Shared Flashcard Set

Details

Regulation 3 -Becker CPA Review
C Corps, Depreciation, MACRS, S Corps, Exempt Orgs
77
Accounting
Professional
12/17/2011

Additional Accounting Flashcards

 


 

Cards

Term

Corporation Formation

 Tax Consequences

Definition

General Rule: Formation is non-taxable event

Formation: Issuance of Common Stock

Reacquistion: Purchase of Treasury Stock

Resale: Sale of Treasury Stock

 Apart of HIDE IT (transactions of corporations)

Term

Corporation Formation

 Basis of Property Received

Definition

General Rule: Basis of property received is the greater of:

 Adjusted NBV of shareholder PLUS any gain recognized by shareholder

 OR 

Debt assumed by corporation (shareholder may recognize a gain to prevent negative basis)

Term

Corporation Formation

 Shareholder Tax Consequences

Definition

No gain or loss recognized if:

 immediately after shareholders own at least 80% of voting stock & at least 80% of non-voting stock

 AND 

NO BOOT RECEIVED (cash or bonds)

Term

Corporation Formation

 Basis of Common Stock

Definition

Cash: amount contributed

Property: NBV. Adjusted basis of property is reduced by any debt on property assumed by corp

Services: FMV of services rendered

(shareholder must recognize as ordinary income)

 

 

Term

Corporation Formation

 

Basis Formula

Definition


NBV + FMV of services + Gain recognized by shareholder - Cash Received - Liabilities assumed - FMV of non money boot received = 

Basis of common stock

Term

Book Income vs Taxable Income

 What's a Schedule M-1 used for?

Definition

Reconciliation between tax return and financial statements appear on M-1

 

Both permanent & temporary  differences

Term
Gross Income for Corporations
Definition

Cash received in advance of accrual, GAAP income is taxed.

 

temporary differences:

interest income received in advance

rental income received in advance

royalty income in advance

 

permanent (not taxable):

income interest from muni or state bonds

proceeds from life insurance of an officer

federal taxes paid

Term
Trade or Business Deductions
Definition

All oridnary and necessary expenses paid or incurred during the year

 

 

 

Term

Trade or Business Deductions

 Domestic Production Deduction:

Qualified Production Activities Income

Definition

9% of the lesser of QPAI

OR

Taxable Income (disregarding QPAI formula)

 

Domestic Production Gross Receipts

<CoGS>

<Other directly allocable expense or losses>

<Proper share of other deductions>

______________________________

QPAI

Term

Trade or Business Deductions 

Executive Compensation 

Definition

Executive compensations in excess of $1,000,000 cannot be deducted for the top 5 employees.

 

 

 

Term

Trade or Business Deductions

 Bonus Accruals

Definition

Bonuses paid by an accrual basis taxpayer are deductible in the tax year when all events have occurred; provided they are paid within 2 1/2 months after year end.

 

Non-shareholder employees only.

 

Term

 Trade or Business Deductions 

Bad Debts 

Definition

Accrual Basis: deduct when specific A/R written off

 Cash Basis: NOT allowed a tax deduction

*income never reported

Term

Trade or Business Deductions

 Business Interest Expense

Definition
  • All interest paid or incurred during the taxable year on indebtedness incurred for business purposes is deductible 
  • Interest expense on loans for investment. Limited to the net investment income
  • Prepaid interest: Must allocate to correct period (incurred and paid)
  • General business interest:deductible
Term

Trade or Business Deductions

 Charitable Contributions

Definition
  • Maximum deduction of 10% of taxable income. Calculated before NOL, DRD, Cap. Loss, Production activities deduction
  • May be carryfoward 5 years
  • Accruals must be paid within 2 1/2 months of year end
Term

Trade or Business Deductions

 Business Losses or Casualty Losses

Related to Business

Definition

100% deductible

 

Partially destroyed: limited to lesser of: decline in the value of the property or,adjusted basis of  property before casualty

 

Fully destroyed: NBV for the property 

Term

Trade or Business Deductions

 Organizing and Startup Cost 

Definition

Deduct up to $10,000 or organizational costs and $5,000 of startup costs.  

 

 Any excess amortized over 180 months

*Look for month business started

 

Excluded: costs of raising capital

Term

Trade or Business Deductions 

Amortization, Depreciation, and Depletion

Definition

Goodwill, convenants not to compete, franchise, trademarks, and trade names must be amortized over a 15 years straight line basis

 

 

Term

Trade or Business Deductions

 

Life Insurance Premiums

Definition
  • If corporation is beneficiary NOT tax deductible
  • Employee/family is beneficiary IS deductible.
Term

Trade or Business Deductions

 

Business Gifts, Meals & Entertainment,

Penalties & Illegal Activities

Definition
  • Business gifts limited to $25 per person per year
  •  
  •  Meals & Entertainment are 50% deductible
  •  
  • Penalties & Illegal Activities are NOT Deductible
Term

Trade or Business Deductions

 Taxes

Definition

State, City and Federal Payroll taxes are all deductible

 

Federal Income Taxes are NOT deductible

 

Term
Lobbying & Political Expenditures
Definition

Lobbying expenses and political

contributions are NOT deductible

Term
Business Capital Gains and Losses
Definition
  • Capital losses are NOT tax deductible. Can only offset capital gains
  • Carryback 3 years. Carryforward 5 years.
  • Taxed at corporate tax rate, same as ordinary income.
Term
Business Net Operating Losses
Definition
  • Carryback 2 years. Carryforward 20 years.
  • In calculating NOL: No charitable contribution deduction is allowed.
  • DRD is allowed to be deducted BEFORE calculating NOL
Term
Inventory Valuation Methods
Definition

In general, the tax method used for accounting purposes can be used for income tax purposes.

 

Expense inventory when sold.

Term
 ****General Business Credits
Definition

MayNOT exceed Net Income Tax (Not refundable)

  • Investment credit
  • Work Opportunity credit
  • Alcohol Fuels credit
  • Increased research credit
  • Low Income Housing credit
  • Small Employee Pension start up costs
Term

Dividends Received Deduction

 % Tiers and Limits

Definition

1st corp must be taxed &stock owned for 45 days

% Owned           DRD

   0% < 20%         70%

  20% < 80%         80%

   80% or more      100%

 Limited to the lesser of: % of dividend received or 

% of taxable income w/o regard to the DRD, NOL or capital loss carryback

Term

 What types of companies are excluded? 

"Don't take DRD's personally"
Definition

Personal Services Corporations

Personal Holdings Companies

(Personally taxed) S Corp

Term

Dividends Received Deduction

 Who can get 100%?

Definition

Affiliated corporations (80% ownership)  who file consolidated returns qualifies for 100% deduction

 

Small business investment companies

Term

Depreciation

 

Half Year Convention

Definition

Applies to personal property

(Machinery & Equip)

 

Treated as having been in placed in service/disposed of at the midpoint of the year

 

Term

Depreciation

 
Mid Quarter Convention
Definition
If more than 40% of depreciable property is placed in service during the last quarter of the year, the mid-quarter convention must be used.
Term

Depreciation

 
Real Estate 
Definition

Residential rental property 27.5 years S/L

  

Non-residential (office, warehouse) 39 years S/L

 

One 1/2 month is taken in the month

the property is placed in service.

Term

Depreciation

 

Section 179

 

Definition

Equip can b expensed in the year put into service

 

Max: $500,000.  Reduced $ for $ after

$2,000,000 worth of property.

 

Not permitted when loss exists or created.

 

Max on SUVs $25,000

Term

Depletion

 

Cost Depletion

Definition

Used on exhaustible natural resources (timber, minerals, oil, gas)

 

Cost Depletion: remaining basis of property is divided by remaining number of recoverable units.

 

i.e. 1000 units costing $2,000, sold 20.

2000/1000 * 20 = $40

Term

Depletion

 

% Depletion

Definition

"Preference for AMT"

 

Limited to 50% of taxable income (excluding depletion) from the well or mine. Ranges from 5% to 22% depending on mineral extracted.

 

Can be taken even after costs have been completely recovered.

Term

Amortization

 

Intagibles

Definition

Intagiblies such as goodwill, lienses, franchises, and trademarks may be amortized using S/L over a period of 15 years.

 

Tax= 15 years

GAAP= impairment test/not amortized

Term
Amortization of Startup and Organizing Costs
Definition

Startup in excess of ($5,000) and organization costs in excess of ($10,000) are amortized over 180 months.

 

Tax= $5,000/$10,000 + amortized amount

GAAP= Expense

Term
Section 1231
Definition

Depreciable personal and real property used in trade or business and held for at least 12 months

 

Applies to involuntary conversions.

 Gains are treated as Capital Gains 

Losses are treated ordinary losses.

*Losses cannot not be deducted in excess of Capital Gains except for the $3,000 allowance for individuals

Term

Section 1245

 

(Gains Only)

Definition

Personal property (machinery and equipment)  used in the course of trade or business,

and held over 12 months.

 

When sold recapture all accum depreciation.

 Any excess gets Capital Gains treatment under Section 1231

Term

Section 1250

 

(Gains Only)

Definition

Real property (buildings) used in a trade or business, and held over 12 months

 Recapture amount of accum. dep. in excess of S/L

 Any excess gets Capital Gains treatment under Section 1231

Term

Taxation of Corporation

 

Filing Requirements

Definition

15th day of the 3rd month after year end

(Dec 31 --> March 15th)

 

Statute of limitations same as for inviduals. 

3 years, 6 with 25% misstatement.

Term

Taxation of Corporation

 

Estimated Tax Payments

Definition

Small corps must pay 100% of current tax or 100% of prior year tax if present.

 

 Large corps must pay 100% of current years tax

Term

Taxation of Corporation

 

Consolidated Tax Returns

Definition

An affilitated corporation may elect to file as a single entity. Affiliated company must own 80% of outstanding AND voting stock.

 

Intercompany gains/losses are eliminated.

 

Brother/Sister corporations MAY NOT 

file consolidated return

 

Consolidate GAAP = 50%

Consolidate Tax = 80% - 100% 

 

 

Term

Taxation of Corporation

 Corporate Alternative Minimum Tax

Definition

Corporate AMT = 20% of AMTI less exemption

Only credit allowed is Foreign Tax Credit

 

Regular taxable income

+/- L.I.E.

+Preferences

+/- A.C.E.

<AMT NOL Deduction>

______________________________

AMT   *   20%

______________________________

Gross AMT

<Foreign Tax Credit>

______________________________

Tenative Minimum Tax

<Regular Tax>

______________________________

Alternative Minimum Tax (AMT)

 

Term

Taxation of Corportation

 

AMT

 

Adjust for a L.I.E.

Definition

Additions or subtractions

 

  • Long-term contracts
  • Installment sale of a dealer
  • Excess depreciation (post 1986)

 

 

 

Term

 

Taxation of Corportation

 

AMT

 
Add back Preferences "P"

 

Definition

Preferences increase income

 

  • Percentage depletion
  • Private activity bonds - issued post '86 tax-exempt interest income
  • Pre '87 ACRS depreciation over S/L
Term

Taxation of Corportation

 

AMT

 
"Your M.I.N.D. is your A.C.E."
Definition

Add or subtract Adjusted Current Earnings

  • Muni interest income - tax exempt interest income
  • Increase CSV life insurance
  • Non S/L depreciation after '89 vs ADS
  • Dividends Received Decution (20% owners)
Term

Taxation of a Corporation

 

Accumulated Earnnings Tax

Definition

Imposed on a regular C corporation whose retained earnings are in excess of $250,000 if improperly held instead of being distrubted as dividends.

 

Personal service corporations limited to $150,000

 

Additional tax rate of 15% on

accumulated earnings

Term

Taxation of Corporation

 

Personal Holding Company Tax

 

"Personal Holding Companies are N.I.R.D.s"

Definition

More than 50% owned by 5 or fewer individuals at any time during the last 6 months and at least 60% of adjusted ordinary gross income from:

 

  • Net rent
  • Interest that is taxable
  • Royalties (not mineral, oil, gas, copyrights)
  • Dividends from an unrelated domestic corp 

 

Used by to shelter investment income of individuals to pay lower corporate tax rates.

 

 

Term

Taxation of a Corporation

 

Personal Service Corporation Tax Rate

Definition

PSCs can NOT use graduated corporate rates

 

FLAT 35% rate

 

Accounting, law, consulting, engineering,architecture, health, actuarial science

Term

Corporate Earnings & Profits

 

 

Definition

E&P is key factor in ability to payout dividends

 

Corporate Taxable Income  

+/- Adjustments (Temp or Perm)

_____________________________

Currents Earnings & Profit

 

 

Term

Corporate Earnings & Profits

 

Negative Adjustments

Definition

Negative adjustments reduce E&P

 

  • Federal income tax expense
  • Non-deductible penalties, fines, political contributions
  • Officer life insurance premium
  • Expense for prouction of tax-exempt income
  • Non-deductible charitable contibutions
  • Non-deductible capital losses

 

 

Term

 

Corporate Earnings & Profits

 

Positive Adjustments

 

Definition

Increase current E & P

  • Refunds of federal income tax paid
  • Tax-exempt inome
  • Refunds of items not subject to regular tax
  • NOL deductions
  • Life insurance proceeds
  • DRD used to calculate regular tax
  • Carryovers of capital losses that impacted TI
  • Carryovers of charitable contributions
  • Non taxable cancellation of debt
Term

 

Corporate Earnings & Profits

 

Accumulated E & P

 

Definition

Beg. Accum. E&P

+ Current E&P

-Distributions from Current E&P

- Distributions from Accum E&P

= Ending Accum  E&P

 

Distributions first applied to current E&P, then Accum Depreciation, then Capital Gains

Term
Corporation Distributions
Definition

Distributions are taxable when defined as dividends

 

Current E&P --> Taxable

Accum E&P --> Taxable

Return of Capital --> Tax free, reduces basis

Capital gain distribution --> Taxable as capital gain

Term
Constructive Dividends
Definition

Not in the form of a dividend but treated as such when not in proportion to stock ownership

 

Excessive salaries paid to shareholder employees

Excessive rents & royalties

"Loans" to shareholders with no intent to repay

Sales of assets below FMV

Term
Stock Dividend
Definition

Distributions of stock to shareholders

 

Generally NON taxable, unless cash or property was  and option

 

FMV at ditribution date

 

Basis of a nontaxable stock dividend is

average of old basis i.e "stock split"

Term

Corporation Distributions

 

Shareholder Taxable Amount

Definition

Individual & Corporate

Cash dividends - amount received

Property dividends - FMV of propert received

 

Corporate shareholders subject to DRD

Term

 

Corporation Distributions

 

Corp Paying Dividend, Taxable Amount

 

Definition

General Rule: Payment of a dividend does not create a taxable event for corp.  A dividend is a reduction of E&P.

 

If accum. property is distributed treat as being sold (FMV - Adjusted Basis)

 

Gain increases corp current E&P which means the dividend is not taxable to receipt like a dividend

Term

 

Corporation Distributions

 

Stock Redemption

 

Definition

Occurs when a company buys back stock from shareholders.

 

Proportional- Taxable dividend income (ordinary)

Disporportional- Capital Gains treatment

Term

Corporation Distribution

 

Liquidation

Definition

Transaction is subject to double taxation.

 

1st when corp sells assets 

2nd shareholder recognizes proceeds received

 

If distributing property assets directly, gain is recognized. Shareholder recognizes excess over basis (FMV- Stock Basis)

Term
Tax Free Reorganizations
Definition

Reorganizations are tax free event due to continuation of the business in a modified form.

 

 

Term

Worthless Stock 

 

Section 1244 Stock (small business stock)

Definition

When corp stock is sold or becomes worthless, stockholder can treat as an ordinary loss up to $50,000/$100,000.

 

Any excess treated at capital loss

 

If held for more than 5 years, shareholder can exclude up to 50% of the gain or exchange.

 

75% if held between 2/18/09 and 12/31/10

Term

Small Business Corporation (S Corp)

 

100 USA people are common

Definition
  • Limited to 100 shareholders.
  • One class of stock (i.e. no preferred stock)
  • Shareholders must be individual, estate, or trusts
  • Made retroactive to Jan 1 if selected by March 15
  • Calendar tax year

 

Term

Small Business Corporation (S Corp)

 

Effect on S Corp when elected

Definition

S Corp MUST adopt calendar tax year unless valid business purpose exists

 

Tax return due March 15th

 

General Rule: No tax on corp level

 

Term

Small Business Corporation (S Corp)

 

Effect on shareholder when elected

Definition
  • Pass-through income/loss to shareholder (K-1)
  • Allocations made per share/per day
  • Losses limited to adj basis plus loans provided
  • Any disallowed loss carryfoward indefinitely
Term

Small Business Corporation (S Corp)

 

Exception(s) to no taxation rule

Definition

Exceptions:

  • LIFO Recapture Tax
  • Built-in Gains Tax (when C Corp elects S corp status and FMV of assets exceeds adjusted basis)
  • Passive investment income
Exception to Built In Gains Tax
  • S corp was never a C corp
  • Sale or transfers occurs after 10 years
  • C corp can prove appreciation of property occured after S corp election

 

Term

Small Business Corporation (S Corp)

 

Computing Shareholder Basis

 

B.A.S.E.

Definition

Initial Basis

Add income items

Add shareholder investments in corp

Subtract distributions to Shareholders

Subtract loss or expense items

Ending Basis

 

Term

Small Business Corporation (S Corp)

 

Tax treatment of Distributions

Definition

Generally not subject to tax

 

with no C Corp E&P

Within stock basis- No taxable. ROC

In excess of stock basis- Taxed as Capital Gain

 

w/ C Corp E&P

  • To the extent of AAA-non taxable, reduce basis
  • To the extent of C corp E&P-taxed as div, does not reduce basis. 
  • To the extent stock basis- no tax, reduce basis. ROC
  • In excess of stock basis- LTCG. Capital gain dist
Term

Small Business Corporation (S Corp)

 

How is election terminated
Definition
  • Holders of a majority of the corp stock mus consent
  • S corp fails to meet elibility requirements
  • More than 25% of gross receipts come from passive investment income for 3 straight years "3 strikes and you're out"
Term

Exempt Organizations

 

Section 501(c)1

Definition

Organized under and act of Congress as a US instrumentality

 

Does not require application

Term

Exempt Organizations

 

Section 501(c)3

Definition

No part of earning may inure private shareholder

 

Causes:

Charitable, Educational, Religous, Scientific, Public  Safety, Amateur Sports, Prevention of Cruelty

 

Prohibited Activities:

  • Influencing legislation
  • Participating in any political campaign
  • Endorsing candidates
  • Engaging in fund raising activities for political candidates
Term

Exempt Organizations

 

Section 509 Private Foundations

Definition

Private Foundation terminates when it becomes a public charity.

 

Private Foundation may voluntary terminate

Term

 

Exempt Organizations

 

Unrelated Business Income

 

Definition
  • Derived froman acivity that constititua a trade or buinsess
  • Regularly carried on
  • Not substantially related to org tax exempt purpose
Term

Exempt Organizations

 

Unrelated Business Income
Tax Exemptions
Definition

 

  • Regular tax payments should be made
  • $1,000 max UBI allowed
  • Royalties, dividends, interest, annuities excluded
  • Rental income excluded
  • Gains & Losses on sale of property
  • Income from research of a college or hospital
  • Income of labor unions used to establish a retirement home, or hospital
  • Acitivities limited to exempt organizations (bingo)

 

 

Term

Exempt Organizations

 

 Membership Organizations

 

 
Definition

Taxed on gross income less deductions for exemption function income (dues, fees)

 

If a social club makes a profit, profit is usually taxable

Term

 

Exempt Organizations

 

Annual Return

Requirements & Exclusions

 

Definition

Form 990- Annual Information Return

 

Due May 15th

 

CHRIST and < $50,000 not required to report

  • Churches
  • High Schools -Religious
  • Religious Orders
  • Internal Support Auxiliaries
  • Societies -missionary related
  • Tax exempt- organized by congress
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