When are revenues taxed and expenses deducted for a company?
Revenues are taxed when received, even if prepaid
Expenses are deducted when due, even if prepaid
How are proceeds from a key person policy taxed? Are premiums deductible?
The premium is not deductible as a business expense. It is used to reduce the proceeds.
The premium amount is deducted from the proceeds as a basis and the remainder is taxable income
For which entities is the accrual method of accounting required
Purchases and sales of inventories
Tax shelters
Farming corporations (in general)
C-Corps and partnerships having a C-Corp as a partner IF the corp has >$5M of avg annual gross receipts for the 3-year period ending with the tax year
What is the domestic production deduction? How is it calculated?
For companies who manufacture products in the US, a special tax-free bonus is awarded
It is 9% of the lesser of…
++ qualified production activities income (sales of domestically produced items - COGS) OR
++ taxable income (not including the deduction)
But cannot exceed either
++ 50% of the W-2 wages paid for the year OR
++ the AGI (for partnerships, S-Corps or sole proprietors AGI is the only criteria).
What is the maximum executive compensation that may be deducted?
$1,000,000 each for the top four wage earners of the company UNLESS
More can be deducted if
++ The wages are based on commissions OR
++ The wages are based on a performance-based plan of the company
When should bonuses to employees be deducted by the company for tax purposes?
When all conditions are met to create the liability, not when the bonus is actually paid
But, the bonus must be paid by the tax filing date of April 15
(Ex: declare bonus in Dec 2016, deduct on 2016 taxes, paid on Feb 1, 2017)
What method is used for the bad debt deduction for tax purposes by a company using the (a) accrual method, (b) cash method?
Accrual Basis: The direct write-off (specific charge-off) method must be used for taxes
Cash Basis: There is no deduction b/c the cash was never received. If a check was received, entered as income, and then bounced – this can be deducted.
Which of the following interest types can be deducted by an entity for tax purposes and if so, how much? (a) incurred for generating business [such as borrowing funds to purchase a new machine], (b) for buying an investment, (c) prepaid interest
Interest for generating business (such as borrowing to purchase a new machine): deducted when due & paid
Interest for buying an investment: deduct only up to investment income
Prepaid interest: deduct when due, not when paid
What is the limitation on charitable contributions for an entity? Is there carryover?
10% of the adjusted taxable income
The adjusted taxable income is income –deduction for standard expenses and it doesn’t include
++ the charitable deduction,
++ the dividends-received deduction,
++ the domestic production activities deduction
++ NOL carryback
++ capital loss carryback
Chartable contributions carryforward for 5 years
Deduct when accrued as long as it’s paid by when tax return is due on April 15
What are the differences between the deduction for a personal casualty loss and a business casualty loss?
Personal loss: each event is -$100, and then the amt is reduced by 10% AGI
Business loss: ANY loss is fully deducted. No $100 per event or reduction based on income
How is a business casualty loss calculated?
Partially Destroyed: The lesser of the decline in FMV of the property OR the adjusted basis just before the event
Fully Destroyed: The adjusted basis just before the event
How are organizational expenditures and start-up costs deducted?
The first $5,000 of each category are deducted in the year occurred
The remainder is amortized over 180 months beginning with the month in which business begins
The $5,000 is reduced dollar-for-dollar for expenditures >$50,000
What costs are NOT included in start-up or organizational expenditures?
Costs of raising capital….
Issuing and selling stock
Commissions
Underwriter’s fees
Costs incurred in the transfer of assets to a corporation
True / False: In the first year of operation, a new corp can deduct $5,000 of start-up costs PLUS the amortization amount of remaining start-up costs
True
True / False: Intangible assets are amortized over 15 years for tax purposes, regardless of whether purchased or created in-house.
True
Are business gifts deductible? If so, how much?
Yes, up to a maximum deduction of $25 per recipient per year.
The company incurred a fine for double-parking a truck. Is the fine tax deductible?
No
Amounts for illegal activities, such as bribes, kickbacks, fines, penalties are not deductible
Which taxes are deductible by a corporation?
State and local taxes
Federal payroll taxes
Are lobbying expenses or political contributions tax deductible by a corporation?
Only for local government lobbying
Political contributions are not deductible
The corporation incurs a capital loss for the year. How does this affect taxes? Is there a carryback or carryforward?
It doesn’t
Capital losses can only be used to offset capital gains
Excess capital losses can be carried back 3 years or forward 5 years
What are the 3 rate levels for the dividends-received deduction?
If 0 to <20% owned: 70% of the dividend received is deducted
If 20% to <80%: 80%
If 80%+: 100%
How is the dividends-received deduction (DRD) applied?
Gross income – regular expenses – charity = Base Amount
IF Base Amount – the entire DRD = net operating loss, then use entire DRD
IF Base Amount – the entire DRD does not create a loss, then use the lesser of
++ the DRD OR
++ 70% (80%) of Base Amount before DRD
What does the term “unrelated entity” mean?
You own <20% of the stock of that company
If affects the dividend-received reduction
True / False: For a corporation, the LT capital losses can be used to offset ST capital gains
True
What items are included in organizational start-up expenditures?
Fees paid for legal services in drafting the by-laws or operating agreement
