ACC 731 Exam 1 Questions and Answers 2022/2023

C Corporation - ANSWER Subject to an entity-level Federal income tax, results in double tax S Corporation - ANSWER -Separate entity, only pays special taxes -Similar to partnership taxation, flow through taxation Nontax Issues in Selecting Entity Form - ANSWER -Liability -Capital-raising -Transferability -Continuity of life -Centralized management Limited Liability Companies (LLC) - ANSWER -allows owners to avoid unlimited liability (major nontax advantage) -treated as partnership for tax purposes, avoids double taxation (major tax advantage) Check-the-box Regulations - ANSWER -allows taxpayer to choose tax status of entity without regard to corporate or non corporate characteristics -entities with 1 owner can elect to be classified as partnership or corporation -entities with only 1 owner can elect to be classified as sole proprietorship or as corporation -election is not available to entities incorporated under state law or if required to be corp under fed law Charitable Contributions - Individuals - ANSWER -limited to 50% of AGI, 30% for capital gain property unless election is made to reduce FMV of gift -Excess charitable contribution carried over for 5 years -amount of contribution is the FMV of capital gain property; ordinary income property is limited to adjusted basis; capital gain property is treated as ordinary income property if certain tangible personalty is donated to a nonuse charity or a private non operating foundation is the donee -Time of deduction-year in which payment is made Charitable Contributions - Corporations - ANSWER -Limited in any tax year to 10% of taxable income computed w/o regard to the charitable contribution deduction, NOL carry back, capital loss carry back, dividends received deduction, and domestic production activities deduction -Excess of 10% limit can be carried over for 5 years -Time of deduction-year in which payment is made unless accrual basis corp, allows deduction in year preceding payment if authorized by board of directors and paid within 2.5 months of year end Casualty Losses - Individuals - ANSWER $100 floor on personal casualty and theft losses; personal casualty losses deductible only to extent losses exceed 10% of AGI Casualty Losses - Corporations - ANSWER Deductible in full Net Operating Loss - Individual - ANSWER -Adjusted for several items, including nonbusiness deductions over nonbusiness income and personal exemptions -Carryback period is 2 years, while carry forward is 20 years Net Operating Loss - Corporations - ANSWER -No adjustments -Carryback 2 years, carry forward 20 Dividends Received Deduction - ANSWER 70%,80%, or 100% of dividends received depending on percentage of ownership by corporate shareholder Net Capital Gains - Individuals - ANSWER Taxed in full. generally 15 or 20% on net capital gains Net Capital Gains - Corporations - ANSWER taxed in full Capital Losses - Individuals - ANSWER Only $3000 of capital loss per year can offset ordinary income; unused loss is carried forward indefinitely to offset capital gains or ordinary income up to $3000; short-term and long-term carryovers retain their character Capital Losses - Corporations - ANSWER Can offset only capital gains; unused loss is carried back 3 years and forward 5; carryovers and carry backs are characterized as short-term losses Passive Losses - Individuals - ANSWER In general, passive losses cannon offset either active income or portfolio income Passive Losses - Corporations - ANSWER Passive loss rules apply to closely held C corps and personal service corps: -C corp- may offset active income, but not portfolio income -PSC- cannot offset either active income or portfolio income Domestic Production Activities Deduction - ANSWER Based on 9% of the lesser of qualified production activities income (QPAI) or modified AGI (individuals)/taxable income (corps) Schedule M-1 - ANSWER used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return (book-tax differences) -required for corps with less than $10m of total assets Schedule M-3 - ANSWER similar to an M-1 but in much more detail, required by corps with total assets of $10m or more Organizational Expenditures - ANSWER -A corporation my amortize org exp over a 180 month period -a special exception allows the corp to immediately expense the first $5000, phased out on a dollar-for-dollar basis when expenses exceed $50,000 Organizational expenditures include the following: 1. legal services incident to the organization 2. necessary accounting services 3. expenses of temporary directors and of organizational meetings of directors and shareholders 4. fees paid to the state of incorporation Start-up Expenditures - ANSWER -Up to $5000 can be immediately expensed (subject to the dollar cap and excess of $50,000 phaseout) -any remaining amounts are amortized over a period of 180 months Temporary Differences - ANSWER -Depreciation -Compensation-related expenses -Accrued income and expenses -Net operating losses -certain intangible assets Permanent Differences - ANSWER -Nontaxable income: muni bond interest -Nondeductable expenses: 50% of meals and entertainment are deduct -Tax credits that reduce fed income tax but no corresponding book treatment Current tax expense - ANSWER theoretically represents the taxes actually payable to (or refund receivable from) the government Deferred tax expense or Deferred tax benefit - ANSWER represents the future cost (or savings) connected with income reported in the current-period financial statement Deferred tax liability - ANSWER -an expense is deductible for tax in the current period but it not deductible for book until some future period OR -Income is includible currently for book purposes but is not includible in taxable income until a future period Deferred tax asset - ANSWER -an expense is deductible for book in the current period but is not deductible for tax until some future period OR -Income is includible in taxable income currently but is not includible in book income until a future period Alternative Minimum Tax - ANSWER -if Tentative minimum taxregular corporate income tax, the corporation must pay regular tax plus the excess, the AMT Small Corporation Exemption - ANSWER -Initially qualifies the first tax year in existence regardless of its gross receipts -Avg annual gross receipts for 3 prior years ≤$7.5 m -if only 1 prior year, then it is $5m Tax Preference Items - ANSWER -Accelerated depreciation on real property in excess of straight-line for property placed in service before 1987 -Tax-exempt interest on "private activity bonds" -Percentage depletion in excess of the adjusted basis of property -Certain intangible drilling costs for "integrated oil companies" Unadjusted AMTI - ANSWER Regular taxable income after AMT adjustments and tax preferences (other than the NOL and ACE adjustments) AMTI adjustments to arrive at ACE - ANSWER -Exclusion items-items that will never be included in regular taxable income or AMTI -Disallowed items- ex:DRD of 70% -Other adjustments items including intangible drilling costs, circulation expenditures, organization expense amortization, LIFO inventory adjustments, installment sales, other items Minimum Tax Credit - ANSWER AMT paid in one year can be used as a credit against future regular tax liability that exceeds its tentative minimum tax -Indefinite carryforward -cannot be carried back -cannot offset any future minimum tax liability -small corporations with unused minimum tax credits may use them against regular tax liability -Limit=regular tax - [25% x (regular tax-$25,000)] Section 351 - ANSWER In general, no gain or loss to transferors: -On transfer of property to corporation -In exchange for stock -IF immediately after transfer, transferors are in control of corporation If boot (property other than stock) received by transferors -gain recognized up to the lessor of boot received or realized gain -no loss is recognized Property besides PPE (for 351) - ANSWER -cash -secret processes and formulas -unrealized accounts receivable (for cash basis taxpayer) -installment obligations *code specifically excludes services from definition of property Stock (for 351) - ANSWER -includes common and most preferred stock -does not include stock rights or stock warrants -does not include corporate debt or securities (treated as boot) Assumption of Liabilities - ANSWER -does not result in boot to the transferor shareholder for gain recognition purposes -liabilities ARE treated as boot for determining BASIS in acquired stock -Liabilities are not treated as boot for gain recognition unless: 1. liabilites incurred for no business purpose or as tax avoidance mechanism (boot=entire amount of liability) 2. liabilitiesbasis in assets transferred (gain recognized = excess amount (liabilities - basis)