TAX: Special Corporate Deductions

Question 1

What is the corporate tax formula?

Answer 1

Gross Income
- Deductions (except charitable, dividends received, and capital loss carry back)
= Taxable income for charitable limitations
- Charitable contributions (<= 10% of above)
= Taxable income for DRD (NOL Carry-forward not allowed)
- Dividend Received Deduction
= Taxable income before carry back
- Capital Loss Carryback
= Taxable Income

Question 2

Are charitable contributions the same for corporations as they are for individuals?

Answer 2

It is the same with a few exceptions:
- Inventory: If charities use inventory it needs to be to care for the ill, needy, or infants or where it is used for research purposes.

The deduction for the inventory: Lower of
AB of property + 50% (FMV-AB), or 2 X AB

Accrued based corp: They can deduct if paid within 3.5 months of the following year, 2.5 months if a June 30 YR End.

The limit on the deduction is 10% of taxable income (before special deductions for charity, dividends received, and capital loss carry back)

The carry forward is 5 years (there is no carry back)

Question 3

What is the purpose of the DRD?

Answer 3

To prevent triple taxation

Question 4

Does the dividend have to be received from a domestic corp to qualify for the DRD?

Answer 4

YES!

Question 5

What are the corporation ownership percentages for the DRD deductions?

Answer 5

20% or less: 50% of the dividend

80% or more: 100% of the dividend

Between 20 and 80: 65%

Question 6

What is the DRD limited to:

Answer 6

• Taxable income * the same percentage used to compute the DRD
• The limitation is NOT required if the full DRD would create or add a NOL

Question 7

Example Problem:

Corporation receives a $100,000 dividend, 5% ownership

Corp recorded the following:
Loss from operations. (10,000)
Dividend received 100,000
Taxable income (before DRD) 90,000

Answer 7

Step 1:
Full DRD: 100,000 * 50% = 50,000

Step 2:
Taxable income limit: $90,000 * 50% = 45,000

Step 3:  
Do you have to apply the limit?   
TI was $90,000 
Full DRD:  50,000 
= Taxable income after= $40,000 

Because we subtracted the full DRD and it DID NOT create a loss or further a loss, therefore you do have to apply the limitation.

ANSWER: $45,000!!

Question 8

What are organization expenses?

Answer 8

Board of directors before business begins
CPA for accounting services
Fees for incorporation

Question 9

How much of organizational expenses can be expensed immediately and what is the limit?

Answer 9

$5,000 to the extent of $50,000. Anything above $50,000 is reduced.

Remainder will be expensed over 180 months (15 years)

Question 10

What are syndication expenses?

Answer 10

The cost of issuing and selling stock, must also be capitalized BUT CANNOT be amortized.

Question 11

What are start-up costs?

Answer 11

Start-up costs that would be deductible if they were in business.

These fees are not deductible because the business has not started yet. This will have to be capitalized which can be amortized (same rules as organizational expenses)

Question 12

What insurance is not deductible?

Answer 12

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

If the corp is not the bene then it is deductible

Question 13

R&D expensed can be recovered through one of three methods:

Answer 13

1) Current deduction
2) Ratably over 60 monts
3) Recover of 10 years