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Corporation governed largely by Section 162 when determining deductibility of payments to shareholders. Shareholders governed largely by Sections 162 and 212 when making corporate related expenditures, but are limited by Sections 262 and 263(a)(1).
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162(a) In General. There shall be allowed as a deduction all the ordinary and necessary expenses in carrying on any trade or business, including(1) a reasonable allowance for salaries .. (2) traveling expenses (3) rentals
What is the presumption in the Code regarding the relationship of corporate activities and Section 162(a)? Does Section 212 apply to corporations?
No deduction is allowed for interest on amounts borrowed to purchase taxexempt securities, illegal bribes or kickbacks, fines or penalties imposed by a government, or insurance premiums incurred to insure the lives of officers and employees when the corporation is the beneficiary.
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Char. Corp.-organized 1-1-2011 Income per books-2011 Book Income includes: Municipal bond Interest Meals & entertain. Exp. Prem. - officers' life ins. (corp. is beneficiary) Capital losses Fines What is taxable income? 8,000 20,000 3,800 1,000 200
Return
$400,000 $400,000
Char. Corp.-organized 1-1-2011 Income per books-2011 Book Income includes: Municipal bond Interest Meals & entertain. Exp. Prem. - officers' life ins. (corp. is beneficiary) Capital losses Fines What is taxable income? 8,000 20,000 3,800 1,000 200
Return
UNCC Corporation - 1 of 3
Compute Tax. Income Debit Credits Sales $700,000 Cost of sales $400,000 Mun. bond interest 2,000 Compensation 100,000 Meals, entertain-Gross 20,000 Other Expense 140,000 Subtotal 660,000 702,000 Net Income before tax
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UNCC Corp - 2 of 3
Debit
Sales Cost of sales $400,000 Mun. bond interest 2,000 Compensation 100,000 Meals, entertain. (Gross) 20,000 Other Expense 140,000 Subtotal 660,000 702,000 Net Income before tax 42,000 Add: one half of entertain. Less: Mun. bond interest Taxable income Income Tax Compute E & P (Similar to Retained Earnings)
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Credits $700,000
UNCC Corp - 3 of 3
Debit
Sales Cost of sales $400,000 Mun. bond interest 2,000 Compensation 100,000 Meals, entertain. (Gross) 20,000 Other Expense 140,000 Subtotal 660,000 702,000 Net Income before tax 42,000 Add: One half of entertain. 10,000 Less: Mun. bond interest (2,000) Taxable income 50,000 Income Tax 7,500 Compute E & P (Similar to Retained Earnings)
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Credits $700,000
Blue Corporation Blue Corp. reported GAAP net income before income tax of $400,000 in its first year of operation. Financial Statements include bad debts expense of $3,000. Blue Corp. wrote-off bad debts totaling $2,000 in first year. Taxable income for the year?____
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X Corp. taxable income in first year: $400,000. Fin. Statements: bad debts exp. of $3,000. X Corp. wrote-off bad debts totaling $2,000. Taxable income will be $400,000 in future. Fin. statements at end of first year include: a. Deferred tax asset of $340 b. Deferred tax asset of $660 c. Deferred tax liability of $340 d. Deferred tax liability of $660
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Cash
XXX
Accts. Rec.
80
Allowance
7
Revenue
Other Exp.
Maxwell Corp. Book/Tax Differences Book income before tax $400,000 Revenue included: Tax-exempt interest income 8,000 Expenses included: Meal & Entertainment Exp. Life insurance premium Fines Taxable income Tax Rate Income Tax Liability 22,000 3,300 200
Maxwell Corp. Book/Tax Differences Book income before tax $400,000 Tax-exempt interest income Meal & Entertainment Exp. (50% x $22,000) Life insurance premium Fines Taxable income Tax Rate 34% Income Tax Liability All adjustments - permanent differences.
Life insurance premium 3,300 Fines 200 Taxable income $406,500 Tax Rate 34% Income Tax Liability $138,210 All adjustments - permanent differences?
Schedule M-1
Tax-exempt interest.
5 a b c 6
Expenses recorded on books this yr, not deducted on this retum (itemize): Depreciation .............. Contributions .... Travel and entertainment...
a. b.
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Add lines 1 throuqh 5
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Schedule M-1
Tax-exempt interest.
$8,000 $8,000
5 a b c 6
Expenses recorded on books this yr, not deducted on this retum (itemize): Depreciation .............. Contributions .... Travel and entertainment... $11,000
a. b.
Fines $200
$14,500 $414,500
9 10
$8,000 $406,500
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Cash
XXX
Accts. Rec.
80
Allowance
7
Revenue
Other Exp.
Client recorded 2011 transactions on cash basis and prepares the tax return on the accrual basis. Collections from customers in 2011 $300,000 Cash payments for expenses 200,000 Other information Beginning Accounts Receivable 100,000 Ending Accounts Receivable 90,000 Write-off of uncollectible accounts 4,000 Depreciation Expense 50,000 Change in accounts payable 0 All sales are on credit Direct Charge-Off Method is used. What is amount of sales (accrual)? What is taxable income?
Client - Slide 2 of 3
Cash Ac-Rec. Other Rev. Exp. Beg. Bal. Sales Collection Write-off Deprec. Other Exp. Balance
Client - Slide 3 of 3
Cash Ac-Rec. Other Rev. Exp. Beg. Bal. Sales Collection 300 Write-off Deprec. Other Exp. (200) Balance 90 100 294 (300) (4) (50) 4 50 200 294
GAAP Income Statement: Rent Revenue $54,700 Cash Collections from tenants for rent?
GAAP Revenue for Year 2 54,700 Beg. Rent Receivable End. Rent Receivable Beg. Unearned Revenue End. Unearned Revenue Revenue on Tax Return Tax law follows GAAP for accruing receivables, but not for reporting rent income received in advance.
GAAP Revenue - Year 2 54,700 Beg. Rent Receivable End. Rent Receivable Beg. Unearned Revenue (2,600) End. Unearned Revenue 1,300 Revenue on Tax Return $53,400 Tax law follows GAAP for accruing receivables, but not for reporting rent income received in advance.
Realty Corporation - Slide 2. GAAP Tax Rent Revenue $20,000 Cash Expenses (5,000) Depreciation Exp. (10,000) NIBT/Taxable Income 5,000 Income Tax Rate 40% Income Tax Expense Income Tax Paid Net Income What is the amount of the deferred tax asset or liability at end of Yr 1?
Realty Corporation - Slide 3. GAAP Tax Rent Revenue $20,000 $40,000 Cash Expenses (5,000) (5,000) Depreciation Exp. (10,000) (10,000) NIBT/Taxable Income 5,000 25,000 Income Tax Rate 40% 40% Income Tax Expense 2,000 Income Tax Paid 10,000 Net Income 3,000 What is the amount of the deferred tax asset or liability at end of Yr 1?
Realty Corporation - Slide 4. GAAP Tax Rent Revenue $20,000 $40,000 Cash Expenses (5,000) (5,000) Depreciation Exp. (10,000) (10,000) NIBT/Taxable Income 5,000 25,000 Income Tax Rate 40% 40% Income Tax Expense 2,000 Income Tax Paid 10,000 Net Income 3,000 What is the amount of the deferred tax asset or liability at end of Yr 1? 8,000
Note, the installment sales method is generally prohibited for dealers in inventory. However it is allowed in limited circumstances. The problem on the preceding slide is included to help illustrate the differences between accrual accounting and other revenue recognition methods and the impact on deferred taxes.
The End
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