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UC - ACCT 6072 - Study Guide - Midterm

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UC - ACCT 6072 - Study Guide - Midterm

School: University of Cincinnati
Department: Accounting
Course: Tax II
Professor: Pr.richshafer
Term: Fall 2016
Tags:
Name: 6072Tax II Exam 1 Questions Review
Description: These notes cover the Questions on the Exam 1 which are pointed out by the Professor, and the all the class Examples that the professor mentioned on the class. It also contains the Schedule M form for the last optional question.
Uploaded: 10/31/2016
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background image Q1: Business Expenses→ Organizational Expenditures. 
Organizational expenditures include expenditures:  
(1) incident to the corporation’s creation; 
(2) chargeable to the corporation’s capital account;  
(3) of a character that, if expended incident to the creation of a corporation having a 
limited life, would be amortizable over that life. 
Specific organizational expenditures include:  
1. Legal services incident to the corporation’s organization (e.g., drafting the  corporate charter and bylaws, minutes of organizational meetings, and terms of 
original stock certificates) 
2. Accounting services necessary to create the corporation 
3.  Expenses of temporary directors and of organizational meetings of directors and 
stockholders  4.  Fees paid to the state of incorporation  Organizational expenditures  do not include  expenditures connected with issuing or  selling the corporation’s stock or other securities (e.g., commissions, professional fees, 
and 
printing costs) and expenditures related to the transfer of assets to the corporation. 
 
CLASS EXAMPLE:   Omega Corporation incorporates on July 12 of the current year, starts business 
operations on August 10, and elects a tax year ending on September 30. Omega 
incurs the following expenditures while organizing the corporation: 
Date                   Type of Expenditure                                                       Amount 
June 10         Legal expenses to draft charter                                          $ 2,000 
July 17           Commission to stockbroker for issuing and selling stock      40,000 
July 18            Accounting fees to set up corporate books                       2,400 
July 20           Temporary directors’ fees                                                   1,000 
August 25          Directors’ fees                                                                  1,500 
 
Notes: Amortization Example: ** B|Z- begins 8/10  ● Only get amortization only when business starts for the first year! 
● Isolate all pre-opening expenses and treat as "organizational expenses" under 
Sec. 248  - Omega’s first tax year begins July 12 and ends on September 30.  
- Omega has organizational expenditures of $5,400 ($2,000 + $2,400 + $1,000). The 
commission for selling the Omega stock is treated as a reduction in the amount 
of Omega’s paid-in capital. Omega deducts the directors’ fees incurred in August 
as a trade or business expense under Sec. 162 because Omega had begun 
business operations by that date. Assuming a deemed election to amortize its 
organizational expenditures, Omega can deduct $5,000 in its first tax year and 
background image amortize the remaining $400 over 180 months. Thus, its first year deduction is 
$5,004 [$5,000 + ($400/180) × 2 months]. 
The following table summarizes the classification of expenditures:     
Start-Up Expenditures. 
 A distinction must be made between a corporation’s organizational expenditures and its 
start-up expenditures. Start-up expenditures are ordinary and necessary business 
expenses paid or incurred by an individual or corporate taxpayer: 
● To investigate the creation or acquisition of an active trade or business 
● To create an active trade or business 
● To conduct an activity engaged in for profit or the production of income before 
the time the activity becomes an active trade or business   
Examples of start-up expenditures include: 
● the costs for a survey of potential markets;  
● an analysis of available facilities;  
● advertisements relating to opening the business;  
● the training of employees;  
● travel and other expenses for securing prospective distributors, suppliers, or 
customers; and the hiring of management personnel and outside consultants.   - The expenditures must be such that, if incurred in connection with the operation of an 
existing active trade or business, they would be allowable as a deduction in the year 
paid or incurred. 
- Under Sec. 195, a corporation may elect to deduct the first $5,000 of start-up 
expenditures. 
However, this amount is reduced (but not below zero) by the amount by which the 
cumulative start-up expenditures exceed $50,000. The corporation can amortize the 
remaining start-up expenditures over a 180-month period beginning in the month it 
begins business. 
 
 
 
 
background image Q2. Have both Charitable Contributions  & DRD at same year  1) Charitable Contributions of C Corp  Limitation for C corp. limited to 10% of Adjusted taxable income ​; Anything excess,  must forward for the next 5 years.  Adjusted taxable income- the base, also defined as taxable income  without  Charitable  Contributions deduction or any dividends received deduction.        2)  dividends received deduction 
Q: 
need report on tax return​, how much dividends deduction?  How much the function  as stocks/ownership can ?  ● Only C corp has the dividends received deduction ​ under Section 243:  Rule: If the C Corp own less than 20%, then deduction is 70% 
                                       At least 20%, but less 80%, deduction is 80% 
                                       at least 80%, or more, deduction is 100%. 
Exceptions: 
(1) if sub pay dividends as a foreign c corp. No deduction. However, if the foreign c corp 
conduct some business in US, there are some limitation on DRD.  Section 243 
● Eg. Suppose has C Corp gross sales 100,000; 95,000 business expense are C  Corp own 15%, this year, subsidory pay 40,000 dividends, what 
deduction/taxable income? (Exam Q) 
Exception:  DRD is lower of allowable DRD, or Allowable DRD % * taxable income  before the special deduction 
 
Class Example:  
Have both 
Charitable Contributions   & DRD at same year  1step: Calculate taxable income before the  Charitable Contributions  and Before DRD  2step: 10% of taxable income 
3step: subtract 10% TI from the taxable income (difference called taxable income after 
CC but before DRD ) 
4step: calculate DRD on that last taxable income 
 
● E.G. Have DRD and CC same year. Gross Sales-200,000; COGS:150,000; 
Operation expenses:70,000; Dividend income: 30,000; CC:15,000  How much C corp Taxable income? Own 10% of Sub stocks.  1.  taxable income before the Charitable Contributions: 200,000+30,000-  150,000-70,000= 10,000  2. 10% * 10,000= 1000 
3. 10,000-1000=9,000 
4. DRD lower of 70%* 30,000=21,000; OR, 70%* 9000=6300 
5. 9000-6300=2700 
  
 
 
background image Q3. Dividends-Received Deduction 
General Rule: Corporations that own less than 20% of the distributing corporation’s 
stock may deduct 70% of the dividends received. If the shareholder corporation owns 
20% or more of the distributing corporation’s stock (both voting power and value) but 
less than 80% of such stock, it may deduct 80% of the dividends received. 
 
Example:  
Hale Corporation reports the following results in the current year: 
Gross income from operations $300,000 
Dividends from 15%-owned domestic corporation 100,000 
Operating expenses 280,000 
 
Note: 
Gross income from operations and expenses both pertain to qualified  production activities, so Hale’s qualified production activities income is $20,000 
($300,000 − $280,000). Hale’s dividends-received deduction is $70,000 (0.70 × 
$100,000).  
Thus, Hale’s taxable income is computed as follows:     
 
 
 

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School: University of Cincinnati
Department: Accounting
Course: Tax II
Professor: Pr.richshafer
Term: Fall 2016
Tags:
Name: 6072Tax II Exam 1 Questions Review
Description: These notes cover the Questions on the Exam 1 which are pointed out by the Professor, and the all the class Examples that the professor mentioned on the class. It also contains the Schedule M form for the last optional question.
Uploaded: 10/31/2016
17 Pages 50 Views 40 Unlocks
  • Better Grades Guarantee
  • 24/7 Homework help
  • Notes, Study Guides, Flashcards + More!
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