3. Partially taxable. Bad debts are not deductible even for an accrual basis taxpayer, unless specifically written off. Therefore, only recovery of bad debts that were specifically written off in previous years, are taxable as income in the current period. In this case, Kimberly Corp. is an accrual basis taxpayer and uses aging of accounts receivable method to determine its amount of bad debts. If Kimberly, had previously written off certain bad debt, then the recovery would be included in income to the extent taxpayer received a tax benefit from the deduction in the prior year. Therefore, it is partially taxable.

5. Non-taxable. Insurance proceeds on key person life insurance are considered non-taxable income for income tax purposes. Here the Vice president of Kimberly is a key person and the proceeds went to Kimberly Corp. itself who is the beneficiary.

1. Personal Holding Company: A C corporation is a Personal Holding Company (PHC) if it derives at least sixty percent of its adjusted gross income from passive sources i.e.. dividends, interest, adjusted rents, royalties etc. and more than fifty percent of the value of its outstanding stock is owned (directly or indirectly) by five or fewer individuals at any time during the last half of the taxable year.

2. Global Intangible Low-Taxed Income (GILTI): GILTI has been introduced by TCJA to discourage corporations from moving intangibles outside of the U.S. and then bringing back foreign earnings tax-free. A US Shareholder who has 10% or more interest in a CFC (Controlled Foreign Corporation) is subject to the GILTI tax. It is computed as:
   
   

Prorate share of US Shareholder’s net CFC tested income over such shareholder’s net deemed tangible return, where net deemed tangible return = 10% of shareholder’s pro-rata share of Qualified Business Asset Investment over Interest Expense

3.Base Erosion Anti-abuse Tax (BEAT): Introduced by TCJA, BEAT acts as a limited-scope AMT by adding back certain deductible payments made to related foreign persons. It was also introduced as a deter U.S. corporations from eroding their U.S. tax base by paying tax-deductible expenses to their foreign affiliates and then receiving back tax-free dividends. BEAT applies if:

Corporation had gross receipts of at least $500 million in any one of the 3 tax years preceding the current tax year, and

Base erosion % is at least 3% (2% in the case of banks and securities dealers)

Base erosion % = Base Erosion tax benefits / Aggregate deductions of the corporation

4. C Corp: 100% deductible without any limitation; A C corporation is allowed to deduct health insurance premium paid for its employees, spouse and their dependents on its tax return without any limitation.

4. Sole Prop: 100% deductible as an adjustment to gross income A sole proprietor can deduct 100% of the health insurance premium paid for self, spouse and any dependents as an adjustment to gross income (Mnemonic: WISHES Et All)

6) $65,000 – Action Corp.’s taxable income before applying Dividend Received Deduction (DRD) will be $80,000 taxable income + $10,000 dividend income = $90,000. Since, Action owns less than 20% of the investee corporation (10%), its DRD will be equal to $10,000 x 50% = $5,000. Note, that Net Operating Loss (NOL) carryover from prior years is not used in computing the DRD. However, it is used in computing the overall taxable income. Accordingly, taxable income of Action Corp will be $80,000 preliminary taxable income + $10,000 dividend income – $5,000 DRD – $20,000 NOL carryover = $65,000.

TCJA Update: Corporations generating NOL after 2018, can no longer carryback the loss. The loss can be carried forward indefinitely, and the deduction of loss is limited to the lesser of (1) the aggregate of NOL carryover to such year or (2) 80% of taxable income without regard to the deduction allowed. This rule however, does not apply to farming losses and insurance companies other than life insurance companies who can still carry back the NOL 2 years or forward 20 years as set by the prior law.

The Coronavirus Aid, Relief and Economic Security Act (‘the CARES Act’) update – CARES Act amended this provision of excess business losses in the following manner:

· NOLs generated in the years 2018, 2019 and 2020 may be carried back to the preceding 5 years. Taxpayer can choose to not carry back the NOL. The Consolidated Appropriations Act (CAA) allows taxpayers with farming losses to elect out of the special 5-year NOL carryback tax treatment for 2018, 2019, and 2020.

· The 80% taxable income limit is suspended for NOL carryovers for 3 years. The limit will not apply to tax years beginning 2018, 2019, 2020, i.e., NOL carried over to 2018,2019,2020 are not subject to the 80% of taxable income for those years.

8) $63,000 - Since Action Corp. owns more than 20% but less than 80% of Investee Corporation, its DRD will be equal to the lesser of (i) 65% (lowered from 80% per TCJA) of the dividend income or (2) 65% of taxable income. Accordingly, Action Corp.’s DRD should be based on the lower taxable income of $180,000 [$(20,000) + $200,000 Dividend income] i.e. 65% x $180,000 = $117,000 and its taxable income after DRD will be $(20,000) preliminary taxable income + $200,000 dividend income – $117,000 DRD = $63,000.

Therefore, Anita qualifies to be part of the control group. Accordingly, the formation of FIA Inc., meets the requirement of Sec 351 transaction and none of the shareholders would recognize any gains or losses on transfer of property, except under circumstances listed above.

2. No effect on E&P: Unrealized losses at the end of the year on securities owned, do not have any effect on taxable income. Though these losses are recorded in the books for GAAP purposes, for purposes of determining the ability of the corporation to pay dividends, it does not affect the current E&P.

7. Add to taxable income (increase E&P): As life insurance policies mature, the cash surrender value may increase more than the annual premium. The current year increase over the premium is non-taxable income,but constitutes earnings and profits available for distribution (Rev-Ruling 54-230). Therefore, it must be added to taxable income to arrive at E&P.

When there are multiple distributions in a year or when total distributions exceed CEP, as in the case of Alaska Inc.,

(i) Allocation out of CEP must be on a pro-rata basis for each distribution and

(ii) Allocation out of AEP must be in chronological order

3. Partially taxable. Bad debts are not deductible even for an accrual basis taxpayer, unless specifically written off. Therefore, only recovery of bad debts that were specifically written off in previous years, are taxable as income in the current period. In this case, Kimberly Corp. is an accrual basis taxpayer and uses aging of accounts receivable method to determine its amount of bad debts. If Kimberly, had previously written off certain bad debt, then the recovery would be included in income to the extent taxpayer received a tax benefit from the deduction in the prior year. Therefore, it is partially taxable.

a) $4,500 reimbursement of employee's expenses for business meals purchased from restaurant.

c) $1,750 for business travel which includes $500 for employee's meals purchased from a restaurant, $650 for employee's lodging and $200 travel expense for employee's spouse and remaining $400 other transportation and incidental expenses of the employee.

The reimbursed expenses were properly substantiated under an accountable plan and were not treated as employee compensation

3. $3,950, Increase: As per the Tax Cut and Jobs Act (TCJA), business meals are 50% deductible only if they directly relate with the conduct of business and do not include any entertainment value. Also as per TCJA, starting 2018, business entertainment expenses are non-deductible even if they are associated with the business (50% deductible earlier). Expenses incurred during business travel lodging and transportation and incidental expenses are 100% deductible except meals that is 50% deductible. Also, no deduction is allowed for personal portion of employee expenses, such as the transportation expenses of the employee spouses, unless the spouse is an employee of the corporation.

The Consolidated Appropriations Act (CAA) of 2020 revised the provision to have businesses claim 100% deduction for food and beverage purchased from a restaurant for 2021 and 2022. This includes carry-out and delivery meals. However, the increased deductibility of business meals expenses is temporary and applies only with respect to amounts paid or incurred after December 31, 2020, and before January 1, 2023. Other requirements for deductibility like the expense being ordinary and necessary and incurred in carrying out a trade or business remain intact.

Accordingly, an M-1 adjustment would be required for 100% of entertainment expenses of $3,750 and 100% of spouse's travel of $200, for a total of $3,950. This would have an effect of increase on the taxable income.