tax ch 15, 16, 18, 20, 22
Shane starts a new business this year and incorporates the business entity as SNB, Inc (taxed as a C corporation). Unfortunately, SNB, Inc. has a slower than expected start and loses $6,800. Assuming a 40% income tax rate, how much income tax will SNB, Inc. pay this year?
$0 Because SNB generated a loss, it will pay no taxes this year. It probably can carry forward the loss to a future year to offset income.
Newt, Inc. incurs capital losses of $500 and capital gains of $100 in the current year. For tax purposes, Newt will recognize a net capital gain or loss of ______.
$0 Reason: Corporations can only offset capital losses against capital gains in the year of a net capital loss ($100 losses offset against $100 gains).
Candles, Inc. distributes some defective candles to its shareholders. The market value of the candles was $20,000 (adjusted basis = $60,000). What are the tax consequences of the distribution to Candles?
$0 gain or loss recognized No loss is recognized on the distribution of noncash property by a corporation. E&P is reduced by the E&P basis in the property.
Gretchen has 100 shares of Phillip Drummond, Inc. (PDI) stock with a basis of $3,500. PDI declares a 2-for-1 stock dividend when the post-dividend market price of a share of PDI is $45. What is Gretchen's basis in her old 100 shares and her new 100 shares?
$1,750 for old and $1,750 for new Gretchen will allocate basis to the new shares based on the FMV at the time of the dividend. $45 x 100 = $4,500 of FMV of the new shares / $9,000 or the FMV of total shares ($45 x 200) = 50%. This share (50%) is multiplied by the $3,500 basis = $1,750. $3,500 (total basis) - $1,750 (new shares basis) = $1,750 (old shares basis).
Vebos, Inc. distributes $10,000 cash and a machine with a fair market value of $5,000 (adjusted basis to Vebos of $200 at the time of distribution) to its shareholder Jody. Vebos had current E&P of $100,000 at the distribution. What is the amount and character of the distribution to Jody?
$15,000 dividend $10,000 cash + $5,000 FMV of property is all paid from E&P.
In 2020, a taxpayer (with $26,500 of employee compensation) was allocated $176,000 of self-employment income. Calculate the amount of self-employment tax the taxpayer would owe.
$17,734. Taxpayer would report $162,536 of net earnings from self-employment ($176,000 * .9235) and owe $17,733.84 of self-employment tax [(137,700 - 26,500) * .153] + [($162,536 - $137,700) * .029] = $17,013.60 + $720.24 = $17,733.84. Rounded to the nearest dollar ($17,734).
Burke, Inc. granted 1,000 nonqualified employee stock options with an estimated value of $2 per option. Each option entitled the owner to purchase 1 share at a price of $10 per share (the price of the stock at grant date). The options vested immediately but none were exercised in the current year. What is the current year book-tax difference?
$2,000 temporary and unfavorable difference $2,000 will be expensed for book purposes with no commensurate tax deduction until exercised, creating a temporary and unfavorable difference.
Fast Rocket, Inc. generated a net loss of $5,000 in its first year (2018) and taxable income of $15,000 in its second year of operations (2019). Assuming a tax rate of 21%, what is Fast Rocket's total tax for both years?
$2,100 A corporation can carry forward its net operating losses to offset 80% of income in a future period. Since 80% x 15,000 > the NOL of $5,000, Fast Rocket can use the whole NOL carryforward. ($15,000 - $5,000 = $10,000 x 21% = $2,100)
Rebellion, Inc. distributes property worth $20,000 (adjusted basis = $5,000) to its shareholder, Jerry. Rebellion's current E&P was $100,000 at the time of distribution. What is Jerry's basis in the property received?
$20,000 The basis in the property received is the fair market value.
In 2020, a taxpayer (with no employee compensation) was allocated $156,000 of self-employment income. Calculate the amount of self-employment tax the taxpayer would owe.
$21,253 Taxpayer would report $144,066 of net earnings from self-employment ($156,000 * .9235) and owe $21,252.71 of self-employment tax [$137,700 * .153 + ($144,066 minus $137,700) * .029]. Rounded to the nearest dollar ($21,253).
Joshua, Inc. has taxable income of $1,000,000 in the current year. Using the corporate tax tables, Joshua Inc.'s federal tax liability is ______.
$210,000 Reason: $1,000,000 x 21% = $210,000
Akram owns a C corporation that has generated a $10,000 loss in its first year. Akram has other forms of ordinary income totaling $80,000. Assuming Akram's marginal tax rate is 35% and a corporate rate of 21%, how much tax will Akram pay on the income?
$28,000 Akram may NOT offset the loss from the corporation with his other income and will pay tax of $28,000 ($80,000 x 35%).
Joshua Corp. distributes land to its shareholder, Eddie. The land has a fair market value of $25,000 and is subject to a mortgage of $40,000. Joshua Corp.'s basis in the land is $1,000. How much gain does Joshua Corp recognize on the distribution of the land?
$39,000 Because the liability assumed with the land exceeds its fair market value, the amount of the distribution is assumed to be the liability ($40,000) less $1,000 (adjusted basis) = $39,000.
Test Pilot, Inc. reported a net operating loss of $25,000 for its tax year ended December 31, 2019 and net income of $20,000 in 2020. After considering the NOL carryforward, Test Pilot will report 2020 taxable income of ______.
$4,000 and carryforward $9,000 indefinitely Reason: Test Pilot may reduce taxable income in 2020 by $16,000 (80% x $20,000) for taxable income of $4,000, leaving $9,000 available to apply in 2021 and beyond.
Amy redeemed all 50 of her shares of Fontaine Corp. for $46,000. This represented one-half of Fontaine's outstanding stock. Just prior to the redemption, Fontaine has E&P of $80,000. What is Fontaine's E&P after the redemption?
$40,000 In a redemption treated as an exchange, E&P is adjusted by the same percentage as the percentage of stock redeemed, not to exceed the FMV of the property distributed. 50% of stock redeemed x $80,000 =$40,000.
Collins, Inc. issued a nontaxable stock dividend of one share for each share owned. Melissa, a shareholder of Collins, had a total basis in her 500 shares of stock of $5,000. The total basis of Melissa's 1,000 shares of stock after the dividend is ______.
$5,000 Melissa's total basis does not change.
An example of a permanent book-tax differences includes ________.
$50,000 of interest expense associated with the generation of tax-exempt income Reason: This is deductible for book, but not for tax.
In tax year 2020, A single taxpayer had net investment income (NII) of $32,000 and AGI of $215,000. Calculate the amount of net investment income tax the taxpayer is required to pay?
$570 The 3.8% tax would be applied to $15,000 (the amount above the $200,000 threshold). $15,000 * 3.8% = $570.
Yellow Sub Corp. deducted $30,000 of 5-year property immediately under Section 179. How much of that expenditure can be expensed for E&P?
$6,000 Section 179 immediate expensing is amortized over five years for E&P.
Gopher, Inc. has $40,000 of current E&P and $50,000 of accumulated E&P at the start of the year. The sole shareholder, Carl has a basis in his stock of $10,000. If Gopher distributes $60,000 cash to Carl, it will be treated as a ______.
$60,000 dividend Distributions are dividends to the extent of E&P. The first $40,000 comes from current E&P and the next $20,000 ($60,000 less $40,000) comes from accumulated E&P.
Gopher, Inc. has negative $40,000 current E&P and $100,000 of accumulated E&P. Gopher made a $70,000 distribution at the end of the year. What is the character of the distribution?
$60,000 dividend and $10,000 return of capital to the extent of basis Total E&P at time of distribution is $60,000 ($100,000 - $40,000). Distribution in excess of total E&P is return of capital
At the end of 2020, Gopher, Inc. has current E&P of negative $40,000. Accumulated E&P at the beginning of the year was $100,000. Gopher made a $70,000 distribution on January 1, 2020. What is the character of the distribution?
$70,000 dividend
Pear, Inc. generates a $100,000 net operating loss in the current year. Plum, Inc. generates $500,000 of taxable income. Compute the current year tax if Pear and Plum do/do not file a consolidated return.
$84,000 if consolidated; $105,000 if not consolidated. Reason: If consolidated, taxable income is $400,000: ($500,000 - $100,000) x 21% = $84,000. If not consolidated, Plum pays $500,000 x 21% = $105,000, and Pear will carryback or carryforward the loss if possible. *The loss can be offset against the income if the two corporations file a consolidated return. The loss cannot be offset if they do not file a consolidated return.
Which of the following concerning the amortization of goodwill for tax purposes is correct?
- Book goodwill does not always have a corresponding tax basis. - Amortized goodwill generated in an asset purchase can create either a favorable or unfavorable book-tax difference. - Goodwill acquired by a corporation in a taxable asset acquisition is recovered over 180 months for tax purposes.
Corporations receiving dividends from other corporations account for such dividends for GAAP purposes the following ways at the various ownership percentages. Owns less than 20 percent Owns at least 20 percent but not more than 50 percent Owns more than 50 percent
- Includes the dividend in income (same as tax; no book-tax differences) - Includes a pro-rata portion of the distributing corporation's earnings in its book income under the "equity method of accounting" - Consolidates their financial reporting books and the intercompany dividend is eliminated
Schedules M-1 and M-3 ______.
- are both for reporting differences in book and taxable income - are both schedules filed with Form 1120
A favorable book-tax difference:
- decreases taxable income relative to book income *Favorable book-tax differences reduce taxable income. - is an adjustment to book income that decreases current tax liability *By reducing taxable income, favorable differences lower tax liability.
Accrual method, calendar-year corporations can deduct a charitable contribution ______.
- if accrued, approved by the board, and paid within 3 1/2 months of year-end - when paid *An accrual-based corporation can accrue a charitable contribution for tax purposes if approved by the board of directors and paid within 3 1/2 months of year end. *A deduction is permitted when the donation is actually made.
Generally, state law classifies business entities as: (Check all that apply.) venture capital entities. S corporations. limited liability companies. business trusts. corporations.
- limited liability companies. - corporations. Some businesses are engaged in venture capital as a business objective, but this is NOT a form of business entity. An "S" election is a tax election made for tax purposes, NOT a type of entity under state law. Although a small number of states allow business trusts, it is NOT one of the typical business entity choices.
A book-tax difference at the time of exercise of non qualified employee stock options (post ASC 718) can be:
- permanent and unfavorable. - temporary and unfavorable. *If the bargain element of the stock options is less than the value estimated at vesting, the resulting permanent difference is unfavorable. *At vesting, an unfavorable difference can be created when the book expense is recorded.
In order to qualify for exchange treatment as a redemption that is NOT essentially equivalent to a dividend, the redemption must ______
- result in the shareholder's voting power being below 50% - result in a meaningful reduction of the shareholder's proportionate interest in the corporation *The less than 50% ownership test must be met. *Under a Supreme Court decision, a meaningful reduction is required.
The tax rate for the additional Medicare tax is:
.9%
Corporate distributions to shareholders are treated in the following order.
1. dividend to the extent of E&P included in gross income 2. non-taxable return of capital that reduces the shareholders basis 3. gain from sale or exchange of stock
Match the tax classification with the required federal income tax return form: C Corporation S Corporation Partnership Sole Proprietorship
1120 1120S 1065 Form 1040, Schedule C
Match the type of shareholder with the typical tax rate on corporate dividends. Individual Corporate (before the DRD) Pension funds
15% or 20% 21% 0%
For GAAP purposes, if a dividend receiving corporation owns less than _______ percent of the stock of the distributing corporation, the receiving corporation includes the dividend in income (same as tax; no book-tax differences).
20
In an effort to avoid the second level of tax, corporations that retain earnings are subject to a ________ percent accumulated earnings tax on the retained earnings.
20
In general, a taxpayer can deduct _______ % of the amount of qualified business income allocated to her from a flow-through entity subject to certain limitations
20
The deduction for qualified business income (QBI) for flow-through entities is calculated as what percent of qualified business income?
20%
In tax year 2020, a married taxpayer with AGI of $300,000 had gross investment income of $6,150 (which included a long-term capital gain of $3,500 and interest income of $2,650), brokerage commissions of $75, and tax preparation fees of $210. Calculate the amount of net investment income tax the taxpayer is required to pay?
231 ($6,150 - $75) * 3.8% = $6,075 * 3.8% = $231
If a single taxpayer had net earnings from self employment (from all sources) and compensation earned as an employee in the amount of $225,000, then $________ would be subject to an additional Medicare tax of ________ percent
25,000 .9
The percent of tax assessed on net investment income above a threshold is:
3.8%
GW Corp. has two shareholders; Devana owns 40 shares and Alpine Corp. owns the other 60 shares. Devana is a 40% shareholder in Alpine Corp. Under the attribution rules for the change in stock ownership tests in a redemption, how many shares of GW Corp. are attributed to Devana?
40 Devana owns 40 shares directly. Because her ownership in Alpine is less than 50%, none of those shares are attributed to her.
Corporate estimated tax payments are due on the 15th of which of the following months of the tax year?
4th 6th 9th 12th
Chuck owns 200 shares of Walnut Corporation. Chuck wishes to redeem some shares in exchange for property and would like exchange treatment for his redemption. If there are 500 common shares of Walnut outstanding (the only class of stock) before any redemption, what is the minimum number of shares Chuck must exchange?
59 Shares In order to meet the 80% test, Chuck needs his ownership percentage to drop below 32%. Walnut must redeem 59 shares (200-x/500-x > 32%) in order to meet the 80% test.
Kevin directly owns 50 shares of Sharon Company stock. He is a 50% partner in AMI Partnership which also owns 50 shares of Sharon. Prior to any stock redemption, how many shares of stock are attributed to Kevin?
75 The 50 shares Kevin holds directly + 25 shares (50% x 50) of the shares held by AMI.
In 2020, A taxpayer who paid $16,500 of self-employment tax would deduct $________ of the tax as a (for/from) ________ AGI
8,250 for
Net operating losses arising in tax years beginning after December 31, 2017 can offset only _____ % of taxable income in future years.
80
The amount of net earnings from self-employment is used to calculate self-employment tax. A taxpayer's net earnings from self employment equals _________ % of self employment income.
92.35
Which of the following dividends is NOT eligible for a dividends received deduction (DRD), if received by a US corporation?
A dividend from a wholly owned subsidiary corporation established under the Russian corporations laws Dividends received from non-US corporations are NOT eligible for the DRD.
Which of the following provides an opportunity for a corporation to avoid double taxation on payments to its shareholders?
A reasonable deduction for salaries paid to owner
Generally, under state law, which of the following is NOT considered an entity separate from its owner(s)? A sole proprietorship A corporation A limited liability company A general partnership
A sole proprietorship
Marcie and her husband, Franklin, each own 50 shares of Chestnut, Inc. Sally, Marcie's old high school friend, owns the remaining 50 shares (150 total shares outstanding). Chestnut redeems 40 of Marcie's shares for $38,000 (her adjusted basis was $5,000). What is the tax treatment of the basis of the shares redeemed?
Add the $5,000 basis to Marcie's remaining 10 shares. As her spouse, Franklin's shares are attributed to Marcie. Thus Marcie owns 60 (her remaining 10 + Franklin's 50) shares of Chestnut's total 110 (150 - 40) outstanding. Because 60 ÷ 110 > 50%, Marcie fails the 50% test and the redemption is treated as a dividend. As a result, the unused basis is added to the basis of Marcie's remaining shares.
A C-corporation with a calendar year-end has an income tax return due on ______ 15th.
April
Which business entity pays tax on their income at the entity level?
C corporation
Which business entity pays tax on their income at the entity level? C corporation S corporation Sole proprietorship Partnership
C corporation
A(n) ________ is a separate taxpaying entity unless a valid S election is made for tax purposes.
C corporation *Partnerships are treated as flow-through entities for tax purposes. *LLCs are generally treated as flow-through entities for tax purposes.
CH 16
Corporate Operations
CH 18
Corporate Taxation: Nonliquidating Distributions
Nolan seeks to protect himself from the debts his business is going to incur. Which of the following entities would be the best entity choice for Nolan? Sole proprietor General partnership Corporation
Corporation
Which one of the following legal entity types is best suited for an initial public offering?
Corporation
Which of the following are the characteristics of a distribution defined as a dividend?
Distribution of cash or other property Out of the earnings and profits Made to shareholders Made by a corporation
Match the result of a corporate noncash property distribution with its result. Taxable gain to the corporation Loss not recognized
Fair market value of distributed property exceeds its adjusted basis Fair market value of distributed property is less than its adjusted basis
True or false: Depreciation deducted when calculating E&P is the generally same as depreciation deducted when calculating taxable income.
False Depreciation is calculated under a specific method for E&P (straight-line and often over a different recovery period) that is different than typical depreciation.
True or false: Under no circumstances will a shareholder who has shares redeemed be able to treat the stock redemption as an exchange unless the shareholder meets the bright line change-in-stock-ownership tests.
False The not essentially equivalent to a dividend test is still available.
True or false: In a stock redemption, the stock redeemed by the corporation must be immediately canceled.
False The stock acquired by the corporation can be canceled, retired or held in treasury stock.
Which of the following legal entity types does not require the owners to formally organize the entity with the state?
General Partnership
Select the shareholder-type that is likely to pay a 15% (or 20%) tax on distributions from a C corporation.
Individual shareholders
Which business entity is NOT recognized by the U.S. tax system?
Limited Liability Company (LLC)
A reconciliation of the corporation's beginning and ending balance in its unappropriated retained earnings account is reported on Schedule ______.
M-2
Which of the following taxes does not apply to a C corporation? Accumulated earnings tax Corporate income tax Personal holding company tax Net investment income tax
Net investment income tax
Match the entity with the description of income or loss allocation. C corporation Partnership S corporation Sole proprietorship
No allocation Based on owner's agreement Based on stock ownership % All earnings allocated to owner
Which entity types can generally use either the cash or accrual method of accounting for tax purposes?
Partnership S corporation Sole proprietorship *C corporations are generally required to use the accrual method of accounting, unless qualified as a smaller corporation
Greta is concerned about the level of debt her business has incurred, as she is responsible for its liabilities. Assuming Greta is the sole owner, how could she organize her business to protect herself from the liabilities of the entity? (Check all that apply.) Sole proprietor Single member limited liability company Corporation Limited partnership General partnership
Single member limited liability company Corporation
To calculate the taxpayer's net earnings from self-employment, 92.35% is multiplied by:
Taxpayer's self-employment income.
When does the DRD modified taxable income limitation NOT apply?
When, after deducting the DRD, the corporation would report a net operating loss
When does the DRD modified taxable income limitation apply?
When, as a result of the DRD, the corporation would report net operating income Reason: If after the DRD, the corporation reports taxable income, the DRD is limited.
Almonds, Inc. redeems 25 shares of Lucy's common stock in exchange for $10,000, dropping her ownership from 40 shares to 15. There is only one class of stock and 100 shares were outstanding prior to the redemption. Is Lucy's redemption substantially disproportionate?
Yes Lucy owns less than 50% (15 ÷ 75). Lucy's percentage ownership went from 40% (40 ÷ 100) to 20% (15 ÷ 75), which is more than the 80% decrease required (32% is 80% of 40%). The market value test is met by virtue of there being only one class of common stock.
The potential tax consequences of a corporate distribution of cash or other tangible property to a shareholder are ______.
a gain from the sale of stock a non-taxable return of the shareholder's capital a dividend included in gross income *A corporate distribution can be a dividend, return of capital or gain. *A corporate distribution can be a dividend, return of capital or gain.
The federal income tax deduction that a corporation takes under ASC 740 is ______ book-tax difference.
a permanent Reason: Federal income taxes are NOT deductible for tax purposes, making them a permanent book-tax difference.
When current E&P is negative, the tax status of a distribution is determined by the ______.
accumulated E&P on the date of distribution total E&P = current E&P + accumulated E&P
The excess of the fair market value of the stock when a stock option is exercised over the exercise price of the option is the _________ __________
bargain element
To properly track earnings and profits, a corporation must keep ______ E&P account.
both a current and an accumulated
When an S corporation shareholder does not work for the entity, the _____.
business income allocated to the shareholder is considered to be passive income
A corporation can carry back a net capital loss to a previous year to offset previous net capital gains UNLESS:
by carrying back the loss, a net operating loss is created or increased Reason: A net capital loss carryback may NOT serve to create or increase a net operating loss for the year.
Under family attribution, individuals are treated as owning the shares of stock owned by their ______.
children parent spouse
A ___________ dividend is when a deductible expense is recategorized as a dividend by the IRS.
constructive
A stock redemption could result in ______.
dividend treatment, taxable at preferential rates sale treatment with a gain or loss recognized by the shareholder *A stock redemption will be treated as a dividend only if it fails the definition of a redemption under tax law.
When a corporation pays a distribution that is characterized as a dividend, the corporation _______ the dividend from taxable income.
does NOT deduct Corporations do NOT deduct dividends from taxable income, thus resulting in double-taxation of corporate earnings.
The corporate tax formula differs from the individual tax formula because the corporate tax formula ______.
does not separate deductions into those before AGI and those after AGI like the individual formula does Reason: The individual tax formula includes adjusted gross income (AGI); whereas the corporate tax formula does not.
Dividends are taxable at both the corporate and shareholder level, resulting in __________ taxation
double
A measure of a corporation's economic profits is known as ________ and ________
earnings profits
When noncash property subject to liabilities is distributed by a corporation to shareholders, the amount of the distribution is
equal to the FMV of the property minus the liability assumed by the shareholder
True or false: A Net Operating Loss arising in tax years beginning after December 31, 2017 can only be carried forward 20 years.
false
True or false: The United States taxes C corporations on their income using a progressive tax rate system.
false
True or false: Like individuals, corporations can claim a deduction for qualified business income.
false Corporations do not itemize deductions, receive a standard deduction or claim a deduction for qualified business income.
Corporate taxpayers reconcile _________ income with __________ income on Form 1120, Schedule M-1 or M-3
financial taxable
Charitable contributions in excess of the 10% limit are carried ______ for ______ years
forward 5
Goodwill recovery differs between GAAP and tax rules in that GAAP requires corporations to (amortize/impair) goodwill whereas tax law requires corporations to (amortize/impair) goodwill
impair amortize
Permanent book-tax differences:
include items of income for book purposes that will never be items of income for tax purposes Reason: Permanent book-tax differences are income or deductions for either book or tax, but NOT both.
Advantages of filing a consolidated tax return include ______.
income from intercompany transactions can be deferred until sold to an outside party the losses of one group company can be offset against the income of another
Permanent book-tax differences include ______.
interest from a bond issued by the City of Los Angeles a political contribution made by a business half of the cost of a business meal with an important customer
In order for a stock distribution to be non-taxable, it must be ______.
made with respect to the corporation's common stock made pro-rata with respect to all shareholders
Under which of the following E&P scenarios will a distribution NEVER be a dividend?
negative Current E&P/ negative Accumulated E&P A distribution can NOT be a dividend when there is no positive E&P.
Corporations are taxed on dividends received at the ______.
ordinary corporate tax rate
Match the ultimate responsibility for debt with the legal entity type: Sole proprietor General partnership Corporation
owner general partner entity
Fleck Corporation redeemed stock from a shareholder in exchange for $20,000. The redemption qualified as a dividend. As a result, Fleck will ______.
reduce E&P by $20,000
Jonas, an individual taxpayer, establishes his business as an LLC, for which he is the only member (owner). By default, his business will be treated as a _________ for tax purposes. separate taxpaying entity partnership sole proprietorship
sole proprietorship A single-member LLC is taxed as a sole proprietorship.
Ellenbogen Inc. gave each shareholder two shares of Ellenbogen stock for each one share already owned. This is known as a:
stock split stock dividend
DRD modified taxable income is ________
taxable income before the DRD, capital loss carrybacks, and any NOL carryforward
Which of the following book-tax differences is not reported on Schedule M-1?
the dividends received deduction.
true or false: Dividends paid to individual shareholders enjoy preferential rates, but still have double taxation.
true