad debt losses are classified as ordinary

Question 24

What is the casualty loss floor for a C-Corporation?

Answer 24

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property’s basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

Question 25

How are net operating losses handled in a C-Corporation?

Answer 25

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward

Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year

Any leftover NOL = This year’s NOL

Question 26

How is investment interest expense handled in a C-Corporation?

Answer 26

Unlike individual taxation, investment interest expense is not limited to investment income.

Investment interest on tax-free investments are NOT deductible.

Question 27

What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?

Answer 27

Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction

Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)

Question 28

What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?

Answer 28

Reconciles beginning to ending retained earnings

Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings

Question 29

What is the purpose of Schedule M-3 on a Corporate tax return?

Answer 29

Like M1, but for Corporations with $10M+ in assets

Question 30

How are affiliated (80%) Corporation tax returns handled?

Answer 30

Consolidation election is binding going forward

Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.

One AMT exemption

One accumulated earnings tax allowed

Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value

Question 31

How are Corporate distributions to shareholders handled?

Answer 31

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)

Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain

Distribution amount = FMV of Property + Cash - Liability Assumed

Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

Question 32

What is the order of treatment in a Corporation’s distribution to a shareholder?

Answer 32

1. Distribution is a dividend to the extent of current and accumulated earnings and profits
2. Shareholder basis is then exhausted
3. Remainder, if any, is a Capital Gain

Question 33

What is the basic calculation for accumulated earnings and profits in a Corporation?

Answer 33

Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits

Question 34

What is the treatment of a gain in a complete Corporate liquidation?

Answer 34

If Capital Property, then Capital Gain

If Non-Capital Property, then Ordinary Income

Gain characterization is the same for both the Corporation and the shareholder

Question 35

What is the treatment of a loss in a complete Corporate liquidation?

Answer 35

Corporation: Depends on if property is capital in nature, otherwise ordinary loss

Individual: capital loss only

Question 36

What is the treatment of the liquidation of a subsidiary?

Answer 36

No G/L to parent company

Question 37

What is a consent dividend? How is it treated?

Answer 37

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

Question 38

Describe the requirements for a personal holding company.

Answer 38

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock

60% of the PHC’s income must be from passive means

PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

Question 39

How is Corporate accumulated earnings tax (AET) different from PHC taxation?

Answer 39

Not Self-Assessing like a PHC

Question 40

How is the accumulated earnings credit calculated for a Corporation?

Answer 40

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

Question 41

What are the requirements for holding S-Corporation status?

Answer 41

Only individuals, estates and trusts can be shareholders

Domestic only, no international S-corps or foreign shareholders

Up to 100 shareholders allowed, and only one class of stock allowed

Calendar tax year only

Question 42

How is an S-Corporation election made?

Answer 42

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election, 100% of the shareholders must consent

Question 43

How is an S-Corporation terminated?

Answer 43

To terminate election, 50% of the shareholders must consent

No S Corp election allowed for 5 years after termination

S Corp termination effective immediately following an act that terminates status

Question 44

What items are not included in calculating an S-Corporation’s ordinary income?

Answer 44

These items are included on Schedule K, not in ordinary income:

Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction 
1231 Gain or Loss
Charitable Contributions
Portfolio Income (dividends or interest)

Question 45

How is S-Corporation shareholder basis calculated?

Answer 45

Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis

Question 46

What is the formula for an S-Corp Built-in Gains Tax?

Answer 46

FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate