Ch-12. S Corps-2015 C15-Chap-00-Tst-4-Exm-Sol-2015-May-01-2015-Posted-3-09-2016 Page 1 of 8 1 A 2 D 3 C Total One Owner Form 1040 Basis Stockholder A, Basis in Stk $100,000 Taxable Income $300,000 $100,000 $100,000 $100,000 Municipal interest $30,000 $10,000 $10,000 Distributions $120,000 $40,000 ($40,000) 3 C Amount of income for one owner $100,000 4 C Basis for Shareholder A $170,000 5 D Total AAA Taxable Income $300,000 $300,000 Municipal interest $30,000 Distributions $120,000 ($120,000) AAA Balance $180,000 6 C S Corporation Losses Owner's loss deduction is limited to basis in stock and amount of loan to S corporation. Cannot count share of corporate debt to others in computing basis of stock. Facts Bob's Basis Investment in the S corporation $7,000 $7,000 Loan to S Corporation by Shareholder 6,000 6,000 S Corporation loan from bank 10,000 Limit on loss deduction $13,000 Amount of S corporation loss for year $40,000 Bob's share of S corp. loss for year $20,000 Amount of Bob's deduction this year $13,000 7 D S Corp. Distribution E & P AAA Basis 1040 income Beginning Bal. $40,000 $30,000 $50,000 Income for year $100,000 $100,000 $100,000 Subtotal $40,000 $130,000 $150,000 $100,000 Distribution $150,000 First layer (AAA) $130,000 ($130,000) ($130,000) $0 Next layer (E&P) $20,000 ($20,000) $20,000 Subtotal $0 $0 $0 $120,000 Total income recognized by Joe $120,000 Ending basis $20,000 8 A Bern Corporation Loss for year $365,000 $365,000 Days in year 365 Loss per day 1,000 Loss for 60 days for all stock 60 60,000 Loss for 60 days for 50% of the stock 30,000 $30,000 Note that this is the share of the loss. Basis of stock is determined at the stockholder level. He will be able to deduct $10,000.
Ch-13-Compare Organ-2015 C15-Chap-00-Tst-4-Exm-Sol-2015-May-01-2015-Posted-3-09-2016 Page 2 of 8 9 C 10 Facts Basis-S Corp Partnership Investment in the a business $7,000 $7,000 $7,000 Business obtained a loan from bank 10,000 5000 Limit on loss deduction $7,000 $12,000 Amount of business loss for year $40,000 Owner's share of loss for year $20,000 $0 10 D Amount of loss deduction - S corp $7,000 11 B Amount of loss deduction - Partnership $12,000 Facts for next 3 questions Walter contributed land to a new business in return for a 50% ownership interest. On the same day, another investor contributed cash of $100,000 for a 50% interest. Walter's land had a FMV of $140,000, an adjusted basis to Walter of $20,000. Walter's land was subject to a $40,000 mortgage which was assumed by the new business. 12 A What was Walter s recognized gain if the new business is a C corporation of a partnership? 13 A What is Walter's basis of his interest, if it is a C corporation of a partnership 14 C What is the basis of the land to the new business if it is a C corporation of a partnership? 1. Stockholder's Gain or Loss on Exchange 351, 357(c) 1 Value of all consideration received by stockholder: 2 Value of Stock received $100,000 3 Value of Other Assets received 4 Liabilities assumed the other party 40,000 5 Minus: Cost of all property transferred to corp. (20,000) 6 Equals Gain Realized $120,000 7 Recognized Gain: Lesser of gain realized or 12 A 8 boot (include excess debt) received 20,000 2. Stockholder's Basis in Stock Received 358(a)(1) 9 Basis of all property transferred to Corporation 20,000 10 Plus gain recognized 20,000 11 Minus boot received (include all debt transferred) (40,000) 13 A 12 Equals basis of stock received $0 13 3. Corporation's Gain on the Exchange 118(a), 1032 $0 4. Corporation's Basis in Property Received 362(a) 14 Basis of non-cash property transferred by stockholder 20,000 15 Add: Gain recognized by stockholder 20,000 14 C 16 Equals: Basis of non-cash property to corporation $40,000 1. Partner's Gain on investment in Partnership 721,752,731 Note: "Partner-1" is investing in the Partnership. 1 Partner-1's asset had a VALUE of $140,000 2 Partner-1's asset had a BASIS of $20,000 3 Partnership capital % received by Partner-1 50% 4 Partnership capital % of other partners 50% 5 Partnership's debt before investment 6 Partnership's debt assumed by Partner-1 752(a) 7 Partner-1's debt assumed by PARTNERSHIP 40,000 8 Partner-1's debt assumed by other PARTNERS 752(b) 20,000 9 Excess of line 8 over lines 2 + 6 732(a)(1) - 12 A 10 Partner-1's Gain-Positive Amt. on Line 9 $0
Ch-13-Compare Organ-2015 C15-Chap-00-Tst-4-Exm-Sol-2015-May-01-2015-Posted-3-09-2016 Page 3 of 8 11 2. Partnership's gain or loss on exchange 721 $0 3. Partner-1's Basis in partnership Interest 722 12 Asset basis before contribution $20,000 13 Add: Partnership debt assumed by Partner-1 13 A 14 Less: Partner-1's Debt assumed by other Ptnrs (20,000) 15 Partner-1's Basis - Cannot be negative 1.722-1 $0 4. Partnership's basis in Asset Received 723 16 Partner-1's asset basis (before contribution) $20,000 17 Add: Investment company gain (rare) 721(b) 14 C 18 Do not add gain for excess debt XXX 19 Partnership's basis in asset received $20,000 15 A On 1-1-15, Jan invested $200,000 in Repair Corp. and $200,000 in Consulting Corp. Jan received all stock of both corps. Consulting Corp immediately elected S Status. Repair Consulting Summary of 2015 Transactions C Corp. S Corp. Jan-1040 Revenue $100,000 $200,000 Compensation paid to Jan (40,000) (40,000) $80,000 Rent (20,000) (70,000) Other Expenses (10,000) (10,000) Net Income before income tax- Repair $30,000 0 Net Income before income tax - Consulting $80,000 80,000 Dividends paid to Jan by Repair Corporation $10,000 10,000 Dividends paid to Jan by Consulting Corporation Total income recognized by Jan $10,000 0 $170,000 16 D Jan and Joe each own 50% of a business. Each has a basis of $20,000 in the entity There is no debt.they each take a curent distribution of $20,000 (Total $40,000). If entity is a C corporation, it has retained earnings and E&P of $5,000. If entity is an S corporation, it has AAA of $2,000 and E&P of $3,000. If entity is assumed to be a partnership, there is no hot asset. How much total income is recognized by Joe? Note: 50% of corporate amounts (E&P and AAA) are shown for Joe C Corp. Distribution E & P AAA Basis 1040 income Beginning Bal. $2,500 N/A $20,000 Distribution $20,000 N/A First layer $2,500 ($2,500) N/A $2,500 Next layer $17,500 N/A ($17,500) Total income recognized by Joe N/A $2,500 Ending basis N/A $2,500 Note: 50% of corporate amounts (E&P and AAA) are shown for Joe S Corp. Distribution E & P AAA Basis 1040 income Beginning Bal. $1,500 $1,000 $20,000 Distribution $20,000 First layer $1,000 ($1,000) ($1,000) Next layer $1,500 ($1,500) $1,500 Next layer $17,500 ($17,500) Total income recognized by Joe $1,500 Ending basis $1,500 Partnership Distribution E & P Basis AAA 1040 income Beginning Bal. N/A $20,000 N/A Distribution $20,000 N/A N/A First layer $20,000 N/A ($20,000) N/A $0 Next layer N/A N/A Total income recognized by Joe N/A N/A $0 Ending basis N/A $0 N/A Note: Income column may show ordinary income and/or capital gain.
"Incomplete Tax Return Problem" This is the first year of operation December 31, 2014 Cash $50,000 Service Revenue $250,000 Accounts Receivable 80,000 Municipal bond interest 30,000 Income Tax Refund Receivable Expenses Bond Investments 100,000 Salaries Expense 44,000 Equipment (5-year life) 50,000 Rent, Insurance, etc. 48,000 Accumulated Depreciation (10,000) 40,000 Interest expense 11,000 Deferred Income Tax Asset Depreciation Expense 10,000 Less Valuation Allowance Loss on sale of capital asset 40,000 Total Assets $270,000 Other Expense 27,000 180,000 Accounts and Notes Payable 100,000 Net Income before Tax 100,000 Income Tax Payable-Current Current Tax Expense (Benefit) Deferred Income Tax Liability Deferred Tax Expense (Benefit) Total Liabilities $100,000 Net Income (loss) after tax $100,000 Common Stock ($10 Par) 70,000 Retained Earnings - Beginning Balance 0 Retained Earnings 100,000 Subtotal 100,000 Stockholders' Equity 170,000 Less: Dividends Total Liabilities & Equity $270,000 Retained Earnings - Ending Balance 100,000 Income tax rate is 40% for 2014 and 30% for later years. All deferred tax assets will be realized. 17 D 17 Compute Taxable Income (on tax return) Net income per books $100,000 Less: Municipal bond interest (30,000) Add: capital loss 40,000 Taxable income $110,000 Income tax rate 40% Current income tax expense $44,000 18 B 18 Compute the deferred tax account balance(s). Capital loss carryforward 40,000 Tax rate 30% Ending Deferred tax asset (DTA) 12,000 Beginning Deferred Tax Asset (DTA) 0 19 C 19 Income tax Provision (Current and Deferred) Current income tax expense 44,000 Current income tax payable 44,000 Deferred tax asset 12,000 Deferred tax benefit 12,000 Total Provision 32,000 20 A 20 What is effective tax rate in audited statements GAAP Net Income Before Taxes 100,000 Provision for income tax 32,000 Effective tax rate (using info. above) 32.00% C15 Chap 00 Tst 4 Exm Sol 2015 May 01 2015 Posted 3 09 2016, Acct for income tax
Questions-21-26 C15-Chap-00-Tst-4-Exm-Sol-2015-May-01-2015-Posted-3-09-2016. Page 5 No An 21 D Which of the items represent temporary book-tax differences? 22 D Charlotte GAAP Return Revenue? Expenses? Book net income Before Tax $500,000 $500,000 Warranty Expense - GAAP? Warranty Expense on Tax Return? Excess GAAP Warranty Expense $50,000 $50,000 Book net income Before Tax $500,000 Taxable income $550,000 Income tax rate 40% 40% 22 B GAAP provision for income tax $200,000 23 C Income tax currently payable $220,000 24 A Best- No fixed asset sold in 2014 Book Tax Difference Depreciation Expense-2013?? $50,000 Depreciation Expense-2014?? ($10,000) Total difference in basis at end of 2014 $40,000 2013 2014 Excess GAAP basis $50,000 $40,000 40% 40% 24 A Deferred Tax Liability $20,000 $16,000 25 D Charlotte Corp. had pretax income of $800,000 for the year ended December 31, 2013. In the computation of federal income taxes, the following data were considered: Pre-tax book net income $850,000 Interest revenue on municipal bonds $350,000 ($350,000) Depreciation for tax purposes in excess of GAAP deprec. $50,000 ($50,000) Federal estimated tax payments, 2015 Enacted federal tax rates, 2015 $70,000 30% Taxable income Enacted federal tax rates, 2015 $450,000 30% Current federal income tax expense on its 2015 income statement? $135,000 26 C Abbot Corporation reported the following information for 2015 Pretax book income DECREASE in the reserve for bad debts Tax depreciation exceeded GAAP depreciation by Received life insurance proceeds on death of an officer $500,000 $5,000 $40,000 $10,000 $500,000 ($5,000) ($40,000) ($10,000) $445,000 Income tax rate 40% 40% Abbot's current income tax expense or benefit would be $178,000
Tax Return-changes-2015 C15-Chap-00-Tst-4-Exm-Sol-2015-May-01-2015-Posted-3-09-2016 Page 6 of 8 No Ans Tax Return 32 D Entertainment expense understated by $30,000. Taxable Income in Original Project $138,800 Taxable Income in Original Project-Before DRD and Charity $162,000 Gross change in "amount" of revenue Change in "type" of revenue (tax-free or taxable) $0 Gross change in "amount" of expense ($30,000) Change in non-deductible amount of entertainment expense $15,000 Subtotal - Base for Charity Deduction limit $147,000 Impact of change in deduction for Charity Original Charity Deduction $16,200 Revised Charity Deduction $14,700 ($14,700) Change $1,500 Total Dividend Income/Dividend received ded. $10,000 ($7,000) Revised Taxable Income $125,300 33 D Original amount of entertainment expense 18,000 Additional entertainment expense 30,000 48,000 24,000 34 E Selling price 190,000 Adjusted basis for tax return 180,000 Gain 10,000 35 C 36 D
PracticePenalties C15-Chap-00-Tst-4-Exm-Sol-2015-May-01-2015-Posted-3-09-2016 Page 7 of 8 27 A Compute late filing penalty 6651 Penalty for failure to file is 5% per month, up to 5 months. Penalty for failue to pay is.5% per month. (Max. 25%) Failure to file penalty is reduced by failure to pay penalty (.5%) In effect, total penalty is 5% per month, for first few months. Amount Underpaid $10,000 April 15 301.6651 Rate per month 5.0% May 15 One month Penalty per month $500 June 15 Two months Number of months 3 July 15 Three months Late payment penalty $1,500 28 D Amount of underpayment $30,000 6662(a) 20% Underpayment Penalty $6,000 29 A Amount of fee $7,000 6694(a) 50% of fee $3,500 Minimum penalty $1,000 Penalty imposed $3,500 30 D Not a substantial omission of income from tax return (25% error). 6501( e)(a)(a) 31 B Minimum level of authority required, if disclosed (it was disclosed) 6662(d)(2)(B) Without disclosure, minimum level of authority would be substantial authority
Tab: Tax Return Prob-2015 File: C15-Chap-00-Tst-4-Exm-Sol-2015-May-01-2015-Posted-3-09-2016. Page 8 of 8 Corporate Tax Return Problem December 31, 2015 Cash $24,000 Accounts receivable 48,000 Investment in IBM Stock 100,000 Investment in North Carolina Bonds (7%) 200,000 Fixed assets 200,000 Accumulated depreciation 16,000 Accounts payable 70,000 Capital stock 400,000 Retained earnings Service revenue 600,000 Dividend income 10,000 Interest income 14,000 Salary expense for employees 300,000 Payroll taxes 29,000 Bad debts expense (Note 1) 5,000 N. C. Corp. estimated income taxes - 2015 12,000 Federal Corp. estimated income taxes - 2015 40,000 Rent expense 73,000 Depreciation expense (Note 2) 16,000 Entertainment expenses 18,000 Capital loss 15,000 Charitable Contribution 30,000 Trial Balance Total $1,110,000 $1,110,000 Total Revenue $624,000 Total Expenses $538,000 Net income per books $86,000 Note 1. The company uses the direct write-off method for bad debts. Note 2. Depreciation for tax purposes is $20,000 Note 3. Assume estimates NC income tax payments are equal to NC liability. Note 4. Profitability will increase. Income tax tax rate will be 40% in the future. Net income (loss) per books $86,000 Bad Debts Expense (Uncollectible Accounts Expense) Charitable Contribution 30,000 Tax-exempt Interest (14,000) Federal Income Tax 40,000 Excess Capital Losses 15,000 Travel and Entertainment (50%) 9,000 Depreciation Expense (4,000) Base for Charitable Contribution Limit 162,000 Limit on Charity Deduction (10%) 16,200 Actual Contributions 30,000 Carryover 13,800 Taxable income before Charity & Dividend Received Deduction 162,000 Charitable contribution deduction (16,200) Taxable Income before Dividend Received Deduction 145,800 Dividends received deduction (70%) (7,000) Taxable income $138,800 Income Tax Computation 50,000 15% 7,500.00 25,000 25% 6,250.00 25,000 34% 8,500.00 38,800 39% 15,132.00 Income tax 138,800 $37,382.00