Exam 4 Review - Discussion

A married couple with two children earning $750,000 can take what approximate child tax credit in 2020?

$0 Phases out around $400k (199k per person)

What is the personal deduction in 2020?

$0 -- eliminated in TCJA was $4,050 in 2017

Cherry Corporation, a calendar year C Corporation, is formed and begins business on April 1 of the current year. In connection with its formation, Cherry incurs organizational expenditures o $54,000. Determine Cherry Corporation's deduction for organization expenditures for the current year

$1,000 [$5,000 - (54,000-50,000) plus $2,650 $54,000 - $1,000 / 180 then * 9 = $3,650

The foreign earned income exclusion in 2020 is approximately how much?

$100,000

By the end of 2017, Klein, a domestic corporation, had accumulated $10MM in cash from the overseas operations of its Liberia subsidiary. Klein made no distributions of this accumulated E&P during 2017. Compute the one-time transition tax liability that was incurred by Klein

$10MM * 15.5% tax rate = $1.55MM The tax applies whether or not Klein made an actual distribution of the accumulated funds. can be paid over 8 years

What is the standard deduction for a singe filer in 2020? $6,200 $18,650 $12,400 $24,800

$12,400

Keystone, your tax consulting client, is considering an expansion program that would entail the construction of a new logistics center in State Q. List at least five questions you should ask in determining whether an asset that is owned by Keystone is to be included in State Q's property numerator.

- Is the property tangible or intangible? -Where is the property located? -What is the tax basis of the property? -What was the original purchase price of the property? -Was the property used in the taxpayer's productive or other active business?

You are working with the top management of one of your clients in selection the US location for a new manufacturing operation. List some of the tax incentives the CEO should request from the economic development representatives of several candidate states during the negotiations.

-Lower property tax rate or exemption -Sales and use tax exemptions -Favorable loan from local government -Tax credits for jobs created

What is the effective FDII tax rate closest to?

13%

What is the FICA tax rate for a self-employed individual earning $100,00?

15.3%

Tax credits are found in which IRS schedule? 1 2 3 None

3

What is the highest tax bracket for short-term capital gains? 15% 37% 20% 39.6%

37%

How many states levy no corporate income tax?

4

Individual Income taxes comprised approximately how much of federal revenue sources -25% -50% -75% -90%

50-51%

How many states levy no personal income tax?

8

What is not an additional revenue source from the TCJA? -FDII -GILTI -BEAT -All are revenue sources

All are revenue sources

Which of the following is not a transfer pricing method? -CUP -BEAT -RPM -TNMM

BEAT

T/F: BEPS is a collaboration of many countries to make the tax code more fair. Also... Pillars?

Better disclosure of what is considered taxable; effort to solve digital taxation 2 pillars

Which of the following is a transfer pricing method? CPM RMP TNM FDII

CPM

What is not a type of treasury department regulation? Temporary Proposed Enacted Final

Enacted

Which of the following is generally not deductible? for companies Expense attributable to rents Expense attributable to royalties Expenses attributable to litigation Expenses related to casualties

Expenses attributable to litigation

Creditors cannot go after personal assets of partners in general and limited partnerships

False

T/F: A limited partnership is designed for multiple owners seeking passive investment with participation in daily management

False

T/F: Allocation is a means by which a. corporation's taxable income is divided among the states it operates in

False

T/F: Hobby expenses are not deductible in 2021

False

T/F: If a tax credit is not fully used in a year it wasted

False

T/F: It is possible to take a standard and itemized deduction in the same year.

False

T/F: State income tax modificaitons occur after federal income for idnviiduals but before federal income for corproations

False

T/F: Tax credits greatly simplify the tax code since it averts the needs for many people to file

False

T/F: Tax deduction is more than a tax credit

False

T/F: The Supreme Court's Quill decision established physical presence is required for income tax nexus

False

T/F: Transfer pricing involves giving away goods and services to avoid taxation

False

T/F: When litigating a case in the US Tax Court, the taxpayer has to initially pay the tax levied

False

T/F: C Corporations obtain no tax benefit from capital gains and no harm from capital losses

False No benefit from gains, but harm from losses

T/F: A low tax jurisdiction is likely to have its tax base eroded by transfer pricing

False -- a high tax jurisdiction would

T/F: The US Consitution mandates consistency in the use of apportionment formulas

False -- inconsistent between states

T/F: The US 39.6% corporate tax rate before 2017 prompted companies in "tax planning"

False -- wrong rate

T/F: Most tax disputes are litigated in the US District Courts

False --> US Tax Court

T/F: The estate tax is 40% on the value above $11.7 million

False --> tiered structure

T/F: 8 states impose no income tax on individuals and C corporations

False; 8 states no income tax on individuals but 4 states no income tax on C corporations

Five unrelated US individuals own all of the shares of Popping, a corporation organized and operating fully in the country Vivace. Mariam, one of the shareholders, asks you whether the income from Popping will be tax to her immediately as earned; she believes the entity is classified as a "controlled foreign corporation (CFC)." Explain how the Federal income tax law applies to the profits earned by Popping. Use the correct Federal income tax terminology.

For an entity to be a CFC, more than 50% of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporations must be owned by US shareholders on any day during the taxable year of the foreign corporation. For purposes of determining if a foreign corporation is a CFC, a US shareholder is defined as a US person who owns, or is considered to own, 10% or more of the total combined voting power of all classes of voting stock of the foreign corporation. Stock owned directly, indirectly, and constructively is counted.

Randall operates his distribution business in several countries. He wants to move some equipment to a new corporation with an office in South Africa (move equipment from US to out). This equipment includes assets with a large acquisition price and accumulated MACRS (modified accelerated cost recovery system) depreciation. The assets to be transferred would generate a $1MM realized gain if sold. Advise Randall on the tax effects of his proposed asset transfer.

If a US taxpayer transfers assets outside the US, gain may be recognized as a result of realized appreciation these assets. The general rule is that any gain is recognized in such a transfer. Different rules may apply if the transferred items are intangible assets

List some general guidelines that a taxpayer can use to determine whether it has an obligation to file an income tax return with a particular state. Include the terms nexus and domicile (permanent resident) in your answer

If a corporation is to be subject to tax in a state other than that of its incorporation, the state with significant operations (domicile) must show that sufficient contract with the state (nexus) has been established. Typically, sufficient nexus exists when a corporation derives income from sources, within the state, owns or leases property in the state, employs personnel in the state, or has physical or financial capital there. A state generally cannot tax the out-of-state activities of an out-of-state corporation The state in which a business is incorporated has the jurisdiction to tax the income of the corporation, regardless of the volume of its business activities within the state

Joel is the sole shareholder of Manatee Corporation, a C corporation. Because Manatee's sales have increased significantly over the last several years, Joel has determined that the corporation needs a new distribution warehouse. Joel has asked your advice as to whether 1) Manatee should purchase the warehouse, or 2) he should purchase the warehouse and lease it to Manatee. What relevant tax issues will you discuss with Joel?

If he buys the warehouse and rents it to the corporation: -He can charge the corporation the highest amount of rent that is reasonable. The rental operation can help bail some profits out of the corporation and avoid double taxation on corporate income. Joel would have rent income; Manatee would have a deduction for rent expense -The depreciation and other expenses incurred in connection with the warehouse will be deductible by Joel, which should enable him to offset some or all of his rental income - Upon future sale of warehouse, Joel will not be subjected to the additional depreciation recapture provision that would be applicable to Manatee

A taxpayer sells a warehouse for a recognized gain. Depreciation had been property claimed on the property based on the straight-line method over a 39-year recovery period. Will the same amount of depreciation recapture a result whether the taxpayer is an individual or C Corporation? Explain Answer is likely no phrased like this

Individuals can't participate in depreciation recapture and is only reserved for C Corporations

Which of the following is not a method to determine fair market value? Comparable unrelated transaction Replacement cost Estimated discounted cash flows Interest rate benchmarking

Interest rate benchmarking

Molly, Inc., a domestic corporation, generates income from the receipt of royalty income from patents that it owns. Molly wants to avoid US income tax on these royalties, so it has it 100%-owned subsidiary, based in Nigeria, hold the patents and collect the royalties. What US income tax issues must be considered in assessing this arrangement by Molly, Inc.?

Is there a tax treaty between Nigeria and US? Is Nigeria a Tax Haven? Is the sub a CFC? If the Nigeria entity, were not used, would the FDII rules be in effect on Molly's income?

Which of the following about tax credits is false? It is only applicable to individual tax returns It is often enacted to promote beneficial acitivity It assists needy individuals Most families with children receive a tax credit

It is only applicable to individual tax returns

John (a sole proprietor) and Eagle Corporation (a C corporation) each recognize a long-term capital gain of $10,000 and a short-term capital loss of $18,000 on the sale of capital assets. Neither taxpayer had any other property transactions during the year. Describe the tax consequences of these gains and losses for John and for Eagle

John and Eagle each net their $10,000 LTCG against the $18,000 STCL, resulting in an $8,000 net capital loss. John reports the capital transaction on his individual tax return, deducts $3,000 of the net capital loss in the current year, and carries forward to next year a $5,000 STCL for the remainder of the net capital loss. Eagle reports the capital transaction on its corporate tax return, but none of the $8,000 net capital loss is deductible in the current year. Instead, Eagle carries back an $8,000 STCL three years and, if necessary, forward five years, to be offset against capital gains in such years

Which of the following activities is typically sufficient to establish nexus in a jurisdiction? -Leasing a warehouse - Carrying free samples for distribution -Launching an advertising campaign -Furnishing automobiles to salespersons

Leasing a warehouse

Which of the following is not considered in evaluating whether an activity qualifies as a trade or business Location of activity Time and effort Previous success History of income or loss

Location of activity

Evaluate this statement: An S corporation can facilitate the meeting of its state income tax filing obligations by developing a common spreadsheet that allocates and apportions income among the states with which it has nexus. This spreadsheet is attached to each of the state returns to be filed. (Hint: use the term composite return in your answer)

Many states accept block filing or composite returns from multiple-shareholder S corporations. Such a return essentially is a spreadsheet that discloses and computes the allocation of ordinary income and separately stated items, on a per-state and per-shareholder basis

The trend in state income taxation is to adopt an apportionment formula that places extra weight on the sales factor. Many states now use sales-factor-only apportionment. Explain why this development is attractive to the taxing states

Most states overweight the sales factor b/c such a computation tends to create greater levels of apportionable income for the state from nonresident (meaning nonvoting) entities than would an equally weighted three-factor apportionment formula. A sales-factor-only apportionment formula can be seen as an extreme application of the policy of increasing state income taxes on nonresidents

Gold Corporation, a calendar year C Corporation, was formed in 2012 and has been profitable until the current year. In 2020, Gold incurs a NOL. Identify the issues that Gold corporation should consider regarding its net operating loss

NOLs arising in a tax year ending after 2017 are carried forward indefinitely. However, the NOL deduction for any carryforward year is limited to 80% of taxable income (determined without regard to the NOL deduction). For a year in which taxable income limitation is applicable, the NOL deduction might be increased by accelerating income into the current year or deferring deductions to a subsequent year. NOLs arising in years prior to 2018 are carried back 2 years and forward 20 years and are not subject to the 80% of taxable income limitation

The legal concept describing the degree of business activity before a tax can be levied is

Nexus

Omar, an individual in the 37% tax bracket, wants to shift some of his income to a new corporation in order to take advantage of the 21% corporate tax rate. Omar plans to avoid any tax on dividends by retaining all earnings within the corporation. Will Omar's plan work? Discuss

No, because the company will pay 21% and you won't keep it there forever and eventually have to sell and pay the 37% tax rate. Also, there's an Accumulated Earnings Tax to prevent companies from hoarding their cash

Marmot Corporation pays a dividend of $100,000 in the current year. Otter Corporation, a calendar year C Corporation, owns 15% of Marmot's stock. Gerald, an individual taxpayer in the 24% marginal bracket, also owns 15% of Marmot's stock. Compare and contrast the treatment of the dividend by Otter Corporation and Gerald

Otter Corporation will be allowed a dividends received deduction equal to 50% of the $15,000 dividend it received from Marmot (subject to taxable income limitation). It will pay tax at the applicable corporate tax rate of 21% on the remaining portion of the dividend. Gerald must include in income the entire $15,000 dividend he received from Marmot, and he will pay tax at the 15% rate applicable to individuals (preferential rate)

Which is not a deduction pertaining to State and Local taxes? State income taxes Property taxes State sales taxes Payroll tax

Payroll tax

Liang Corporation, a US entity, owns 100% of ForCo, a non-US corprotation not engaged in US trade or business. Is Liang subject to any US income tax on her dealings with ForCo? Explain

Probably not. When ForCo repatriates its profits to Liang in the form of a dividend, a dividends received deduction offsets the offshore profits in full. US income taxation may occur as the profits are earned if the CFC or GILTI rules apply. Depending on the type of income that is generated, the lower FDII rate may be available.

Josie is a sales rep for Talk2Me, a communications retailer based in Fort Smith, Arkansas. Josie's sales territory is Oklahoma, and she regularly takes day trips to Tulsa to meet with customers. During a typical sales call, Josie takes the customers' current orders for phone, cases, and attachments and, using an app on her wireless phone, send the orders to HQ in Fort Smith for immediate action. Approved orders are shipped from Little Rock where the warehouse is. Are Josie's sales subject to the Oklahoma corporate income tax? Explain

Public Law 86-272 limits the states' right to impose an income tax on interstate activities. Federal law prohibits a astate from taxing a business whose only connection with the state is to solicit orders and shipped/fulfilled out of state Only the sale of tangible personal property is immune from taxation. Leases, rentals, and other dispositions of tangible property are not immune. Sales don't exceed the solicitation standard, so no Oklahoma nexus is created and no Oklahoma corporate income tax results

What is not a type of a business entity? C Corp S Corp QBAI Sole Proprietorship

QBAI

Corporate owners are generally protected from liability if they do all but: -Remit taxes to the relevant tax authorities -Observe corporate formalities -Adequately capitalize the entity -Maintain separate bank accounts

Remit taxes to the relevant tax authorities

In general, what is the limitation on the deductibility of business interest expense? What happens to any business interest deduction disallowed under the limitation?

Section 163(j)... limits the deduction for business interest for any year to the sum of (1) the taxpayer's business interest income for the year, (2) 30% of the taxpayer's adjusted taxable income for the year, and (3) the taxpayer's floor plan financing interest for the year. However, the limitation does not apply to taxpayers having average gross receipts for the prior 3-year period of $26MM or less. Any business interest deduction disallowed by the limitation is treated as business interest paid or accrued in the succeeding tax year, and the carry-forward period is unlimited

What is not a benefit of forming a limited liability corporation? Flexibility in management Flexibility in profit allocation Mitigation of personal liability risk Simple taxation under partnership regulations

Simple taxation under partnership regulations

T/F: An optimally operating multinational company can easily achieve a worldwide ETR of 17%

TRUE

What is not a factor for apportionment? -Property -Payroll -Sales -Tax

Tax

What is not a factor for apportionment? Property Tax Payroll Sales

Tax

When are C corporations required to make estimated tax payments? How are these payments calculated?

Taxes paid quarterly Estimated tax payments are required if it is expected to be $500 or more. Less of (1) 100% of the corporation's tax for the current year or (2) 100% of the corporation's tax for the preceding year. A large corporation (one w/ over $1MM of taxable income in any of the three years), thus you can't use preceding years as base installments and are due: April 15, June 15, September 15, & December 15

QuinnCo could not claim all of the income taxes it paid to Japan as a foreign tax (FTC) this year. What computational limit probably kept QuinnCo from taking its full FTC? Explain

The US Tax (or lesser of) limitation restricts the effectiveness of the foreign tax credit in mitigating double taxation of foreign-source income. The limitation prevents domestic corporations operating in high-tax foreign jurisdictions from offsetting those higher foreign taxes against the US tax on US source income

What is not a form of doing business outside the US? -Trade Desk -Liaison -Foreign Branch -Foreign Corp Subsidiary

Trade Desk

A property's basis rests upon the owner's death

True

T/F: A low tax jurisdiction benefits from transfer pricing

True

T/F: A shareholder/employee may be personally liable for actions taken as an employee

True

T/F: A tax credit exceeding tax liability can result in the IRS making a net payment to you

True

T/F: All business must provide Form W-2 or Form 1099 to personnel

True

T/F: An affiliated group of corporations can file a consolidated federal return if all members consent

True

T/F: Income from C Corporations is often subject to double taxation

True

T/F: Itemized deductions can be limited to amounts above a floor and below a ceiling

True

T/F: Nexus is the legal concept describing the degree of business activity before a tax can be levied

True

T/F: S Corporations are not taxable at the company level

True

T/F: States are inconsistent with respect to each other in their use of apportionment formula

True

T/F: Tax Base * Tax Rate = Tax Liability

True

T/F: Tax avoidance refers to minimizing taxation through legal techniques

True

T/F: Taxpayers are not subject to income tax on return of capital

True

T/F: Taxpayers can take an additional standard deduction if they are 65+ or blind at the end of the year

True

T/F: The TCJA taxes overseas profits even if they are not repatriated

True

T/F: The phaseout for itemized deductions was eliminated by the TCJA

True

T/F: Trade or business is poorly defined by the IRC and Regulations

True

T/F: Travels costs, including meals and lodging, can qualify for the medical expense deduction

True

T/F: Unitary theory requires filing returns for all operations, even if they occurred out of state

True

T/F: A disadvantage of C corporations is the presence of double taxation

True First 21% on earnings then when profits flow to owners then they pay a tax as well

The OECD's BEPS project involves how many pillars?

Two pillars

"US persons are taxed on their worldwide income." Explain

US persons are taxed on all income from whatever source derived. Both US and foreign source income is subject to US taxation. Tax law in effect after 2017 moves US corporate income tax law toward a territorial system for some taxpayers, with provisions that overlay the worldwide approach -- now modified territorial system

Velocity Inc., a non-US corproation, earned $500k US source income from royalties that it collected and $400,000 interest from its investments in the US Treasury bonds. Compute Velocity's US income tax on these amounts

US-source royalty income $500k * 30% tax rate = $150,000 The portfolio interest income of a non-US person generally is not subject to current US income taxation

Indicate whether each of the following should be allocated or apportioned by the taxpayer in computing state corporate taxable income. Assume that the state follows the general rules of UDITPA a) Profits from sales activities b) Profits from consulting and other service activities c) losses from sales activities d) profits from managing the stock portfolio of a client e) profits from managing one's own stock portfolio f) Gain on the sale of a plot of land held by a real estate developer g) gain on the sale of a plot of land held by a manufacturer, on which it may expand its factory h) rent income received by a manufacturer from the leasing of space to a supplier

a) Apportion; business activity b)Apportion; business activity c)Apportion; business activity d)Apportion; business activity e) Neither; not a trade or business f) Apportion; business activity g) Allocate; not a business activity h) Apportion; business activity

Identify the sourcing of each item as either US or foreign a) Suarez, an NRA (non-resident alien), sells stock in Home Depot, a US corporation, through a broker in San Antonio. b) Chris sells stock in IBM, a US corporation, to her brother, Rich. Both Chris and Rich are NRAs, and the sale takes place outside the US c) Crows, Inc., sells inventory produced in the US to customers in Europe. Title passes in the international waters of the Atlantic Ocean. d) Doubles, Inc., a US corporation, manufactures equipment in Malaysia and sells the equipment to customers in the US

a) Foreign, b/c personal property is based on residency of seller. b) Foreign c) US b/c manufactured in US d) Foreign b.c manufactured in Malaysia

Megan is an accountant for KnoxCo. She is a telecommuter and works most days from her home in Tennessee. Twice a month, she travels to GA for a staff meeting at the employer's ATL HQ. In which state's payroll factor should Megan's compensation be included if: a) Megan is an employee and is covered by the qualified retirement plan of her ATL employer? b) Megan works as an independent contractor for several clients, including the Atlanta-based firm? c) Megan is an employee, and for one day each month, she provides accounting services for KnoxCo's Memphis rental properties?

a) Items included in the payroll factor are not split among the states in which an employee works unless the employee is permanently relocated during the year. Assigned to the state in which the employee is normally based; only to Tennessee b) Excluded from Tennessee (and GA) payroll factor, b/c it only includes compensation paid to employees and the compensation paid to independent contractor is not part of the payroll factor in any state. c)Only compensation related to business income is included in the payroll factor. Rental properties constitute a nonbusiness activity for KnoxCo, so the costs of Megan's time on these days offset the allocable income from the rent income.

Regarding the apportionment formula used to compute state taxable income, does each of the following independent characteristics describe a taxpayer that likely is based in state or out of state? Explain a) the sales factor is positively correlated with the payroll, but not the property factor b) the sales factor is much higher than the property and payroll factors c) the property and payroll factors are much higher than those for other nexus states d) the sales and payroll factors are low, but the property factor is very high e) the sales factor is remaining constant, but the payroll factor is decreasing

a) Probably out of state -- based inside a state, then you would have more property there proportionately b) Probably out of state -- c) Probably in state d) Probably in state -- due to property e) Probably out of state

The trend in state income taxation is for states to adopt a version of the unitary theory of multijurisdictional taxation in their statutes and regulations. a) Explain why some states are attracted to the unitary theory and a combined reporting schedule of multistate income taxation b) Is the application of the unitary theory a help or a detriment to the taxpayer? Why?

a) The unitary approach to state taxation attempts to neutralize entities' tax planning techniques that place profitable operations in low or no tax jurisdictions. States have adopted combined reporting as a means to discourage the use of passive investment companies and allow inclusion of income from intangible assets. Some market-baed and economic nexus rules objective measures of whether income tax nexus exists b) when the businesses are found to be unitary, apportionment factors are computed on the basis of the entire unitary entity, not just the subsidiary that is based on the taxing state. This computational convention can work to the taxpayer's benefit when high taxed income now is subjected to apportionment in a low tax state To the contrary, the unitary theory can increase the taxpayer's income tax liabilities, where the apportionment formula includes operations in locations where payroll, property values, and selling prices are higher than those experienced elsewhere

Identify the sourcing of each item as either US or foreign A) $600 interest from a savings account at a Florida bank b) $5,000 dividends from US Flower Company, a US corporation that operates in the US c) $7,000 dividend from Stern Corporation, a US corporation that generated total gross income of $4MM from the active conduct of a foreign trade or business for the immediately preceding three tax years. Stern's total gross income for the same period was $5MM d) $10,000 dividends from International Consolidated, Inc., a foreign corporation that reported gross income of $4MM effectively connected with the conduct of a US trade or business for the immediately preceding three tax years. International's total gross income for the same period was $12MM. e) $5MM interest on Warren Corporation bonds. Warren is a US corporation that derived $6MM of its gross income for the immediately preceding three tax years from the operation of an active foreign business. Warren's total gross income for this same period was $7.2MM

a) US b) US c) US d) US, b/c it's 25% or more US income in the last 3 years then it's US e) Foreign b/c if a US company has 80% or more foreign business/income then it is Foreign

Janice is the sole owner of Catbird Company. In the current year, Catbird had operating income of $100,000, a long-term capital gain of $15,000, and a charitable contribution of $5,000. Janice withdrew $70,000 of profit from Catbird. How should Janice report this information on her individual tax return if Catbird Company is: a) an LLC? b) an S Corporation? c) a C corporation

a) if an LLC has one shareholder, so it is a pass through and on her personal return. $100k goes to her tax return. Can claim full $5,000 if itemized b) same as A -- file an 1120 S -- flows through personal return c) none on her individual other than if the company pays the owners

Pillar 1 BEPS

designed to simplify the OECD's existing proposals and avoid perceived discrimination against US multinational companies

Pillar 2 BEPS

seeks to create a global minimum tax through two mechanisms: 1) an income inclusion rule (IIR), which would allow a parent company's jurisdiction to tax on a current basis income earned through the parent's subsidiaries subject to low tax rates 2) an undertaxed payment rule (UTPR), which would act as a backstop to the IIR and allow a jurisdiction to deny deductions for payments made to related parties subject to low rates of taxation