Topic 2 - Tax Treatment for C Corporations

Question 1

What is the carry forward rule for Net Operation Losses for 2018 to present?
What is the carry forward rule for Net Operation Losses up to 2017?

Answer 1

2018 to present - carry forward indefinitely up to 80% of taxable income
Up to 2017 - carry back of 2 years and a carry forward of 20 years 100% of taxable income

Question 2

Where does a C Corp report their NOL carry forward amounts?

Answer 2

Schedule K of Form 1120

Question 3

How are C-Corps taxed on short term capital gains? Long term?

Answer 3

ALL NET CAPITAL GAINS (long or short term) are taxed at the ordinary income tax rate of 21%

Question 4

What is the current rule for carry back/forward on net capital losses for C Corps?

Answer 4

Net capital losses can be carryback is 3 years and carryforward is 5 years

Question 5

How long can C Corps carry forward charitable contributions?

Answer 5

5 years

Question 6

How much charitable contributions can a C Corp deduct in a given year?

Answer 6

Charitable contribution may not exceed 10% of modified taxable income (taxable income before charitable contribution, before capital loss carrybacks, dividends received deductions)

Question 7

What value can a C Corp deduct when capital gain property is donated?

Answer 7

Can deduct FMV of capital gain property if there is no knowledge the property is going to be sold for $$$ by organization. If we know the charitable organization plans to sell the property, the C Corp can only deduct the basis.

Question 8

If a C-Corp owns less than 20% of another corporation’s stock and they receive a dividend, what is their Dividends Received Deduction Percentage?

Answer 8

50%

Question 9

If a C-Corp owns at least 20% but less than 80% of another corporation’s stock and they receive a dividend, what is their Dividends Received Deduction Percentage?

Answer 9

65%

Question 10

If a C-Corp owns 80% or more of another corporation’s stock and they receive a dividend, what is their Dividends Received Deduction Percentage?

Answer 10

100%

Question 11

What is a Schedule M1 and when is it used?

Answer 11

The Schedule M1 is included in Form 1120 to report the book-tax difference. This schedule is used when the C Corp has total assets of less than $10,000,000.

For corporations with total assets above $10,000,000, schedule M3 is used.

Question 12

What is a Schedule M3 and when is it used?

Answer 12

The Schedule M3 is included in Form 1120 to report the book-tax difference. This schedule is used when the C Corp has total assets above $10,000,000.

Question 13

When are tax returns due for C corps?

Answer 13

C corporations tax returns are due on the 15th day of the fourth month following entity year end (exception - if C corporation has a June 30 end date, tax returns are due on the 15th day of the third month - September 15)

Question 14

Is there a tax extension available for C corps?

Answer 14

C corps may request an automatic extension - 6 month extension except for June 30 year end, then it is 7 month

Question 15

What is a 52/53 week year?

Answer 15

An accounting period a corporation elect that is a fiscal year that ends on the same day of the week that is the last such day in the month or on the same day of the week nearest the end of the month.
Ex. a business could adopt a 52/53 week fiscal year that
Ends on the last Saturday in July each year or
Ends on the Saturday closest to the end of July (although this Saturday might be in August rather than July)

Question 16

How does a C Corp adopt an accounting method? How do they change it?

Answer 16

Taxpayer typically picks its method by using them on their tax return (Form 1120, Schedule K)

To change accounting method, must file Form 3115 with IRS

If you change methods, must do Section 481 adjustments - provides that where a taxpayer’s taxable income for a tax year is computed under a method of accounting different from that previously used, an adjustment will be made to previous amounts from being duplicated or omitted solely by reason of the change in accounting method

Question 17

What does it mean when a business expenditure must be a ‘reasonable amount?’

Answer 17

Expenditures not reasonable when it is extravagant or exorbitant

Arm’s Length amount- within the range of amounts typically charged in the market by unrelated persons considered reasonable.

Question 18

What are prohibited business deductions? (5)

Answer 18

Expenditure against Public Policy – illegal bribes, kickbacks, fines and penalties

Political Contributions and Lobbying expenses

Capital Expenditures – tangible assets with a useful live of more than one year must be depreciated not a deduction

Expenses to produce tax-exempt income (if you borrow money to invest in tax exempt income like municipal bonds of if you buy insurance on an employee, since the proceeds from the insurance would be tax exempt you cannot deduct the premiums)

Personal Expenditures – personal, living, or family expenses ( can’t deduct the new designer jeans you bought but can deduct of you buy uniforms that can only be worn at work and no place else) Education can only be deductible if taxpayer is self employed and education maintains or improves skills required by the individual in his existing trade.

Question 19

How are business deductions on meals limited?

Answer 19

May deduct only 50% of actual business meal

To qualify: 1) amount must be reasonable, 2) taxpayer or employee must be present when meal is furnished 3) meal mut be directly associated with the active conduct of the taxpayer’s business.

Question 20

How are business deductions on transportation limited?

Answer 20

Can deduct direct cost of transporting the taxpayer to and from business sites – actual cost (cost of operation plus depreciation on the vehicle’s tax basis) or use standard mileage rate 2018 – 54.5 cents per mile

Cannot deduct travel to and from home and regular place of business

Question 21

How are business deductions on travel limited?

Answer 21

Travel only applies to away from home overnight

Travel solely for business all cost of travel are deductible (still 50% for meals)

If Travel is mixed use business and personal – deductible is primary purpose is business (All travel covered, meals at 50%, lodging, incidental expenditures limited to those incurred during business portion of travel)

Question 22

Only certain businesses have a limitation on business interest deductions. Who does this limitation apply to?

Answer 22

This limitation does not apply to small businesses, this is a taxpayers with average annual gross receipts of $25 million or less for three prior tax years.

Question 23

How are business deductions on business interest limited?

Answer 23

Deduction for business interest expenses is limited to the sum of

1) business interest income
2) 30 percent of the adjusted taxable income for the taxable year.

Business interest income is interest paid or accrued on indebtedness allocable to a trade of business.
Ex, includes interest on loan to buy equipment for the company
Does not includes interest for loans on money you borrow to buy stock for investment

Question 24

Define the following business deduction: Losses on Disposition of Business Property

Answer 24

Business realize and recognize a loss when the asset’s tax basis exceeds the sales proceeds.

Question 25

Define the following business deduction: Business Casualty Losses

Answer 25

Casualty are unexpected events driven by forces outside the control of the taxpayer that damage or destroy taxpayer’s property Section 165 list fire, storm, shipwrecks as examples.

Casualty losses deducted in year they occur (or for theft discovered) – the amount of loss depends if totally destroyed or partially destroyed.

Calculate total loss: insurance proceeds-adjusted tax basis of asset.

Calculate partial loss: insurance proceeds – (the lesser of) 1) asset;s adjusted tax bases or 2) the decline in the value to due to casualty.

Question 26

Book-Tax Differences
Permanent or Temporary?
Favorable or Unfavorable?

INTEREST INCOME FROM MUNICIPAL BONDS

Answer 26

Permanent - the business will never be expected to eventually pay taxes on the income (never reverses)

Favorable - Income included in book income, excluded from taxable income for regular tax purposes