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Wk 3 Corp Inc TF
Corp. Inc. Tax Wk 3
| Question | Answer |
|---|---|
| A company makes a payment of $100k to its sh-ho. For tax purposes, is this considered a dividend (taxable) or a return of capital (often not taxable)? | A distri. of the following 2 figures. -distri. company's income for the curr. yr. -distri. company's acc. earnings (or RE) as of the end of the curr. yr. Any amount paid in excess of the 2 numbers is viewed as a return of capital to the owner. |
| For corp. tax purposes, what is and is not considered to be a capital assets? | -Capital Assets: investment prop (not used in business), such as ownership of stocks and bonds. -Non Capital Assets: prop used in a trade or business, such as inventory, machinery, buildings, and receivables |
| In general, how do a corp's capital gains and capital losses affect taxable income? | All of a corp's CG and CL are netted together to arrive at 1 net gain or loss number. -Gain: taxed ASAP! -Loss: no deduction is allowed =( |
| A corp has a net CL of $5k. What happens to this loss for tax purposes? | No CL deduction. CB 3 yrs and CF 5 yrs, to offset any net CG earned during this period. |
| What is the tax effect resulting from G & L's created by transactions in company's own stock? | No tax effects are created by G & L's. |
| What is included in S1231 property? | Any assets or property used in a trade or business. i.e. equipment, pc, or a warehouse |
| What are the 2 subclassifications of S1231 property? | -S1245: depreciable personal property --equipment, machinery, cars, trucks -S1250: real estate --land, building, warehouse |
| If S1245 property is sold at a gain, for tax purposes, how is this gain reported? | It is taxed at ordinary income tax rates. However, any portion of the gain that is in excess of acc. depr. on the asset is separately classified as S1231 gain (depends on a complex computation) |
| Baker Co. sells equipment (S1245) for $37k. This prop. had an orig. cost of $40k and now has acc. depr. of $5k for a BV of $35k. How is the gain handled for tax purposes? | $2k gain ($37k sale - $35k BV) it is reported as ord. inc. bc it is smaller than the acc. depr. (2k < 5k) |
| Baker Co. sells equipment (S1245) for $43k. This prop. had an orig. cost of $40k and now has acc. depr. of $5k for a BV of $35k. How is the gain handled for tax purposes? | $8k gain ($43k sale - $35k BV) The amt up to acc. depr. is an ord. inc. item. The remaining $3k is included as S1231 gain. |
| James Jones is president of Company X. The company has life insurance policy on the president. He dies during the year and the company collects $250k in cash. What is the tax effect? | Proceeds from a life insurance policy is not taxable for corporations. |
| In year 1, Company X pays $89k in state income taxes. In year 2, the company receives a refund of $4k. What are the tax effects of these taxes? | The $89k would be a deductible expense in year 1. Because the entire amount is taken as an expense in year 1, the $4k refund is taxable in year 2. |
| Mr. X transfers land costing $20k to Co. Z for stock valued at $30k. Mr. X now owns 20% of Co. Z. What is the taxable gain or loss does Mr. X have? What taxable gain or loss does Co. Z have? What is the tax basis of the land does Co. Z have? | Mr. X has a taxable gain of $10k ($30k-$20K). This is a non-like-kind exchange. Co. Z has no taxable G/L. Transactions by a co. in its own stock doesn't create G/L. Co. Z's tax basis is $30k, the FMV of the stock given up bc this is a taxable exchange. |
| Mr. X trans. land costing $32k to Co. Z for 83% of its outst. stock valued at $40k. What taxable G/L does Mr. X have? What taxable G/L does Co. Z have? What is the tax basis of the land to Co. Z? | When a trans. between a co. and an owner who (after the exchange) owns 80%+ of the stock, the exchange is based on BV and is normally tax-free. So, Mr. X & Co. Z have no taxable G/L bc there is no taxable G/L, Co. Z retains the previous $32k tax basis. |
| A company has revenues of $300k and ordinary & necessary business expenses of $320k. What is the overall tax effect? | NOL of $20k. Can be CB 2 yrs to reduce taxable income and possibly get a refund and if any of the loss is left, the rest can be CF 20 yrs to reduce future taxable income. |
| A company has revenues of $200k and total deductions of $250k. Within the deductions are charitable contributions of $10k. What is the tax effect for this company? | CC are a special deduction and not an operation expense. So, the $10k is pulled out, leaving a loss of $40k ($200-$240). This NOL can be CB 2 and CF 20 yrs. Bc of this loss, no CC can be deducted, so it will be CF 5 yrs. These two amts are kept separate. |
| In what cases can 2 companies file a consolidated tax return? | A consolidated tax return can be filed for 2 companies if both companies are domestic and if 1 company owns at least 80% of the other. |
| Company A owns 86% of Company Z and both are located within the US. These companies form an "affiliated group" What is an affiliated group? Do these companies have to file a consolidated tax return? | An affiliated group is made up of companies that can file a consolidated tax return. All companies must be domestic and at least 80% of the other company's stock must be held by the parent company. A consolidated tax return is optional for members. |
| Who is subject to AMT? | Both corporations and individuals are subject to the AMT. |
| What is the purpose of the AMT? | It was designed to tax individuals and corps that get significant tax benefits from certain tax rules and tax methods, so that they cannot eliminate their tax burden completely. |
| When does a taxpayer have to pay an AMT? | The TP computes income tax using normal tax rules. Then they compute it using AMT rules. Any add'l amt must be paid along with the normal tax amt. i.e. normal tax shows $30k, then AMT shows $32k. the TP must pay $30k plus $2k. |
| A corporation is computing its AMT. It starts with taxable income,then remove tax benefits of certain tax adjustments. Do these adjustments cause taxable income to go up or down? What are some common adjustments utilized at this point for the AMT? | These adjustments normally cause the taxable income to increase, but might decrease under some conditions. Adjustments include the installment sales method for inv. transactions, completed contract method, acc. depr. rather than the SL method. |
| AMT computation includes tax preference items are removed. Does the removal cause taxable income to go up or down? Give some examples. | The removal of tax preference items causes taxable income to rise. Examples include: amount that percentage depletion exceeds the basis of the property being depleted. Tax exempt interest on private activity bonds. |
| After removal of tax adjustments and tax preference items, there is the adjusted current earnings (ACE) adjustment. What percentage of the tax benefit is used in making the ACE adjustment? | 75% of the amount of specified tax benefits. |
| What are common examples of the tax benefits that lead to the ACE adjustment? | The ACE adj. is caused by a number of tax benefits provided to corp. TP such as municipal bond interest, 70% DRD, life insurance proceeds, and the benefit of using the installment sales method for non-inventory items. |
| After the adjustments, tax preferences, ACE adjustment - this leaves the TP with the alternative minimum taxable income (AMTI). An exemption is then subtracted to arrive at income. What is the amount of the exemption? | Exemption available for corp is $40k, but if the corp has an AMTI of $150k+, the exemption is lost at the rate of 25% per dollar. i.e. if AMTI is $190k, exemption is $30k, not $40k. The corp is $40k over the limit, so 25%*40k = 10k will become lost. |
| In computing the AMT, the corp using the following structure: taxable income +/- removal of adjustments + removal of preference items +/- ACE adj = AMTI - exemption => income subject to taxation. How does this structure change for the individual TP? | -individuals have add'l adjustments to remove that aren't available to corporations. -the benefit of preference items is approximately the same as for a corporation. -individuals don't get ACE adj. -individuals have a different exemption than corps. |
| What are some of the individual adjustments available? | -medical exp deductions are changed from a corp that removes 7.5% of AGI to one that removes 10% of AGI -all home equity interest is removed -all standard deduction is removed -any amount subtracted because of personal exemptions is removed. |
| What is the exemption for an individual? | -joint return: %62,550 -single return: $42,500. -both of these exemptions are reduced, and eventually removed if the TP's income level gets too high. |
| What are some examples of tax-free exchanges? | Under normal conditions, the following: -mergers -consolidations -recapitilzation -a change in a company that only affects the identity, form, or place of an organization. |
| For tax purposes, what is the difference between a merger and a consolidation? | In a merger, one person is absorbed into another and goes out of business as a separate legal entity. In a consolidation, 2 companies combine to form a third (NEW) company. |
| In a tax-free exchange, the TP may still have taxable income. Under what condition can there be taxable income? | If a TP receives cash as a result of a tax-free exchange, the TP is taxed on the amt of cash or the gain from the transaction, whichever is less. The gain is the FMV of all items received in excess of the tax basis (BV) of all items surrendered. |
| A TP gives up property with a tax basis of $300k for property with a FMV of $298k. In addition, the TP collects $12k cash. The transaction qualifies as a tax-free exchange. What is the taxable gain or loss for the TP? | Because the TP received cash, the cash or gain is taxed. The gain is $10k...310 (298+12) less 300. Because the $10k gain less than the $12k in cash collected, the TP has a $10K taxable gain. |
| A TP gives up property with a tax basis of $300k for property with a FMV of $303k. In addition, the TP collects $11k cash. The transaction qualifies as a tax-free exchange. What is the taxable gain or loss for the TP? | Since cash is involved, the cash or the gain will be taxed. The gain is $14k...314 (303+11) less 300...Because the $14k gain is more than the $11k in cash collected, the TP has a $11k taxable gain. |
| What is the purpose of accumulated earnings tax? | The tax is designed to force comp. to pay sufficient dividends to their sh-ho. Historically, some comp. have failed to pay dividends so that the owners of the company could avoid paying taxes. So this tax can be avoided by simply paying enough dividends. |
| How is the accumulated earnings tax computed? | The tax is assessed when the accumulated earnings (RE) gets larger than the reasonable needs of the company. Any excess amount is subject to this tax. Actual computation is more complex. It is just the amt in excess of the reasonable needs that is taxed. |
| Who determines whether an accumulated earnings tax is due? | The IRS must assess this tax. |
| What is the purpose of the personal holdings company tax? | It is designed to ensure that companies pay a sufficient amount of dividends to their owners. Since it has a similar purpose to the accumulated earnings tax, a company does not have to pay both. |
| What 2 characteristics are used to identify a personal holding company? | 1. tends to have only a few owners. 2. has a lot of passive income, such as dividends, interest, rents, and royalties |
| What is the rule on ownership of a personal holding company? | 5 or fewer owners holding at least half of the company's stock. |
| What amount of passive income is necessary to qualify as a personal holding company? | 60%+ of the income is passive. |
| A co. starts a business on Jan 1. During y1, the co. loses $20k. During y2, the co. makes a profit of $40k. At the end of y2, the co. makes a cash distri of $31k to its owners. What part of it is divi revenue to these owners and what is return of capital? | All $31k is viewed as divi. The amt of a distri that is a divi can't be more than the larger of NI for the curr yr or acc. earnings at the end of the yr. |NI was $40k, while acc. earnings is $20k. BC the 31<40, all of the distri is considered to be a divi |
| To avoid a penalty, a corporation must make estimated tax payments each quarter. How is the estimated quarterly tax payment computed? | Under normal conditions, estimated quarterly pmts must at least equal the lower of the following: 25% of the estimated tax of the current year or 25% of the actual total tax for the tax year |
| For a corporation's income tax payments, when must the payment of estimated quarterly payments be based upon the current year's income and not the prior year's income tax? | -when there was no tax liability in the previous year -when the company has taxable income of over $1 million |
| On a corporate income tax return, what is the purpose Schedule M-1? | The M-1 schedule is required to reconcile a company's book income to its taxable income. TP with total assets of $10M+ must file a Sch M-3 to provide more transparency to reported figures. Sch M-2 analyzes the changes during the year in the corp's RE. |
| A corp is preparing a Sch M-1 for its inc tax return. It has book income of $300k. On its financial records, it has $20k in municipal bond int. The co has depr exp of $9k, although depr for tax purposes was $15k. What is the taxable income? | $20k in municipal and $9k depr exp increase income by $11k. Without these figures, book income is $289k. Taxable income will be $274k. (300-11-15) |
| A corp is preparing a Sch M-1 for its inc tax return. It has BI of $400k. On its financial records, it has bad debt exp of $18k (tax purposes its only $11k). It has depr on its books of $21k (tax purposes its $24k).What was the amt of this company's TI? | 18k in bad debt exp and 21k in depr exp decrease income by 39k. Without that figure, BI is 439k. Taxable income is $404k (-11-24+439) |
| What are uniform capitalization rules? | They are tax guidelines that define what costs must be capitalized in constructing property or purchasing inventory. Direct costs are included in the cost of the asset as are most indirect costs that benefit the asset. |
| A corp distributes a non liquidating dividend to its owners, each of whom own 20% of the corp. The asset being distributed has a tax basis to the corp of $23k but is worth $25k. What is the tax effect to the corp? What is the tax effect to the owners? | For a non liquidating distributing from a corp, the owners report dividend revenue based on FMV. The corp reports a gain of $2k (25-23) |
| A corp distr a nonliquidating divi to an owner holding 80% of the corp's stock. The distri asset has a tax basis to the corp of 34k but is worth 45k. What is the tax effect to the corp & to the owner? What is the tax basis of the asset after the distr? | Conveyances between a corp and an owner who holds 80%+ of the outstanding stock are normally tax free. So neither the corp and the owner has a tax effect to report. The tax basis remains $34k |
| Co X has decided to liqui and makes the liqui distri of 13k in cash to Ms D who owns less than 80% of the outst stock. The tax basis of the inv in Co X is 16k on the fin records of Ms D. If this distri completes the liqui what is the tax effect for Ms D? | Because this is a liquidating distribution, Ms D removes her investment at its $16k tax basis, records the cash as $13k , and reports a $3k capital loss for the difference. |
| Co X is liqui and makes a liqui distri to Ms D who owns less than 80% of the outst stock. Co X distri land with a tax basis of 19k and a FMV of 23k to Ms D. Ms D's tax basis is 18k. If this distri completes the liqui, what is the tax effect for both? | BC this is a liqui distri, Ms D removes her inv at its 18k tax basis, records the land at its FMV of 23k, and reports a 5k capital gain for the difference. Co X (as with a nonliqui distri) reports the land as if it were sold for FMV, a 4k gain (23-19) |
| Co X makes a liqui distri to Ms D of land with a tax basis of 21k, FMV of 23k, and cash of 7k. Ms D's basis in the inv is 24k. She owns less than 80% of the outst stock of Co X. If this completes the distri, what is the tax effect for Ms D and for Co X? | Ms D removes her inv at its 24k tax basis, records the land at its FMV 23k and cash at 7k total 30k and reports a 6k cap gain for the diff. Co X has no income on the cash portion of the distri but reports the land as if it were sold for FMV so a 2k gain. |
| What is the statute of limitations for errors on a corporate tax return? | The statute of limitations is 3 yrs after the due date. However if an extension is used, then the statute of limitations is 3 yrs from the date of the filing. |
| How are any expenses that are incurred for the complete liquidation of a corporation handled for tax purposes? | All liquidation and distribution expenses are fully deductible for the dissolving company. |
Created by:
booklvr2004
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