FUNDAMENTALS OF TAXATIONEXPLAIN THE
CIRCUMSTANCES IN WHICH A CORPORATION CAN USE
THE ACCRUAL BASIS OR THE CASH BASIS OF
ACCOUNTING. UPDATED ACTUAL QUESTIONS WITH
CORRECT ANSWERS
Question 1.
What criteria must a corporation meet to appropriately elect Subchapter S status?
ANSWER
The corporation must be a domestic corporation, have 100 or fewer stockholders who are
individuals, estates, and certain trusts, have only one class of stock, and have shareholders
who are U.S. citizens or resident aliens.
Question 2.
A calendar year corporation properly files a Subchapter S election on January 10, 2017. On what date is
the election effective? What if the election were filed on June 1, 2017?
ANSWER
An election filed on January 10, 2017 is effective for the current (2017) tax year. If the election
were filed on June 1, 2017, it would be effective for the following tax year (2018).
Question 3.
When must a corporate tax return be filed? Can a corporation receive an extension of time to file a
return, and if so, what is the length of the extension?
ANSWER
For most corporations, a corporate tax return must be filed no later than 3 ½ months after the
end of the fiscal year. Corporations can request an automatic extension of six months.
Corporations with a June year-end must file their return 2 ½ months after year end (September
15) and a seven month extension is permitted.
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, Question 4.
For purposes of the corporate alternative minimum tax, explain the application of the AMT exemption
amount and its phaseout.
ANSWER
The AMT exemption amount is $40,000 for corporations with AMT income of $150,000 or less.
The exemption is reduced by 25 cents for each dollar that AMT income exceeds $150,000. Thus,
the exemption is totally phased out at AMT income levels of $310,000 or more.
Question 5.
What are the two
test used to determine whether a group of corporations is a brother-sister group?
ANSWER
Total ownership test. The shareholder group owns stock representing at least 80% of the
voting shares of stock or at least 80% of the total value of all shares.
Common ownership test. The shareholder group has common (identical) ownership of more
than 50% of the voting power or more than 50% of the value of all shares.
What criteria must a corporation meet to appropriately elect Subchapter S status?
For purposes of determining corporate tax brackets, the accumulated earnings credit, and the
minimum tax exemption, a brother-sister group is determined with reference to the common
ownership test or the total ownership test using a threshold of 50% rather than 80%.
Question 6.
Explain the rules associated with capital loss carrybacks and carryforwards.
ANSWER
A corporation is permitted to offset capital losses only against capital gains. Thus, if the
corporation has excess capital losses (more losses than gains), the IRC permits the entity to
carry excess capital losses back three years (to the earliest year first) and, if any loss remains,
forward five years.
Question 7.
What is Schedule M-1, and what is its purpose?
ANSWER
Schedule M-1 is part of Form 1120. It is used to reconcile net income on the financial
statements with net income on the tax return. Schedule M-1 only has to be completed if total
receipts and total assets are $250,000 or greater.
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CIRCUMSTANCES IN WHICH A CORPORATION CAN USE
THE ACCRUAL BASIS OR THE CASH BASIS OF
ACCOUNTING. UPDATED ACTUAL QUESTIONS WITH
CORRECT ANSWERS
Question 1.
What criteria must a corporation meet to appropriately elect Subchapter S status?
ANSWER
The corporation must be a domestic corporation, have 100 or fewer stockholders who are
individuals, estates, and certain trusts, have only one class of stock, and have shareholders
who are U.S. citizens or resident aliens.
Question 2.
A calendar year corporation properly files a Subchapter S election on January 10, 2017. On what date is
the election effective? What if the election were filed on June 1, 2017?
ANSWER
An election filed on January 10, 2017 is effective for the current (2017) tax year. If the election
were filed on June 1, 2017, it would be effective for the following tax year (2018).
Question 3.
When must a corporate tax return be filed? Can a corporation receive an extension of time to file a
return, and if so, what is the length of the extension?
ANSWER
For most corporations, a corporate tax return must be filed no later than 3 ½ months after the
end of the fiscal year. Corporations can request an automatic extension of six months.
Corporations with a June year-end must file their return 2 ½ months after year end (September
15) and a seven month extension is permitted.
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, Question 4.
For purposes of the corporate alternative minimum tax, explain the application of the AMT exemption
amount and its phaseout.
ANSWER
The AMT exemption amount is $40,000 for corporations with AMT income of $150,000 or less.
The exemption is reduced by 25 cents for each dollar that AMT income exceeds $150,000. Thus,
the exemption is totally phased out at AMT income levels of $310,000 or more.
Question 5.
What are the two
test used to determine whether a group of corporations is a brother-sister group?
ANSWER
Total ownership test. The shareholder group owns stock representing at least 80% of the
voting shares of stock or at least 80% of the total value of all shares.
Common ownership test. The shareholder group has common (identical) ownership of more
than 50% of the voting power or more than 50% of the value of all shares.
What criteria must a corporation meet to appropriately elect Subchapter S status?
For purposes of determining corporate tax brackets, the accumulated earnings credit, and the
minimum tax exemption, a brother-sister group is determined with reference to the common
ownership test or the total ownership test using a threshold of 50% rather than 80%.
Question 6.
Explain the rules associated with capital loss carrybacks and carryforwards.
ANSWER
A corporation is permitted to offset capital losses only against capital gains. Thus, if the
corporation has excess capital losses (more losses than gains), the IRC permits the entity to
carry excess capital losses back three years (to the earliest year first) and, if any loss remains,
forward five years.
Question 7.
What is Schedule M-1, and what is its purpose?
ANSWER
Schedule M-1 is part of Form 1120. It is used to reconcile net income on the financial
statements with net income on the tax return. Schedule M-1 only has to be completed if total
receipts and total assets are $250,000 or greater.
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