Discussion question 17 6 lo 1 in general what is the

Discussion Question 17-6 (LO. 1)

In general, what is the limitation on the deductibility of business interest expense? What
happens to any business interest deduction disallowed under the limitation?
The limitation is the sum of (1) the taxpayer’s business interest income for the
year, (2) 30% of the taxpayer’s adjusted taxable income for the year, and (3) the
taxpayer’s floor plan financing interest for the year. Any business interest deduction
disallowed by the limitation is carried forward .
The TCJA of 2017 includes a limitation on the deduction for business interest that applies
to all taxpayers for tax years beginning after 2017. Business interest is interest paid or
accrued on trade or business debt. Although the limitation applies to all businesses, the
rules are most likely to affect large corporations and flow-through entities due to relief
provided to smaller businesses.
Discussion Question 17-7 (LO. 1)
Osprey Corporation, a closely held corporation, has $100,000 of net active income,
$25,000 of portfolio income, and a $120,000 loss from a passive activity.
If an amount is zero, enter "0".
a. If Osprey is a personal service corporation, it can deduct $ 0 of the passive activity
loss in the current year.
The passive activity loss rules apply to individual taxpayers and to closely held C
corporations and personal service corporations (PSCs). For S corporations and
partnerships, passive income or loss flows through to the owners, and the passive activity
loss rules are applied at the owner level.
b. If it is not a personal service corporation, Osprey can deduct $ 100000 of the passive
activity loss in the current year.
Discussion Question 17-10 (LO. 1, 2, 7)
Gold Corporation, a calendar year C corporation, was formed in 2012 and has been
profitable until the current year. In 2018, Gold incurs a net operating loss.
Identify the issues about NOLs that Gold Corporation should consider.
NOLs arising in a tax year ending after 2017 are carried forward indefinitely .
However, the NOL deduction for any carryover year is limited to 80% of taxable income
determined without regard to the NOL deduction.
Like the net operating loss (NOL) of an individual, the NOL of a corporation may be used
to offset taxable income for those future years.
Discussion Question 17-13 (LO. 4)
Omar, an individual in the 37% tax bracket, wants to shift some of his income to a new
corporation in order to take advantage of the 21% corporate tax rate. Omar plans to
avoid any tax on dividends by retaining all earnings within the corporation. Will Omar's
plan work?
Omar's ability to achieve tax savings by shifting income to a corporation may be limited
by either AET or PHC . Omar could be subject to a 20 % penalty tax on undistributed
income retained by the corporation.
The accumulated earnings tax is assessed on the current year’s corporate earnings that
have been accumulated without a reasonable business need. The personal holding
company (PHC) tax was enacted to discourage the sheltering of certain kinds of passive
income in corporations owned by individuals with high marginal tax rates.