Tax Accounting – Exam Three
- After working in accounting for fifteen years, you and two friends have decided, you would really like to start your own firm. Some of the initial consultations you have had in your meetings have brought up a number of issues. Please answer the following issues being brought up.
- You are trying to decide what kind of entity you want to use for your business. You have the option of using the C-Corporation, S-Corporations and the Partnership. Which entity would you argue to use and provide at least three reasons in support of this choice and one potential problem you might have for this choice? (10pts)
- After discussion, the decision is to choose to operate as a C-Corporation. As a part of this organization, you all decide you want to set up an education reimbursement program. You have decided to categorize this under two groups: 1) continuing education and 2) reimbursement for tuition in pursuit towards a master’s degree. Provide discussion of the difference between how each will be taxed to the corporation and the employees under each case. (10Pts)
- After several years, your firm is rather successful and, in an effort, to expand, the company is deciding to expand their benefits package. One of the changes being discussed is offering health care benefits. Discuss how health care benefits are taxed to the owners of the firm under the case the firm is taxed as a partnership vs a C-Corporation. (10pts)
- How are health benefits treated for owners of S-Corporations under two situations. 1) If the owner is a 1% owner. 2) If the owner is a 25% owner. (10pts)
- You have a client, and they formed a corporation with 5 of their friends. All of the owners (all six of you) were required to put in $50,000 or assets valued at the same into the company, but only 1 of the owners is going to work full time for the company. Under which tax code does this transaction apply and what are the tax effects to the corporation and to the shareholders, who all contribute (for this transaction specifically). (10Pts)
- In 2019, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it
|expensed $10,000 of business meals expenditures. What is the total book–tax difference associated with|
|these items? Is it favorable or unfavorable? What amount of the book–tax difference is temporary and|
what amount is permanent?
- What is the difference between the aggregate and entity theories of partnership taxation? Provide two examples of how partnership tax rules reflect the aggregate theory and two examples of how they reflect the entity theory.
- What are five common book to tax differences in determining tax income from book income? (10Pts)
- During 2020, Sienar Systems, Inc purchased Correalian Drives, Inc. (one of its suppliers) using the assets method. As a part of this business, it was determined the company purchased 1,200,000 of Goodwill.
- How much is the book to tax difference with this purchase in 2020 and is it temporary or permanent? (5Pts)
- In 2022, it was determined the goodwill was impaired to the tune of about $200,000. What is the book effect of the impairment in 2022? (5Pts)
- What is the book to tax difference of the impairment in question 6.b. ass reported on the form 1120? Is it temporary or permanent? (5Pts)
- In 2020, Bespin Gas Systems, Inc (a C-Corporation), made a charitable donation of $250,000 to the Wookie Relief Fund (a qualifying charity). For 2020, they reported net income of $350,000, which included (i.e. the following items are a part of the net income) the $250,000 donation, a $75,000 dividends received deduction and a $30,000 Net Operating Loss carryover, from the previous year.
- What is the permitted charitable deduction allowed in 2020? (5Pts)
- What is the effect of the remaining amount (both amount and time of the carryover). (5Pts)
- Corporation A owns 10 percent of Corporation C. The marginal tax rate on nondividend income for both A and C is 21 percent. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income, and distributes the remainder proportionately to its shareholders as a dividend. In addition, Corporation A owns 40 percent of Partnership P, which earns $500 million in the current year. Given this fact pattern, answer the following questions:
- How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend, assuming Corporation A is eligible for the 50 percent dividends received deduction?
- If Partnership P distributes all of its current-year earnings in proportion to the partner’s ownership percentages, how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership?
- If you were to replace Corporation A with Individual A [her marginal tax rate on ordinary income is 37 percent and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does Individual A have from the Corporation C dividend after all taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that Corporation C distributes all of its after-tax income to its shareholders.
- Kevin, Gerald and Robb formed HyperTech Systems, LLC. No election was made as to the status of this entity, as they wanted to leave it as a partnership. Kevin and Robb contributed $350,000 to the partnership. Gerald contributed the following assets:
|Asset||Basis||Fair Market Value|
- What is the tax basis of Kevin and Robb in the partnership? (10Pts)
- Assume Gerald is asking for an equal part in the partnership in terms of capital? What will be the tax effects to Gerald? (10Pts)
- Assume Gerald is asking for an equal share in the partnership in terms of profits and losses only.
What are the tax effect to Kevin, Robb and Gerald for transferring the profit and losses interest? (10Pts)
- Jack, Jill and James own a CPA firm (Smith, Smith, Bond and Co., LLC), which is taxed as a partnership, and where each work full-time. Each contributed cash of $100,000 to the firm in 2019 at its beginning. The firm in the first year made $40,000 in profit in its first year. Profits and losses are split three ways.
The partnership has the following forms of debt:
Recourse: $150,000 (The recourse debt was secured 100% by James)
Qualified Nonrecourse Mortgage: $600,000
- Calculate the total basis (including debt basis) for each partner. (10Pts)
- Calculate the at-risk amount limitation for each partner. (10Pts)
- Calculate the passive loss limitation for each partner. (10Pts)
- Kim, James and Paul own an accounting firm, but Kim is reaching retirement age after her ownership in the firm for more than 25 years. She decides to sell her interest in the partnership. She is a 1/3 member of the firm and as of the end of the year, these are the following stats for the firm:
- Accounts Receivable: $150,000
- Inventory: $0
- Equipment: $150,000 ($700,000 in total and $400,000 in accumulated depreciation)
Kim had the following stats:
- Total outside basis in the partnership at the end of 2020: $500,000
- Recourse Debt to Kim: $120,000
- Nonrecourse debt: $0
- There is no qualified mortgage debt
James and Paul are not interested in acquiring more of the firm, but Alice, who is a manager in the company is interested in purchasing Kim’s interest. She is willing to purchase it for $750,000 (using a loan from her 401k and the bank to finance it).
- Calculate the total realized gain to Kim, when she sells it. (10Pts)
- Calculate the following types of gains/losses: (10Pts)
- Ordinary Gains/Loss
- Capital Gains/Loss
- Character of the gains/losses