Businesses Taxed as Corporations
The following businesses, formed after 1996, are automatically classified as corporations for tax purposes EXCEPT:
The following businesses formed after 1996 are taxed as corporations.
Company S has 100,000 shares of voting common stock outstanding and no preferred stock. Company P wants to acquire control over Company S and would like to acquire enough shares so that a consolidated tax return can also be filed. How many shares must Company P acquire so that a consolidated tax return is allowed?
For tax purposes, a consolidated return can be filed if the acquiring corporation acquires at least 80 percent of the voting power and 80 percent of each class of nonvoting stock of the other corporation. In tax rules, which are different than used for financial reporting purposes, 80 percent ownership is the minimum level where two companies are basically viewed as one entity
The Asimov Corporation has revenues of $300,000, ordinary and necessary expenses of $200,000, a long-term capital gain of $4,000, and a short-term capital loss of $5,000. What is its taxable income?
This corporation has a net capital-loss for the year of $1,000. However, corporations are not allowed to deduct capital losses. Therefore, the only tax effects come from the revenues and the expenses that net to $100,000. The $1,000 net loss can be carried back for three years and forward for five years to reduce taxable capital gains.
The Spring Corporation's sales from business operations are $500,000 and business expenses are $750,000. The corporation also received dividends from the Acme Corporation of $100,000. The Spring Corporation owns 25% of the Acme Corporation. Acme Corporation is not affiliated with Spring Corporation. What is the Spring Corporation's Net Operating Loss for the year?
A corporation figures NOL in the same way it figures taxable income. It starts with its gross income and subtracts its deductions. If its deductions are more than its gross income, the corporation has a Net Operating Loss.
Since Spring Corporation owns more than 20% of Acme stock, they can deduct 65% of the dividends received.
Spring Corporation's NOL is calculated as follows:
$500,000 Business sales+ 35,000 Dividends (65% excluded)– 750,000 Business expenses($215,000)Net Operating Loss
What is a purpose of Schedule M-2 for an S corporation?
The accumulated adjustments account (AAA) is an account of the S corporation that generally reflects the accumulated undistributed net income of the corporation for the its post-1982 years. An S corporation with accumulated earnings and profits (AE&P) must maintain the AAA to determine the tax effect of distributions. Generally, an S corporation has AE&P only if it has not distributed E&P accumulated in prior years when the S corporation was a C corporation. Schedule M-2 is also used to track the Other Adjustments Account, and Shareholders' Undistributed Taxable Income Previously Taxed.
The following statements regarding qualified personal service corporations are true EXCEPT:
The passive activity rules apply to personal service corporations and closely held corporations other than S corporations.
A corporation is a qualified personal service corporation if it meets both of the following tests.
A qualified personal service corporation is taxed at a flat rate of 21%. Principal activity during the "testing period" (generally prior tax year) must be performing personal services in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts
David Shea transfers real estate with a basis of $40,000 and a FMV of $90,000 to a controlled corporation in return for stock in the corporation. Just before the transfer, David obtains a loan secured by the real estate and uses the $10,000 loan proceeds to buy a new motorcycle. Along with the real estate, the mortgage is transferred to the corporation. Which of the following are true with regard to the tax consequences to David?
In a Sec 351 exchange, if the corporation assumes taxpayer liabilities, the exchange generally is not treated as if the taxpayer received money or other property. There are two exceptions:
Boot is the total amount of the following:
This question has a twist. The liability on the real estate to purchase unrelated property is in anticipation of the exchange. Under the step transaction doctrine, the IRS would consider the motorcycle transaction as part of the exchange, and taxable boot.
Which of the following is NOT considered a related person?
To be a related person, an individual must own, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation.
During the tax year, Sweetheart Corporation had the following income and expenses:
What is the amount of Sweetheart's charitable contribution deduction for the year?
A corporation cannot deduct noncash charitable contributions that exceed 10% of its taxable income for the tax year (25% of its taxable income for cash contributions in 2021). Figure taxable income for this purpose without the following:
Gross income equals $1,200,000 + $30,000 + $120,000 = $1,350,000
Deduction items equal $600,000 + $70,000 = $670,000
Taxable income after considering the deduction items is $680,000. The deduction is limited to 10% or $68,000.
Zyma corporation's total receipts for the year and total assets at the end of the year are both less than $250,000. Which of the following forms is Zyma not required to file?
Corporations with total receipts and total assets at the end of the tax year less than $250,000 are not required to complete Schedules L, M-1, and M-2.
A personal service corporation is classified as a qualified personal service corporation if, in addition to certain other requirements, which of the following circumstances exists?
A corporation is a personal service corporation when, in addition to other requirements, employee-owners own more than 10% of the FMV of outstanding stock on the last day of the testing period.
There is a further classification as a qualified PSC which requires 95% of the corporation’s stock by current (or retired) employees, their estates, or their beneficiaries performing personal services.
Other requirements to be a Personal Service Corporation:
Pietro transfers property worth $50,000 to Vino, Inc. and, also, provides personal services worth $5,000 in exchange for stock valued at $55,000. Immediately after the exchange Pietro owns 90% of Vino, Inc.'s outstanding stock. What is Pietro's income recognition, if any?
This is a Sec 351 exchange as Pietro owns at least 80% of the corporation after the transaction. As such, and since he did not receive any money (or property other than stock) in the transaction, no gain is recognized upon transfer of his property. The term property does not include services rendered or to be rendered to the issuing corporation. The value of stock received for services is income to the recipient.
n 2018, Grant Corporation was formed and had taxable income of $30,000.
In 2019, Grant Corporation had taxable income of $40,000.
In 2020, Grant Corporation had taxable income of $50,000.
In 2021, Grant Corporation had a net operating loss of $300,000.
How much of the net operating loss will Grant carry forward to 2022?
The general 2-year net operating loss (NOL) carryback rule does not apply to NOLs arising in tax years ending after December 31, 2017. The taxpayer may carry the loss forward indefinitely. Exceptions apply to certain farming losses (2-year carryback) and NOLs of property and casualty insurance companies. There is also a provision that limits the NOL deduction to 80% of taxable income (determined without regard to the deduction) for losses arising in taxable years beginning after December 31, 2017.
Therefore, the entire 2021 NOL of $300,000 will be carried forward to 2022.
Carol Corporation and Brown Corporation are domestic corporations. The Carol Corporation owns 25% of the Brown Corporation. Carol Corporation's income from the business for the tax year is $500,000 and business expenses are $750,000. In addition to the income from business, Carol Corporation also received dividends from Brown Corporation in the amount of $100,000. Carol Corporation's dividend received deduction is:
A corporation can deduct, within certain limits, 50% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 65% of the dividends received.
The total deduction for dividends received or accrued is generally limited to 65% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations for dividends received or accrued from 20%-owned corporations.
If a corporation has a net operating loss (NOL) for a tax year, the taxable income limit does not apply. To determine whether a corporation has an NOL, figure the dividends-received deduction without the taxable income limit.
The taxable income limit does not apply to Carol Corporation because Carol has an operating loss for the year, therefore Carol Corporation receives 65% deduction for dividends received without considering the taxable income limitation.
What is the purpose of Schedule M-1?
Not all expenses are deductible on a corporation's tax return. Schedule M-1 reconciles a corporations income (loss) per books with what is reported on the tax return.
The correct term to describe a parent corporation that is connected through stock ownership to one or more other corporations through at least 80% direct ownership is:
An affiliated group is one or more chains of includible corporations connected through stock ownership with a common parent corporation. The parent corporation must directly own stock equal to at least 80% of the total voting power of the stock of such corporation, with a value equal to at least 80% of the total value of the stock of such corporation.
Martha transferred equipment to a corporation in exchange for 100 shares of common stock. The equipment had a basis of $120,000 and a fair value of $160,000 which is equal to the value of the shares received. There are three other shareholders who each own 100 shares of stock. What is Martha's basis in the stock?
In most cases, the basis of property transferred to a corporation is the fair value of the shares received (or $160,000 for this problem). A more formal way of making the determination is that the basis is Martha's previous basis plus any gain recognized on the transfer. In this case, she does not own enough stock for the transfer to qualify for tax-free treatment, so she has a gain of $40,000. The basis was $120,000 and the fair value is $160,000 for a gain of $40,000. Her basis in the stock will be the old basis of $120,000 plus this gain of $40,000 or $160,000.
The Holstein Corporation made sales revenues in 20X1 of $870,000 and incurred operating expenses of $630,000. In addition, the company had a net short-term capital gain on the sale of some securities of $21,000 and a net long-term capital loss on the sale of other securities of $39,000. Which of the following statements is true?
Corporations are not allowed any capital loss deduction. Thus, the net loss of $18,000 ($21,000 gain less $39,000 loss) can be carried back for up to three years and then forward for up to five years to reduce other capital gains. However, no reduction is allowed in taxable income. Only the $870,000 revenue and $630,000 in expenses are allowed for a net taxable income of $240,000.
The Boynton Corporation owns 33 percent of Company A and 17 percent of Company Z. This year, Boynton received a dividend of $60,000 from Company A and a dividend of $50,000 from Company Z. All of the companies are domestic corporations. What is the increase in the taxable income of Boynton as a result of this total of $110,000 in dividend revenue? Assume Boynton is otherwise a profitable company.
When one domestic corporation receives a cash dividend from another, the dividend is included as revenue but a dividends received deduction is then allowed.
The deduction is 50 percent if the company owned less than 20 percent of the other company. The deduction goes up to 65 percent if the company owned less than 80 percent of the other company but at least 20 percent.
For Company A, 33 percent is owned so the dividends received deduction is $39,000 ($60,000 × 65%).
For Company Z, only 17 percent is owned so the deduction is $25,000 ($50,000 × 50%)
Dividend revenue is $110,000 while the dividends received deduction is $64,000 ($39,000 + $25,000) leaving an increase in taxable income of $46,000 ($110,000 – $64,000).
On a Form 1120, what is the purpose of Schedule M-2?
Schedule M-1 on the form 1120 reconciles the income on the corporation’s financial statements to the taxable income being reported. Then, Schedule M-2 analyzes the changes in unappropriated retained earnings from the first day of the year to the last.
ABC Company, a corporate taxpayer, has a fiscal year ending September 30. The due date, excluding extensions, for filing their return is:
April 15th
January 15
May 15
October 15
Generally, a corporation must file its income tax return by the 15th day of the 4th month after the end of its tax year.
This includes fiscal year corporate returns, with one exception. A corporation with a fiscal tax year ending June 30 must file by the 15th day of the 3rd month after the end of its tax year.
In this case, it is indicated that the corporation has a fiscal year ending September 30th. The fiscal year does not end on June 30th, therefore the return is due on January 15th, excluding extensions.
End of Fiscal Year:September 30Return due date:January 15 (15th day of 4th month)Extended due date:July 15 (6-month extension)
In the current year, Dr. Spencer Patel decides to form a corporation. Cash of $120,000 is transferred to the business along with equipment having a tax basis of $100,000 but a fair value of $150,000. Dr. Patel received all of the stock of this new corporation. What is his tax basis in this new business and what tax basis does the new business use for this equipment?
Gain is not recognized on a transfer of property solely in exchange for stock in a corporation if transferor retains control of the corporation immediately after the exchange. Tax basis is retained by both parties and no income effect results. Dr. Patel gave up two assets with a tax basis of $220,000 ($100,000 plus $120,000). He keeps that amount as his tax basis for his investment. The business picks up the equipment at its tax basis of $100,000.
Note: A taxpayer may need to recognize a gain if money or property other than stock is received during the exchange. Also, gain may be recognized if a liability assumed by the corporation exceeds the shareholder's basis in the contributed property.
Which of the following statements is NOT true regarding corporate capital losses?
A corporation can deduct capital losses only up to the amount of its capital gains. In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years. When you carry a net capital loss to another tax year, treat it as a short-term loss. It does not retain its original identity as long term or short term. A capital loss can be carried back three years and carried forward for five.
Big and Bold, Inc. is a C corporation, which constructs billboards for advertising. During the 2021 tax year its books reflect the following:
Income:
Deductions:
Compute tax on 2021 taxable income.
Charitable contribution deductions are typically limited to 10% of taxable income before any charitable contribution deduction and certain other adjustments. The CARES Act temporarily increases the limit on qualified cash contributions made in 2020. A corporation may deduct qualified contributions of cash up to 25% of its taxable income. This relief also applies to qualified cash contributions made in 2021, as the relief was extended by the Consolidated Appropriations Act, 2021. Contributions of non-cash property do not qualify for this relief. A corporation may still claim non-cash charitable contributions as a deduction, subject to the normal limit (10% of its taxable income).
Big and Bold's deductions say "Charitable contributions paid" therefore, it's a cash contribution.
A corporation cannot deduct cash charitable contributions that exceed 25% of its taxable income (2020 and 2021) and non-cash charitable contributions that exceed 10% of its taxable income for the tax year. A corporation may carry forward to each of the subsequent five years any charitable contributions made during the current year that exceed the 25% limit for cash (2020 and 2021) and the 10% limit for non-cash.
Big and Bold's taxable income before the charitable contribution deduction is $8,000 ($35,000 + $1,500 – $28,000 – $500). Their 2021 charitable contribution deduction is limited to $2,000 ($8,000 × 25%). Charitable contributions paid in 2021 are $4,000, $2,000 are deductible in 2021 and $2,000 are carry forward.
Big and Bold's taxable income is $6,000 ($8,000 – $2,000 charitable contribution deduction). Currently, a flat 21% tax rate applies to all corporations. Therefore, Big and Bold's tax on 2021 taxable income is $1,260 ($6,000 taxable income × 21% tax rate).
When is a corporation generally required to file Schedule M-1?
A corporation with total receipts and total assets at the end of the tax year of less than $250,000 is not required to complete Schedules L, M-1, and M-2. A corporation with total assets of $10 million or more on the last day of the tax year must complete Schedule M-3 instead of Schedule M-1.