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.
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- Fall '15
- Taxation in the United States