Question

1.Explain the circumstances in which a corporation can use the accrual basis or the cash basis of accounting.

2.When must a corporate tax return be filed? Can a corporation receive an extension of time to file a return, and if so, what is the length of the extension?

3.An individual contributes property with a fair market value in excess of basis to a corporation un exchange for stock. What is the basis of the stock in the hands of the shareholder, and what is the basis of the property contributed in the hands of the corporation?

4.What criteria must a corporation meet to appropriately elect Subchapter S status?

Answer 1

1)Businesses prohibited from using the cash method include C corporations and partnerships with a C corporation partner, unless one of the following exceptions applies:

a)The average annual gross receipts for the previous three tax years are $5 million or less.
b)The business is a qualified personal service corporation. may it be a law or accounting firm or some othe entity whose stock is substantially owned by current or retired employees or their estates.
Special rules apply to agriculture businesss and are always prohibited from using the cash method.

The following types of businesses generally are required to use the accrual method:

a) construction firms and manufacturers which generally must use the percentage-of-completion method and other long term contractors
b)Businesses with inventories subject to some conditions

A case may be where business is made up of multiple businesses for which different rules will apply for each business

A business is permitted to use the cash method of accounting for tax purposes unless it is prohibited from using the cash method, or required to use the accrual method under law

2)

Corporation	Normal Return	Extension
Non Profit Corporation	Form 990 or 990EZ depending on gross receipts. The filing deadline is the 15th day of the fifth month after your tax year ends. If you follow calendar year, your return is due by May 15.	Application for Extension of Time to File in form Form 8868, to get a three-month extension. Deadline will be Aug. 15.
C & S Corporations	Required to file their income tax returns on the 15th day of the third month after the end of the tax year. For calendar-year corporations, the return is due by March 15. C corporations file corporate tax return in Form 1120 and S corporation file Form 1120S	To get an automatic six-month extension of time, file Form 7004, Application For Automatic Extension of Time & calendar year corporations have until Sept. 15 to file their income tax return.
LLCs Taxed as a Corporation	IC corporation, file Form 1120 by March 15 or S corporation, you must file Form 1120S, by March 15.	C and S corporations can file Form 7004 and get a six-month extension , due date on Sept. 15.

3)the basis of the stock in the hands of the shareholder is equal to the basis of the property contributed plus any gain recognized, minus any expenses which includes relief of liability .To the corporation the basis of the property is equal to the basis in the hands of the shareholder plus any gain recognized by the shareholder

4)Eligibility Criteria for S-Corporations

A corporation may choose to be taxed as an S-Corporation if it meets the following criteria:
a)The company has no more than 100 shareholders.
b)The company is a domestic corporation, or a domestic entity eligible to elect to be treated as a corporation that timely files Form 2553 and meets all the other requirements
c)The only shareholders are individuals, estates, certain exempt organizations
d) the only shareholders are US citizens and US residents
e)The company has only one class of stock
f)It is not one of the following corporations:
- bank using the reserve method of accounting for bad debts
-A corporation that has elected to be treated as a possessions corporation
-A current or former domestic international sales corporation
g)It has or will adopt or change to calender year or natural business year or a 52-53 week tax year
h)Each shareholder consents to the S-Corporation election.

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