WGU Taxation 2
Corporations compute their dividends received deduction by multiplying the dividend amount by
50%, 65%, and 100%, depending on the stock ownership level.
The amount deductible for non-cash contributions is
Depending on the nature of the property, the amount deductible for a contribution can be the fair market value of the contributed property.
related party for the purpose of limitation on accruals are
Family members, shareholders and C corporations if the shareholder owns more the 50 percent of the corporation's stock, and owners of partnerships and S corporations.
The excess loss limitation
does not apply to C corporation shareholders because those losses stay at the entity level.
LLC's
file documents with the state to be formally recognized by the state
Federal income tax expense
generates a permanent book-tax difference for Schedule M-3 purposes.
The DRD limitation does not apply
if the DRD creates or increases a corporation's net operating loss.
Substantially disproportionate stock redemptions
1. the redemption decreases the shareholders voting power to less than 50% of corporation's outstanding stock 2. the shareholder's percentage interest in the voting stock falls to less than 80% of the percentage interest before the redemption; if the stock is nonvoting, then the redemption is treated as a stock sale if the fair market value of the common stock as a percentage of the total stock outstanding falls below 80% of what the stockholder owned previous to the redemption.
the following statements describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend
At a minimum, some portion of the distribution will be a dividend if current earnings and profits for the year are positive, even if accumulated earnings and profits are negative.
the following are subtractions from taxable income in computing current E&P
Federal income taxes paid. Current charitable contributions in excess of 10 percent limitation. Current year net capital loss.
What tax year-end must an unincorporated entity with only one owner adopt?
The entity must adopt the same year-end as its owner.
qualified business income deduction is
a from AGI deduction but is not an itemized deduction.
The dividends received deductions is
a tax only deduction. It creates a favorable permanent book-tax difference.
An unfavorable temporary book-tax difference is
an adjustment that increases taxable income relative to book income.
Organizational and start-up expenses
are capitalized and amortized for tax purposes but immediately deducted for book purposes, so these create a temporary book-tax difference.
Charitable contribution deductions
are deductible in calculating DRD modified taxable income NOL carryovers, NCL carrybacks, and the DRD itself are not included in the DRD modified taxable income calculation.
NOL and capital loss carryovers
are deductible in calculating the charitable contribution limit modified taxable income, while capital loss carrybacks are not.
Corporations with annual average gross receipts exceeding $25 million over the prior three years
are required to use the accrual method.
Owners who work for entities taxed as a partnership receive guaranteed payments as compensation. The guaranteed payments
are self-employment income.
LLCs with more than one owner
are taxed as partnerships and report their income on Form 1065.
Stock redemptions not treated as exchanges
are tested under §301 and could be a tax-free return of capital or gain from sale of stock.
A corporation may carry a net capital loss
back 3 years and forward 5 years.
Tax rules allow entities to
be classified differently for tax purposes than they are classified for legal purposes.
A C corporation's losses must
be used at the entity level. That is, the losses don't flow-through to owners to offset their income from other sources.
An unincorporated entity with more than one owner is
by default, taxed as a partnership.
Limited partnerships are legally formed
by filing a certificate of limited partnership with the state in which the partnership will be organized.
Corporations are legally formed
by filing articles of incorporation with the state in which the corporation will be created.
LLCs are legally formed
by filing articles of organization with the state the LLC desires to organize its business in.
General partnerships may be formed
by written agreement among the partners, called a partnership agreement, or may be formed informally without a written agreement when two or more owners join together in an activity to generate profits.
Adjusted gross income is
calculated for individual returns, but not for corporate returns.
A distribution from a corporation to a shareholder
can be treated as a dividend, a return of capital, or gain from sale of the stock, for tax purposes.
Corporate Net Operating Loss (NOI)
can only offset 80% of taxable income in the carryover year
C corporations NOL carried forward
cannot offset 100% of the corporation's taxable income (before the net operating loss deduction).
Corporations cannot deduct
capital losses against ordinary income.
C corporations can elect S corporation status to
change the entity to a flow-through entity for tax purposes.
Net capital losses
create an unfavorable book-tax difference in the year they occur and a favorable book-tax difference in the year they are applied. These book-tax differences are temporary.
Goodwill impairment in excess of tax goodwill
creates either a permanent difference or an unfavorable temporary book-tax difference.
For tax purposes, a corporation may
deduct corporate capital loss only against capital gains.
Employers computing taxable income under the accrual method to unrelated taxpayers may
deduct wages accrued as compensation expense in one year and paid in the subsequent year, as long as the company makes the payment within 2½ months after the employer's year-end.
The deduction for qualified business income
does not apply to the income of C Corporations
The distributing corporation
does not recognize loss on the distribution and reduces E&P by the land's E&P basis.
S corporations are
flow-through entities whose income "flows through" to their owners who are responsible for paying tax on the income.
LLCs with one single individual owner
follow the same filing guidelines as sole proprietorships. Thus, their income is reported on Form 1040, Schedule C.
Corporations may carry excess charitable contributions
forward five years, but they may not carry them back.
Net operating losses
generally are treated as deductible temporary differences.
Partnerships and their owners
generally don't recognize any gain during a liquidating distribution, giving them a better tax position than C and S corps
A stock redemption that should be treated as a dividend can be treated as an exchange
if the person waives the family attribution rules and files a "triple i" agreement with the IRS.
A permissible method
is adopted by using the method for one year.
An impermissible method
is adopted by using the method to report results for two consecutive years.
Dividends received deduction
is allowed for taxable income but not E&P.
Earnings and Profit (E&P)
is an after tax computation.
A single member LLC with one corporate owner
is considered to be a disregarded entity. In essence, the entity is treated like a division of its parent company. Thus, its income will be reported on the Form 1120 of its parent corporation.
December 15
is not a valid year end date and will not qualify for a fiscal or a 52/53 week year.
The dividend amount
is the fair market value of the land less the liability assumed and the tax basis of the land is the fair market value
A stock redemption
is treated as an exchange only if it meets one of the stock ownership tests described in §302(b) must be satisfied
The current-year charitable contribution deduction is
limited to 10% of the charitable contribution limit modified taxable income. The carryover is any excess of the charitable contribution deduction for the year over the allowable current-year deduction.
A dividends received deduction is
limited to 50% or 65% of taxable income unless it creates or increases a net operating loss deduction, in which case the full amount is allowed.
LLC members have
more flexibility than corporate shareholders to alter their legal arrangements with respect to one another, the entity, and with outsiders.
S corporations have
more restrictive ownership requirements than other entities.
The recipient of a tax-free stock distribution
must allocate a portion of the basis from existing stock.
Shareholders of C corporations receiving property distributions
must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.
C corporations NOL may
not be carried back but may be carried forward indefinitely
Schedule M-1
reconciles net income or loss with taxable income before NOL carryovers and special deductions (line 28 of Form 1120). It does not require the taxpayer to distinguish between temporary and permanent differences.
S corporations have strict rules
regarding the number and type of owners they may have. An S corporation cannot have more than 100 unrelated shareholders. Furthermore, shareholders may not be corporations, partnerships, nonresident aliens, or certain types of trusts.
Income that is included in book income, but excluded from taxable income
results in a favorable, permanent book-tax difference.
liquidation of a corporation
results in a tax deferral to a corporate shareholder owning 80 percent or more of the corporation's stock before it is liquidated.
The C corporation tax rate is
significantly lower than the top individual marginal tax rate.
Taxable income of C corporations is
subject to a flat 21% tax rate.
Sole proprietors are
subject to self-employment taxes on net income from their sole proprietorships.
The computation of current earnings and profits, includes:
taxable income and deductible expenses, as well as tax-exempt income and nondeductible expenses.
Stock distributions can be
taxed as dividend income to shareholders when the distribution has the potential of changing ownership proportions.
For a corporation, goodwill created in an asset acquisition generally leads to
temporary book-tax differences.
In a redemption treated as an exchange
the company reduces E&P by the lesser of the amount distributed versus the percentage of stock redeemed times E&P at the time of the distribution
To recognize loss on the distribution of property in a complete liquidation,
the corporation must distribute the property to unrelated persons who are not 80 percent corporate shareholders. Losses can be recognized on distributions to related parties if the distribution is pro rata and the property is not disqualified property.
Unincorporated entities are
typically treated as flow-through entities for tax purposes.
The tax basis of property received by a noncorporate shareholder in a complete liquidation
will be the property's fair market value.
Temporary book-tax differences
will eventually reverse; if a difference is favorable one year, it will be unfavorable in another. So corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
The recipient of a taxable stock distribution
will have a tax basis in the stock equal to the fair market value of the stock received.
a business income allocation from an S corporation distributed to an employee/shareholder
will only be subject to the regular income tax at the shareholder's marginal ordinary income tax rate.
A distribution from a corporation to a shareholder
will only be treated as a dividend for tax purposes if the distribution is paid out of positive and current or accumulated earnings and profits.
A 2-for-1 stock split to all holders of common stock.
would be a stock distribution that was tax-free to the shareholder.
During distributions of property
Losses are not recorded.
Corporations provide
the least flexible legal arrangement for owners
An S corporation is
the only type of entity that has a limit on the maximum number of owners it may have. S corporations may have up to 100 unrelated shareholders.
When current E&P is negative,
the tax status of the dividend is determined by calculating accumulated E&P on the date of the distribution.
The double taxation of corporate income refers to
the taxation of such income at the corporate level and then at the shareholder level when such income is distributed as a dividend.
Schedule M-3
An expanded reconciliation of book net income with Federal taxable income (see Schedule M-1). Required of C and S corporations and partnerships/LLCs with total assets of $10 million or more
Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year ending in 2017?
If it carries back the NOL and/or carries it forward, it may offset up to 80% of the taxable income (before the NOL deduction) in those years.
Bonuses paid within 2½ months of year-end are
NOT included in employee's compensation in the year they were earned. Employees only include compensation into income in the year they received it.
When calculating a current year net operating loss.
Net capital loss carrybacks and net operating loss carryovers are not deductible
What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property nonliquidating distribution to a shareholder?
Recognizes gain but not loss, gains must be recognized on distributed appreciated property for both taxable corporations and S corporations. However, losses are not allowed if the distributed property has depreciated in value.
Schedule M-2
Reconciles beginning and ending retained earnings
Regarding adjustments to taxable income or net loss to compute current E&P
Refunds of prior year taxes ARE included in the computation of current E&P under the cash method of accounting. Refund of prior year taxes are NOT included in the computation of current E&P under the accrual method of accounting.
From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?
S corporations. They may immediately deduct losses from the assets (and pass them through to shareholders) whereas these losses are typically deferred if the distributing entity is taxed as a partnership.
the priority of the tax treatment of a distribution from a corporation to a shareholder is
The distribution is a dividend to the extent of the corporation's earnings and profits, then a return of capital, and finally gain from sale of stock.
If C corporations retain their after-tax earnings, when will their shareholders who are individuals be taxed on the retained earnings?
Shareholders will be taxed when they sell their shares at a gain.
It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?
Temporary book-tax differences will reverse in future years whereas permanent differences will not.
Accrual-method corporations can deduct charitable contributions before they actually make payment to the charity, only if.
The deduction is allowed in the year authorized by the Board provided the payment is made within 3½ months after year-end.
C corporations are most favorable in regards to tax treatment because
There is no limit to the number of owners allowed, no restrictions on what accounting period to use, and all of the gains from selling shares in a C corporation are capital gains.
when a corporation deducts a charitable contribution carryover.
They generally will report a favorable, temporary book-tax difference
