Question

ITS A REVIEW ( I JUST NEED SIMPLE ANSWERS TO STUDY A LITTLE) CHAPTER 2             (1)   Be familiar with the required Accounting Methods for Regular (C) Corporations.             (2)   Know the rules for Organizational Expenses             (3)   Know how to treat Capital Losses for Regular (C) Corporations             (4)   Know the purpose of the Dividends Received Deduction and how to compute it             (5)   Generally know which entities are Tax-Paying Entities and which are not.             (6)   Be able to make basic comparisons of similarities and differences (mostly differences) between Federal Taxation of                    Individuals and Regular (C) Corporations.             (7)   Know how to compute Charitable Contributions Deductions for Regular (C) Corporations             (8)   Also know the basic rules pertaining to Charitable Contribution Deductions for Regular (C) Corporations.             (9)   Know the basic rules pertaining to Personal Service Corporations.             (10) Know generally how an entity is (or is not) determined to be a Regular (C) Corporation for Federal Income Taxation                     purposes.             (11) Be able to compute Section 1245, Section 1250 (including Section 291) Depreciation Recapture amounts             (12) Be able to compute the Federal Income Tax Liability for Regular (C) Corporations for Taxable Income of less than $335,000             (13) Be able to completely deal with the Schedule M-1 Reconciliation for Regular (C) Corporations from the standpoint of knowing what is added and what is subtracted from Net Income Per Books             (14) Know the Corporate Characteristics for an Association (to be taxed as a Regular (C) Corporation).             (15) Be able to determine the due date for Federal Income Tax Returns for Regular (C) Corporations.             (16) Know generally the rules pertaining to Controlled Groups             (17) Know what entity or entities the Internal Revenue Service (IRS) may disregard.             CHAPTER 4             (1) Know the requirements for Section 351 Transfer (including definitions for Services, Stock and "In Control").             (2) Be able to compute Section 351 Transfer situations (ie. Recognized Gain or Loss to shareholder, Shareholder's Basis In Stock and Corporation's Basis In Properties Received) (including the impact of Section 357(b) and Section 357(c) Debt)             (3) Know the affect of contributions to Regular (C) Corporations by Non-Shareholders (ie. Recognized Gain or Recognized Loss and Basis in property received).             (4) Know the affect on Corporation and shareholders of Debt v. Equity In The Capital Structure.             (5) Be able to compute the total deductions allowed in a Section 1244 Stock situation                         CHAPTER 5             (1) Be able to identify when Stock Dividends are taxable (or not).             (2) Be able to identify Constructive Dividends             (3) Be able to determine the effect on the Corporation for the distribution of property in a Property Dividend             (4) Be able to compute the Taxable Income (Dividends) to shareholders for the four (4) Scenarios (and the Tax-Free Return Of Capital (And Remaining Basis In Stock) and Taxable Capital Gain)             (5) Be able to determine the impact on the Shareholders for the distribution of property in a Property Dividend             (6) Be able to identify the items that Increases and Decreases Earnings And Profits (E&P) and be able to compute Earnings And Profits (E&P)

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Answer 1

Chapter2)

1) For U.S. federal income tax purposes, a regular or Subchapter C corporation must identify its overall accounting method on Form 1120, Schedule K, Line 1 as either cash, accrual or other. Generally, a corporation may use any method of accounting supported by underlying books and records that clearly reflects taxable income on a consistent basis (Internal Revenue Code Section 446).

Cash Method

Most small corporate taxpayers use the cash receipts and disbursements method. This method calls for income recognition when corporations receive payment or when funds are set aside for their use. Claims for deductions under the cash method may only occur when corporate taxpayers actually make payment before year-end and only if payment does not create an asset with a useful life lasting longer than 12 months.

Accrual Method

All corporations with average annual gross receipts exceeding $5 million must use the accrual method. This method broadly requires income recognition upon the completion of earnings activities and allows for expense deduction upon incurring a liability. Note that convoluted provisions in the tax code may apply to situations where corporations receive payments before completing earnings activities or make payments before liabilities actually exist.

Unlike regular corporate expenses, which are deducted from the corporation's ordinary income, C corporation capital losses may not be deducted from a C corporation's ordinary income; capital losses may only be offset against capital gains.

If in any given tax year, a C corporation's capital losses exceed its capital gains, the excess loss may not be deducted in that year. Instead, the current year's excess loss is carried to other tax years in a specific order and deducted from net capital gains in those years (if any gains exist)

Dividends Received Deduction, or DRD, is a tax deduction that C corporations receive on the dividends distributed to them by other companies whose stock they own. As a C corporation's equity interest in a dividend-paying company increases, so does the amount of the DRD as shown below:

Percent Ownership		Dividends Received Deduction		Implied Tax Rate on Dividends*
< 20%		70%		10.5% [= 35% × (1-70%)]
20 - 80%		80%		7.0% [= 35% × (1-80%)]
> 80%		100%		0.0% [= 35% × (1-100%)]

* Assumes a 35% tax rate for the corporation receiving the dividend.

The DRD is designed to soften the blow of triple taxation on corporate dividends. Triple taxation occurs because the company paying the dividend does so with after-tax money. The C corporation receiving the dividend is then taxed on the dividend. Finally, if the receiving C corporation pays out the dividend to its shareholders, the shareholders are taxed yet again.

There are a few limitations to the DRD:

• The DRD is only available to C corporations; not LLCs, S corporations, or individuals.
• There is a 45-day minimum holding period for common stock.
• The DRD does not apply to preferred stock.
• If a corporation is entitled to a 70% DRD, it can deduct dividends only up to 70% of its taxable income.
• If a corporation is entitled to a 80% DRD, it can deduct dividends only up to 80% of its taxable income.

If a corporation is entitled to a 100% DRD, there is no taxable income limitation. Also, if the DRD creates or increases a net operating loss, the taxable