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Taxation

Chapter 11 - Corporations

QuestionAnswer
What are the 4 legal characteristics of a corporation? - Limited liability - Unlimited life - Free transferability - Centralized management
Limited liability - The right of corporate creditor extend only to corporate assets and not to the personal assets.
Unlimited life - One inherit the corporation after an owner dies.
Free transferability of interest - Investors can buy and sell the stocks with maximum convenience and with low transaction costs.
What can be an example of free transferability? One can buy and sell any of the Apple's stocks he or she wants, and one can pay at a cheaper transaction cost.
Centralized management - The board of directors make the managerial decisions.
True or false - Centralized management is becoming MORE important today. False
A closely-held corporations, a buy-sell agreement may prevent ________. transferability
What does an affiliated group consist of? - U.S. parent corporation that directly owns at least 80% of at least ONE domestic subsidiary and/ or all other domestic subsidiaries that are 80% owned within the group.
True or false - A parent company owns 100% of a subsidiary in Sweden. This IS an affiliated group (Hint: It's not domestic). False
What does an affiliated group may elect to file which applies to all members of the group? Consolidated tax return
What is an advantage of a consolidated tax return? Losses and profits of affiliated members offset each other.
True or false - A parent company owns 80.5% of a subsidiary in Florida which also owns 80% of another domestic subsidiary in Louisiana. This IS an affiliated group. True
On corporate formation, for contribution of property for stock, tax is deferred when shareholders own at least _______ %. 80
There's no tax on shareholder unless.. (List 2 things) - Boot is received (trigger a gain) - Substituted basis (from property)
Since there's no tax on corporation, the corporation's basis equals the transferor (shareholder)'s basis. This is called ____________ basis. Carryover
True or false - A corporation IS taxes as a separate entity. True
What does page 1 of the Form 1120 resemble? An income statement (or Schedule C of 1040)
For special deductions, one can deduct charitable contributions up to ____% of Line 28 income BEFORE charitable deductions and dividends-received deduction. 10
Schedules M-1 and M-3 reconcile book income to ________ income. taxable
The M-1 was used by all corporations until 2004 and can be used by small corporations with total assets LESS than $____ million. 10
In 2004, the IRS developed the M-3 for ________ corporations, with assets greater than $10 million, to use. large
For dividends-received deduction, corporations receive dividends from other ________ _____ ______. taxable domestic corporations
If one owns less than 20% of stock, the person will have a ____% dividends-received deduction. 70
If one owns greater or equal to 20% and less than 80% of the stocks, the person will have a ____% dividends-received deduction. 80
If one owns greater or equal to 80% of the stocks, the person will have a _____% dividends-received deduction. 100
What is the reasoning behind dividends-received deduction? Dividends-received deduction can't create loss.
True or false - For distributions to investors, interest payments (wages or rent) ARE deductible, but dividend payment ARE NOT deductible. True
Tax return is due 15th day of _____ month, may extend to 15th day of 9th month, but extension doesn't extend payment deadline. 4th
One must pay ______% of tax due. 100%
Small corporations with taxable income less than $1 million may use ____ _______ rule of paying 100% of prior year tax. safe-harbor
For domestic production activities deduction, one can deduct ____% of the lesser of net production income or taxable income before the deduction. 9
The domestic production activities deduction is limited to _____% of US compensation expense. 50
The domestic production activities deduction of 9% is approximately a ____% lower tax rate on domestic production income. 3
What is the name of a federal tax system that's parallel to the regular income tax that is created to ensure that every corporation pays a "fair share" of taxes? Alternative Minimum Tax
True or false - Only firms with SMALL AMT adjustments and preferences pay AMT. False
To be eligible for AMT exemption, a new corporation is exempt on Year 1. However, a corporation is exempt in Year 2 if....... The Year 1 sales is less than or equal to $5 million.
To be eligible for AMT exemption, in Year 3, a corporation has to have an average sale in Years 1 and 2 to be less than or equal to $_______ million. 7.5
To be eligible for AMT exemption, in subsequent years, a corporation needs to have an average sales for three prior years to be less than or equal to $______ million. 7.5
What is the formula for AMT? = Alternative minimum taxable income (AMTI) - Exemption = AMTI in excess of Exemption * 20% - Tentative minimum tax (TMT) - Regular tax
How do you figure out the AMTI? Regular taxable income + AMT preferences +/- AMT adjustments - AMT NOL - AMT exemption
AMT preferences are ALWAYS ______ ________ to AMTI. positive additions
What are the 2 examples for AMT preferences? - Tax-exempt interest income (municipal bonds issued to fund non-government activities [building a stadium]) - Percentage depletion in excess of cost basis
What are the 3 examples of AMT adjustments? - Differences between MACRS and ADS [Alternative Depreciation System] depreciation amounts - Completed-contract method - ACE [Adjusted Current Earnings] adjustents
AMT NOL Deduction is limited to _____% of AMTI before the AMT NOL. 90
In general, the amount for AMT exemption is $40,000. However, it phases out above AMTI of $150,000 and causes the reduction by 25%* (AMTI - $150,000). The exemption is gone when AMTI = $_________. 310,000
For AMT Timing, corporate AMT ______ the payment of tax but isn't designed as permanent tax increase. Accelerates
Created by: U0105006