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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
- 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 / False: Intangible assets are amortized over 15 years for tax purposes, regardless of whether purchased or created in-house.
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?
- 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
What items are included in organizational start-up expenditures?
- Fees paid for legal services in drafting the by-laws or operating agreement
- Fees paid for accounting services
- Filing fees
What items are included in start-up costs?
- Fees incurred prior to opening the business