Business Tax - Exam 1

Book-to-tax taxable income formula

Taxable income = book income + unfavorable differences − favorable differences. Memory hook: Unfavorable = Up; Favorable = Down.

Unfavorable book-tax difference

Add back to book income because taxable income is higher than book income.

Favorable book-tax difference

Subtract from book income because taxable income is lower than book income.

Permanent book-tax difference

A book-tax difference that never reverses.

Temporary book-tax difference

A book-tax difference that reverses over time.

Municipal bond interest book-tax treatment

Favorable permanent difference because it is included in book income but excluded from taxable income.

Life insurance death benefit on key employee

Favorable permanent difference because it is generally excluded from taxable income.

Life insurance premiums book-tax treatment

Unfavorable permanent difference because they are expensed for books but not deductible for tax.

50% nondeductible meals book-tax treatment

Unfavorable permanent difference because only part of the expense is deductible for tax.

Entertainment expense book-tax treatment

Unfavorable permanent difference because it is generally not deductible for tax.

Fines, penalties, and political contributions book-tax treatment

Unfavorable permanent differences because they are not deductible for tax.

Federal income tax expense book-tax treatment

Unfavorable permanent difference because federal income tax expense is not deductible for federal taxable income.

Dividends-received deduction book-tax treatment

Favorable permanent difference because it reduces taxable income but not book income.

Depreciation book-tax difference

Usually temporary because book and tax depreciation often differ but reverse over the asset’s life.

Bad debt expense book-tax difference

Usually temporary because book allowance methods and tax deduction rules differ.

Deferred compensation book-tax difference

Usually temporary because book expense may occur before the tax deduction.

Corporate taxable income formula

Corporate taxable income = gross income − deductions.

Corporate regular tax formula

Corporate regular tax = taxable income × 21%.

Corporate tax due or refund formula

Tax due or refund = regular tax + other taxes − credits − prepayments.

Corporate charitable contribution limit

Charitable contribution deduction limit = 10% × modified taxable income.

Charitable contribution modified taxable income

Modified taxable income = taxable income before charitable contributions, DRD, and net capital loss carrybacks.

Corporate charitable contribution deduction

Deductible contribution = lesser of actual contribution or 10% of modified taxable income.

Corporate charitable contribution carryover

Carryover = actual contribution − deductible contribution; excess carries forward 5 years.

Charitable contribution property rule: capital gain property

Deduction is generally fair market value.

Charitable contribution property rule: ordinary income property

Deduction is generally adjusted basis.

Accrual-method corporation charitable contribution timing

Deduct when accrued if approved by the board before year-end and paid within 3.5 months after year-end.

DRD ownership percentage: less than 20%

DRD percentage = 50%.

DRD ownership percentage: at least 20% but less than 80%

DRD percentage = 65%.

DRD ownership percentage: 80% or more

DRD percentage = 100%.

Tentative DRD formula

Tentative DRD = dividend income × DRD percentage.

DRD limitation formula

DRD limit = DRD modified taxable income × DRD percentage.

Allowed DRD formula

Allowed DRD = lesser of tentative DRD or DRD limit.

DRD modified taxable income

Modified taxable income = taxable income before DRD, before any NOL, and before capital loss carrybacks.

Special DRD NOL rule

If the full DRD creates or increases an NOL, the taxable income limitation does not apply.

Corporate net capital loss formula

Net capital loss = capital losses − capital gains.

Corporate net capital loss rule

No current deduction for net capital losses.

Corporate capital loss carry rules

Net capital losses carry back 3 years and forward 5 years.

Corporate capital loss ordering rule

Use capital loss carryovers FIFO, meaning oldest first.

Book-tax treatment in year of net capital loss

Unfavorable temporary difference.

Book-tax treatment when capital loss carryback/carryforward is used

Favorable temporary difference.

Pre-2018 corporate NOL rule

Carry back 2 years, carry forward 20 years, offset up to 100% of taxable income.

Post-2017 corporate NOL rule

No carryback, carry forward indefinitely, limited to 80% of taxable income.

Corporate NOL ordering rule

Deduct NOLs FIFO, meaning oldest first.

Post-2017 NOL deduction formula

Deduction = lesser of available post-2017 NOL carryover or 80% × taxable income before post-2017 NOL deduction.

Corporate estimated tax threshold

Corporations must make estimated payments if federal income tax liability is $500 or more.

Corporate estimated tax due dates

Estimated payments are due on the 15th day of the 4th, 6th, 9th, and 12th months.

Corporate estimated tax cumulative percentages

Required cumulative payments are 25%, 50%, 75%, and 100%.

Required estimated tax installment formula

Required installment = required cumulative payment − prior cumulative payments.

Required annual payment safe harbor

Required annual payment is generally 100% of prior-year tax or 100% of current-year tax.

Prior-year safe harbor limitation

Prior-year safe harbor does not apply if there was no prior-year tax liability.

Large corporation estimated tax rule

Large corporations may generally use prior-year tax only for the first quarterly payment.

Annualized taxable income formula

Annualized taxable income = taxable income for the test period × annualization factor.

Annualization factor for first quarter

12 ÷ 3 = 4.

Annualization factor for second quarter

12 ÷ 3 = 4.

Annualization factor for third quarter

12 ÷ 6 = 2.

Annualization factor for fourth quarter

12 ÷ 9 = 1.3333.

Schedule M-1 purpose

Reconciles book income to taxable income for smaller corporations.

Schedule M-3 purpose

Reconciles book income to taxable income for larger corporations with more detailed reporting.

M adjustments

Book-tax differences reported on Schedule M-1 or M-3.

Corporate return form

C corporations file Form 1120.

Corporate return due date

Generally due 3.5 months after the close of the tax year.

Calendar-year corporate return due date

April 15, with an automatic six-month extension generally to October 15.

Business interest expense limitation

Deductible net business interest expense is limited to 30% × adjusted taxable income.

Disallowed business interest expense

Carried forward indefinitely.

Gross receipts exception to business interest limitation

Corporations with average annual gross receipts of $31 million or less over the prior 3 years are not subject to the limitation.

QBI basic formula

QBI deduction starts as 20% × qualified business income.

QBI taxable income limitation

QBI deduction cannot exceed 20% × taxable income before QBI deduction taxed at ordinary rates.

Final QBI deduction formula

Final QBI deduction = lesser of tentative QBI deduction or taxable income limitation.

QBI ordinary-rate income base

Taxable income before QBI deduction minus net capital gains and qualified dividends.

QBI wage/property limitation

QBI deduction cannot exceed the greater of 50% of W-2 wages or 25% of W-2 wages + 2.5% of UBIA of qualified property.

QBI wage-only limit

50% × W-2 wages.

QBI wage-plus-property limit

25% × W-2 wages + 2.5% × UBIA of qualified property.

SSTB meaning

Specified service trade or business.

SSTB phaseout formula

Phaseout percentage = taxable income over threshold ÷ phase-in range.

SSTB allowed percentage formula

Allowed percentage = 100% − phaseout percentage.

2025 SSTB threshold for MFJ

$394,600.

2025 SSTB phase-in range for MFJ

$100,000.

2025 SSTB threshold for non-MFJ

$197,300.

2025 SSTB phase-in range for non-MFJ

$50,000.

QBI memory hook

QBI starts at 20, then gets squeezed by taxable income, wages/property, and SSTB limits.

Self-employment net earnings formula

Net earnings from self-employment = self-employment income × 92.35%.

Self-employment tax formula

SE tax = 12.4% Social Security tax up to the wage base + 2.9% Medicare tax on all net earnings.

2025 Social Security wage base for SE tax

$176,100.

Self-employment tax deduction

SE tax deduction = 50% × SE tax.

S corporation income allocation and SE tax

S corporation business income allocations are not subject to self-employment tax.

Partnership active owner income and SE tax

Active partnership income is generally self-employment income.

Guaranteed payments and SE tax

Guaranteed payments to partners are self-employment income.

Guaranteed payments and QBI

Guaranteed payments are not eligible for the QBI deduction.

C corporation double-tax formula

Overall tax rate = corporate tax rate + [(1 − corporate tax rate) × shareholder dividend tax rate].

C corporation tax rate

21%.

C corporation after-tax earnings formula

After-tax earnings = corporate taxable income × (1 − 21%).

Shareholder dividend tax formula

Shareholder tax = after-tax corporate earnings × dividend tax rate.

Total C corporation income tax burden

Total tax = corporate-level tax + shareholder-level tax.

C corporation double tax memory hook

First the corporation pays tax, then shareholders pay tax on dividends.

Flow-through entity income rule

Income is taxed to the owners, not the entity.

Flow-through basis rule

Income allocated to owners increases basis.

Flow-through distribution rule

Distributions are generally nontaxable return of capital to the extent of basis.

C corporation income and stock basis

Entity income and dividend distributions do not affect shareholder stock basis.

Flow-through loss limitation order

Basis → at-risk → passive activity → excess business loss.

Flow-through loss limitation mnemonic

BAPE = Basis, At-risk, Passive, Excess business loss.