reg3

REGULATION 3C Corporation and 5 Corporation Taxation

1. C corporations, depreciation, and MACRS 3

2. Small business corporations (S corporations) 52

3. Exempt organizations 60

4. Class questions 77

NOTE TO REGULATION STUDENTS

Becker Professional Education is committed to keeping you up-to-date with the most recent effects of changes in the tax

law. The impact of the current economic environment and other factors have resulted in tax law changes that are

continually superseding, amending, and/or clarifying several portions of the Internal Revenue Code. We expect this to

continue throughout 2009 and 2010. Depending on the timing of your particular exam [Note that tax law in effect 6 months

prior to your exam is "fair game" for testing.], periodic updates to the 2010 Regulation textbooks may be required. Please

be sure to check the Regulation Course Updates posted on the Becker Knowledgebase

(www.beckercpa.com/knowledgebase). You can subscribe to automatic e-mail notification of updates by clicking on the

"Notify me by email ... " button on the Course Updates page.

2011 CPA review and final review are available at www.CPAsimulations.com WWW.BECKERCPA.COM

Regulation 3

R3-2

NOTES

Becker Professional Education I CPA Exam Review

©2010 DeVry/Becker Educational Development Corp. All rights reserved.

WWW.BECKERCPA.COM

Becker Professional Education I CPA Exam Review Regulation 3

I.

IHide IT I

(c COR P0 RA TI 0 N 5) 0 EPRE CI A TI 0 N, AND MAC R5

Formation

b. Reacquisition - Purchase of treasury stock.

c. Resale - Sale of treasury stock.

Basis of Property (corporation receives)

The general rule is that the basis of the property received from thetransferor/shareholder is the greater of:

2.

a. Formation - Issuance of common stock.

a. Adjusted basis (net book value) of the transferor/shareholder (plus any gainrecognized by the transferor/shareholder), or

Debt assumed by corporation (transferor may recognize gain to prevent anegative basis).

PASS KEY: SPECIAL RULE - EXCEPTION TO GENERAL RULE

If the aggregate adjusted basis of property contributed to a corporation by eachtransferor/shareholder in a tax-free incorporation exceeds the aggregate fair market value ofthe property transferred, the corporation's basis in the property is limited to the aggregate fairmarket value of the property. (This prevents the transfer of property with "built-in losses" tothe corporation.)

[ a.

b.

B. Shareholder ~ax Consequences

No Gain or Loss Recognized

The shareholder contributing property (not services) in exchange for corporationcommon stock has no gain or loss if the following two conditions have been met:

80% Control

Immediately after the transaction, those transferors/shareholders own at least80% of the voting stock and at least 80% of the non-voting stock.

Boot Not Involved (received)

The following items represent boot (taxable) and will trigger gain recognition:

(1) Cash withdrawn (boot received may generate gain to transferor) and

(2) Receipt of debt securities (e.g., bonds)

-t-- Note regarding C.O.D. (cancellation of debt) - The amount of liabilities assumed

~hat exceeds the adjusted basis of the total assets transferred to the corporation

is not boot (per se) but does generate gain.

NBV Assets<Liabilities>Excess Liability = Boot

©2010 DeVry/Becker Educational Development Corp. All rights reserved. R3-3


Regulation 3 Becker Professional Education I CPA Exam Review

2. Basis of Common Stock (to shareholder)

The basis of common stock received from the corporation will be:

PASS KEY

Cash - Amount contributed

Property - Adjusted basis (NBV)

(1) The adjusted basis of property is reduced by any debt on the property(e.g., C.O.D.) assumed by the corporation

(2) Gain recognized by the shareholder (i.e., when debt exceeds the asset'sadjusted basis) is added to bring the stock basis to zero.

Services - Fair Market Value (taxable)

Ordinary income (taxable) - The shareholder receiving common stock forservices rendered must recognize the fair market value as ordinary income.[Note: A shareholder who contributes only services is not counted as part of thecontrol group for purposes of the 80% controL]

The general rule for taxable events and basis

applies to corporations:

Detailed Alternate Computation of Basis to Shareholder

Adjusted basis of transferred property

+ FMV of services rendered

+ Gain recognized by shareholder

Cash received

Liabilities assumed by the corporation

- FMV of non-money boot received

Basis of common stock

EXAMPLE

FMV

NBV

BasisIncome

FMV

N-O-N-E

TRANSACTIONS

Event

Taxable

Nontaxable

Asset NBV a.

<'Liel\billty;> b.

l\\et bel\sis i,,- st"ck

The ABC Company admits Tim as a 1/3 shareholder. Tim contributes a bUilding worth $500,000 but having a

basis of $100,000. There is a mortgage of $225,000 on the building, assumed by the corporation.

- (ovr. :: ~L\btv~c+ \00%ll~bl1lry

- P~vh\evShlr :: ~L\b ~ct%1l bl1lry

$lOO,OOO

$500,000

$225,000

"Net basis" (if below zero, gain)

2000 Cost:

Mortgage:

"Rollover" cost basisLiabilities assumed by corporation

FMVToday:

>

BAS I S

$ \00,000< 225",000

$ - \25",000

-Illlld-.....;r.;..>'f:!'_-'

Basis - Of Shareholder Tim's Common Stock

~$~~\~2~5"~,~0~0~0~~======~G;a;in~-~T;ax;a;b;le~t~o~S~h;a~re;h;o~ld;e~r ~Ti;m~====~ ~$ - 0 -

$ 225",000 Basis - Corporation Has in Asset

R3-4;/

~h~vehol~ev

~sset ~B\J

\2010 DeVry/Becker Educational Development Corp. All rights reserved.

\..l~"m+y~SSL\"",e~

WWW.BECKERCPA.COM

Equipment

Building

Inventory


EXAMPLE

Olinto forms a corporation and contributes the following:

AdjustedBasis

$ 40,000

20,000

80,000

$140,000

Olinto received 100 shares of stock with the following results:

(i) Gain realized by Olinto

Regulation 3

Amount realizedAdjusted basisGain realized

(ii) Gain recognized by Olinto

$260,000(140,000)$120,000

o

(iii) Olinto's stock basis (see alternate computation)

Old basisLess: BootAdd: Recognized gainNew basis of stock

(iv) Basis to corporation

Tra nsferor's basis

Add: Gain recognizedBasis of asset

$140,000oo

$140,000

$140,000o

$140,000

EXAMPLE

Gearty forms a corporation and contributes property with a basis of $140,000 subject to a $60,000 mortgage,as shown below:

Assets with $60,000 mortgage

AdjustedBasis

$140,000

Gearty received 100 shares of stock with the following results:

(i) Gain realized by Gearty

Amount realizedAdjusted basisGain realized

$260,000(140,000)$120,000

(ii) No gain recognized - no boot received/liabilities do not exceed basis

(iii) Gearty's stock basis (see alternate computation)

Old basis $140,000Less: Liability assumed by corporation (60,000)Add: Recognized gain 0New basis of stock $ 80,000

(iv) Basis to corporation

Transferor's basisAdd: Gain recognizedBasis of asset


$140,000o

$140,000

R3-S



II. OPERATIONS

A. Book Income vs. Taxable Income (Schedule M-1)

GROSS INCOMEIncome from continuing

operations before

taxes

FinancialStatement

INCOME

< EXPENSE>

NIBT

<TAX>

NIAT

TaxReturn

Formation

Operations

Taxation

Distributions

Liquidation

Discontinued

operations,

net of tax

INCOME

< EXPENSE>NIBT - TAX = NIAT < DEDUCTIONS>

Accounting adjustment

and changes, net oftax (to retained

earnings)

A

B

< CHARITY >NIAT Pev"",~\\e\\t&

te""'pov~vy

I I< DIV. REC. DED.>

NET INCOME ~ REC~~lCILE ---- TAXABLE INCOME

- TAX =

INCOME

< EXPENSE>NIBT

Extraordinary gain

< loss >, net of tax

[Note: Schedule M-l does not distinguish between temporary and permanent differences. Part II of the

Schedule M-3 does, however. Please refer to the tax forms on the next several pages.]

-re"",pov~vyAl-P-PeVe\\ceS

B. Determination of Corporate Taxable Income/Loss Items

Corporations are taxed in a manner similar to that of individual taxpayers. Many provisionsare the same for both groups; however, some differences exist. Some of the principaldifferences are presented below.

1. Gross Income

The concept of gross income is very similar for both corporations and individuals.

a. Cash received in advance of accrual GAAP income is taxed, such as:

(1) Interest income received in advance.

(2) Rental income received in advance. (Nonrefundable rent deposits andlease cancellation payments are rental income when received.)

Pev"",~\\e\\tAl-P-PeVe\\ceS

(3) Royalty income received in advance.

b. Some GAAP income items are not includible as taxable income, such as:

(1) Interest income from municipal or state obligations/bonds.

(2) Proceeds from life insurance on the life of an officer ("key person" policy)where the corporation is the beneficiary.

R3-6 ©201O DeVry/Becker Educational Development Corp. All rights reserved.

WWW.BECKERCPA.COM


Form 1120 u.s. Corporation Income Tax Return OMS No. 1545-0123

Department of the TreasuryFor calendar year 2009 or tax year beginning ------ ------ ------- ' 2009, ending ---- ----------- --_.,20 ----- ~@O9Internal Revenue Service ~ See separate instructions.

A Check if: Name B Employer identification number1a Consolidated return

Use IRS(attach Form 851) 0b Life/nonlife consoli- label. Number, street, and room or suite no. If a P.O. box, see instructions. C Date incorporated

dated return . 0 OUlerwise,2 Personal holding co. print or

(attach Sch. PH) . 0 type. City or town, state, and ZIP code o Total assets (see instructions)3 Personal service corp.

0 $ I(see instructions) .4 Schedule M-3 attached D E Check if: (1) D Initial return (2) D Final return (3) D Name change (4) D Address change

la Gross receipts or sales I I I b Less returns and allowances I I I c Sal ~ lc

2 Cost of goods sold (Schedule A, line 8) 2

3 Gross profit. Subtract line 2 from line 1c 3

4 Dividends (Schedule C, line 19) 4.. 5 Interest 5E0 6 Gross rents 6(,)

.E 7 Gross royalties 7

8 Capital gain net income (attach Schedule D (Form 1120)) 8

9 Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) 9

10 Other income (see instructions-attach schedule) 1011 Total income. Add lines 3 through 10 ~ 11

-;;r 12 Compensation of officers (Schedule E, line 4) ~ 12c:

13 Salaries and wages (less employment credits) 130

~ 14 Repairs and maintenance 14::l"tl

Bad debts... 15 15"tlc: 16 Rents 160.,

17 Taxes and licenses 17c:0

~ 18 Interest 18

~ 19 Charitable contributions. 19~ 20 Depreciation from Form 4562 not claimed on Schedule A or elsewhere on return (attach Form 4562) 20

.S!., 21 Depletion 21c:0 22 Advertising 22~::l 23 Pension, profit-sharing, etc., plans 23~

24 Employee benefit programs 24.!:.. 25 Domestic production activities deduction (attach Form 8903) 25..!!l. 26 Other deductions (attach schedule) 26lIJc:

27 Total deductions. Add lines 12 through 26 ~ 270:g

28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11 28::l

I"tl29 Less: a Net operating loss deduction (see instructions) l29a I..

Qb Special deductions (Schedule C, line 20) I29b 29c

.l!l 30 Taxable income. Subtract line 29c from line 28 (see instructions) 30c:.. 31 Total tax (Schedule J, line 10) . 31E'" 32a 2008 overpayment credited to 2009 !i ~dBal~'"D."tl b 2009 estimated tax paymentsc:'" 2009 refund applied for on Form 4466 32d:& c 32c

"tl e Tax deposited with Form 7004 32el!!

Credits: (1) Form 2439 I (2) Form 4136 I(,) f 321.!!!.c 9 Refundable credits from Form 3800, line 19c. and Form 8827, line 8c 32a 32h'""tl 33 Estimated tax penalty (see instructions). Check if Form 2220 is attached ~ D 33c:~ 34 Amount owed. If line 32h is smaller than the total of lines 31 and 33, enter amount owed 34a:x 35 Overpayment. If line 32h is larger than the total of lines 31 and 33, enter amount overpa1id 35'".... 36 Enter amount from line 35 vou want: Credited to 2010 estimated tax ~ Refunded ~ 36

Under penalties of perjury, I declare that I have examined this return. including accompanying schedules and statements, and to the best of my knowledge and belief, it is true,

Sign correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. IMay the IRS discuss this return )IHere ~ Signature of officer

I ~with the preparer shown below

Date Title{see instructionsj?D Yes D No

Paid Preparer's

~I Date I Check If self- D I Preparer's SSN or PTIN

signature employedPreparer's

Firm's name (or yours if

~1 EINUse Only self-employed), address, I Phone no.and ZIP code

For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 114500 Form 1120 (2009)

© 2010 DeVry/Becker Educational Development Corp. All rights reserved. R3-7



'FOrii11120 (2009) Page 2-. Cost of Goods Sold (see instructions)

1 Inventory at beginning of year 1

2 Purchases 2

3 Cost of labor 3

4 Additional sec1ion 263A costs (a1tach schedule) 4

5 Other costs (a1tach schedule) 5

6 Total. Add lines 1 through 5 6

7 Inventory at end of year 7

8 Cost of goods sold. Subtract line 7 from line 6. Enter here and on page 1, line 2 8

9a Check all methods used for valuing closing inventory:

(ij D Cost

{iO D Lower of cost or market

{iiO D Other (Specify method used and a1tach explanation.) ~ ----------------------------------------------------------------------------------------------b Check if there was a writedown of subnormal goods ~ Dc Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) .~ Dd If the LIFO inventory method was used for this tax year, enter percentage (or amounts) of closing

inventory computed under LIFO I 9d I Ie If property is produced or acquired for resale, do the rules of section 263A apply to the corporation? DYes D No

f Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If "Yes,"attach explanation DYes D No

-. - Dividends and Special Deductions (see instructions) (a) Dividends (e) Special deductionsreceived

(b) % (a) x (b)

1 Dividends from less-than-20%-owned domestic corporations (other than debt-financedstock) 70

2 Dividends from 20%-or-more-owned domestic corporations (other than debt-financedstock) 80

3 Dividends on debt-financed stock of domestic and foreign corporations .see

instructions

4 Dividends on certain preferred stock of less-than-20%-owned public utilities 42

5 Dividends on certain preferred stock of 20%-or-more-owned public utilities. 486 Dividends from less-1han-20%-owned foreign corporations and certain FSCs 707 Dividends from 20%-or-more-owned foreign corporations and certain FSCs 808 Dividends from wholly owned foreign subsidiaries 1009 Total. Add lines 1 through 8. See instructions for limitation

10 Dividends from domes1ic corporations received by a small business investmentcompany operating under the Small Business Investment Act of 1958 100

11 Dividends from affiliated group members 10012 Dividends from certain FSCs 10013 Dividends from foreign corporations not included on lines 3, 6, 7, 8, 11, or 12

14 Income from controlled foreign corporations under subpart F (attach Form(s) 5471)

15 Foreign dividend gross-up

16 IC-DISC and former DISC dividends not included on lines 1,2, or 3

17 Other dividends

18 Deduction for dividends paid on certain preferred stock of public utilities

19 Total dividends. Add lines 1 through 17. Enter here and on page 1, line 4 ~

20 Total special deductions. Add lines 9, 10, 11, 12, and 18. Enter here and on page 1, line 29b ~.. Compensation of Officers (see instructions for page 1, line 12)Note: Complete Schedule E only if total receipts (line 1a plus lines 4 through lOon page 1) are $500, 000 or more.

(c) Percent of Percent of corporation stock owned(a) Name of officer (b) Social security number time devoted to (I) Amount of compensationbusiness (d) Common (e) Preferred

1 % % %

% % %

% % %

% % %

% % %

2 Total compensation of officers

3 Compensation of officers claimed on Schedule A and elsewhere on return4 Subtract line 3 from line 2. Enter the result here and on page 1, line 12

Form 11 20 (2009)

R3-8 © 2010 DeVry/Becker Educational Development Corp. All rights reserved.

WWW.BECKERCPA.COM


~iiiJ&IPage 3

Tax Computation (see instructions)1 Check if the corporation is a member of a controlled group (attach Schedule a (Form 1120)) . ~ D 1-

2 Income tax. Check if a qualified personal service corporation (see instructions) . ~ D 2

3 Alternative minimum tax (attach Form 4626) 3

4 Add lines 2 and 3 4

5a Foreign tax credit (attach Form 1118) 5a

b Credit from Form 8834, line 29 5b

c General business credit (attach Form 3800) 5c

d Credit for prior year minimum tax (attach Form 8827) 5d

e Bond credits from Form 8912 5e

6 Total credits. Add lines 5a through 5e 6

7 Subtract line 6 from line 4 7

8 Personal holding company tax (attach Schedule PH (Form 1120)) . 8

9 Other taxes. Check if from: D Form 4255 D Form 8611 D Form 8697 1-

D Form 8866 D Form 8902 D Other (attach schedule) 910 Total tax. Add lines 7 through 9. Enter here and on page 1, line 31 10••. •. Other Information (see instructions)

1 Check accounting method: a D Cash b D Accrual c D Other (specify) ~---- ----- ---- ------ ------ ----- ------ ----- Yes No

2 See the instructions and enter the:

a Business activity code no. ~----------------------------------------------------------------------------------------------------------------------

b Business activity ~----------------------------------------------------------------------------------------------------------------------------------

c Product or service ~------------------------------------------------------------------------------------------------------------------------------_.

3 Is the corporation a subsidiary in an affiliated group or a parent-subsidiary controlled group?If "Yes," enter name and EIN of the parent corporation ~

------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------------------

4 At the end of the tax year:

a Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), trust, or tax-exemptorganization own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the

corporation's stock entitled to vote? If "Yes," complete Part I of Schedule G (Form 1120) (attach Schedule G) .

b Did any individual or estate own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of allclasses of the corporation's stock entitled to vote? If "Yes", complete Part II of Schedule G(Form 1120) (attach Schedule G)

5 At the end of the tax year, did the corporation: Yes No

a Own directly 20% or more, or own, directly or indirectly. 50% or more of the total voting power of all classes of stock entitled to vote ofany foreign or domestic corporation not included on Form 851, Affiliations Schedule? For rules of constructive ownership, see instructionsIf "Yes," complete (i) through (iv).

(i) Name of Corporation(ii) Employer (iii) Country of (iv) Percentage

Identification Number Incorporation Owned in Voting(if any) Stock

Form 1120 (2009)




Form 1120 (2009) Page 5· . · Balance Sheets per Books Beginning of tax year End of tax year

Assets (a) (b) (e) (d)

1 Cash

2a Trade notes and accounts receivable Ib Less allowance for bad debts ( ) ( )

3 Inventories

4 U.S. government obligations

5 Tax-exempt securities (see instructions)

6 Other current assets (attach schedule) .

7 Loans to shareholders

8 Mortgage and real estate loans

9 Other investments (attach schedule)

10a Buildings and other depreciable assets Ib Less accumulated depreciation. ( ) ( )

11a Depletable assets .

b Less accumulated depletion. ( ) ( )

12 Land (net of any amortization)

13a Intangible assets (amortizable only)

b Less accumulated amortization ( ) ( )

14 Other assets (attach schedule)15 Total assets

Liabilities and Shareholders' Equity I16 Accounts payable.

17 Mortgages, notes, bonds payable in less than 1 year

18 Other current liabilities (attach schedule)

19 Loans from shareholders.

20 Mortgages, notes, bonds payable in 1 year or more

21 Other liabilities (attach schedule)

22 Capital stock: a Preferred stock Ib Common stock

23 Additional paid-in capital.

24 Retained earnings-Appropriated (attach schedule)

25 Retained earnings-Unappropriated

26 Adjustments to shareholders' equity (attach schedule)

27 Less cost of treasury stock i( ) ( )

28 Total liabilities and shareholders' equity· . · Reconciliation of Income (Loss) per Books With Income per Return

Note: Schedule M-3 required instead of Schedule M-1 if total assets are $10 million or more-see instructions

1 Net income (loss) per books . 7 Income recorded on books this year2 Federal income tax per books not included on this return (itemize):

3 Excess of capital losses over capital gains Tax-exempt interest $----------------

4 Income subject to tax not recorded on books ----------------------------------------------

this year (itemize):____________________________________.----------------------------------------------

---------------------------------------------------------- 8 Deductions on this return not charged

5 Expenses recorded on books this year not against book income this year (itemize):

deducted on this return (itemize): a Depreciation $-----------------

a Depreciation $---- ----- - ----- --- ----

b Charitable contributions $-----------------

b Charitable contributions $ ---- ----- - ----- --- ---- ----------------------------------------------e Travel and entertainment. $

---- ----- - ----- --- ---- ----------------------------------------------

----------------------------------------------------------9 Add lines 7 and 8

6 Add lines 1 through 5 . 10 Income (page 1, line 28)-line 6 less line 9· . · Analysis of Unappropriated Retained Earnings per Books (Line 25, Schedule L)

1 Balance at beginning of year 5 Distributions: a Cash

2 Net income (loss) per books . b Stock

3 Other increases (itemize):--------------------------

e Property

---------------------------------------------------------- 6 Other decreases (itemize):----------------

----------------------------------------------------------7 Add lines 5 and 6

4 Add lines 1, 2, and 3 8 Balance at end of year (line 4 less line 7)

Form 1120 (2009)


WWW.BECKERCPA.COM


SCHEDULE M-3 Net Income (Loss) Reconciliation for Corporations OMS No. 1545-0123

(Form 1120) With Total Assets of $10 Million or More~(Q)09Department of the Treasury ~ Attach to Form 1120 or 112O-C.

Internal Revenue Service ~ See seoarate instructions.Name of corporation (common parent. if consolidated return) I Employer identification number

Check applicable box(es): (1) 0 Non-consolidated return (2) 0 Consolidated return (Form 1120 only)

(3) 0 Mixed 1120/UPC group (4) 0 Dormant subsidiaries schedule attached

ImI Financial Information and Net Income (Loss) Reconciliation (see instructions)

la Did the corporation file SEC Form 10-K for its income statement period ending with or within this tax year?

o Yes. Skip lines 1band 1c and complete lines 2a through 11 with respect to that SEC Form 10-K.o No. Go to line 1b. See instructions if multiple non-tax-basis income statements are prepared.

b Did the corporation prepare a certified audited non-tax-basis income statement for that period?o Yes. Skip line 1c and complete lines 2a through 11 with respect to that income statement.

o No. Go to line lc.e Did the corporation prepare a non-tax-basis income statement for that period?

o Yes. Complete lines 2a through 11 with respect to that income statement.o No. Skip lines 2a through 3c and enter the corporation's net income (loss) per its books and records on line 4a.

2a Enter the income statement period: Beginning MM/DDIYYYY Ending MM/DDIYYYYb Has the corporation's income statement been restated for the income statement period on line 2a?

o Yes. (If "Yes," attach an explanation and the amount of each item restated.)

o No.e Has the corporation's income statement been restated for any of the five income statement periods preceding the period on line 2a?

o Yes. (If "Yes," attach an explanation and the amount of each item restated.)o No.

3a Is any of the corporation's voting common stock publicly traded?o Yes.o No. If "No," go to line 4a.

b Enter the symbol of the corporation's primary U.S. publicly traded voting commonstock. I I I I I I

e Enter the nine-digit CUSIP number of the corporation's primary publicly traded votingI I I I I I I I I Icommon stock

4a Worldwide consolidated net income (loss) from income statement source identified in Part I, line 1 4ab Indicate accounting standard used for line 4a (see instructions): I(1)0 GAAP (2) OIFRS (3) 0 Statutory (4) 0 Tax-basis (5) 0 Other (specify)

5a Net income from nonincludible foreign entities (attach schedule) 5a )

b Net loss from nonincludible foreign entities (attach schedule and enter as a positive amount) 5b6a Net income from nonincludible U.S. entities (attach schedule) 6a )

b Net loss from nonincludible U.S. entities (attach schedule and enter as a positive amount) . 6b7a Net income (loss) of other includible foreign disregarded entities (attach schedule) 7ab Net income (loss) of other includible U.S. disregarded entities (attach schedule) 7bc Net income (loss) of other includible entities (attach schedule) 7e

8 Adjustment to eliminations of transactions between includible entities and nonincludible entities (attachschedule) 8

9 Adjustment to reconcile income statement period to tax year (attach schedule) 9lOa Intercompany dividend adjustments to reconcile to line 11 (attach schedule) lOa

b Other statutory accounting adjustments to reconcile to line 11 (attach schedule) lObe Other adjustments to reconcile to amount on line 11 (attach schedule) 10c

11 Net income (loss) per income statement of includible corporations. Combine lines 4 through 10 11Note. Part I, line 11, must egual the amount on Part II, line 30, column (a), and Schedule M-2, line 2.

12 Enter the total amount (not just the corporation's share) of the assets and liabilities of all entities included or removed on the following lines.

Total Assets Total Liabilitiesa Included on Part I, line 4 ~

b Removed on Part I, line 5 .~

e Removed on Part I, line 6 ~

d Included on Part I, line 7 ~

For Paperwork Reduction Act Notice, see the Instructions for Form 1120. Cat. No. 37961C Schedule M-3 (Form 1120) 2009




Schedule M-3 (Form 1120) 2009 Page 2Name of corporation (common parent, if consolidated return) I Employer identification number

Check applicable box!es): (1) 0 Consolidated group (2) o Parent corp (3) o Consolidated eliminations (4) o Subsidiary corp (5) 0 Mixed 1120/UPC groupCheck if asub-consolidated: (6) 01120 group (7) D 1120 eliminations

Name of subsidiary (if consolidated return) I Employer identification number

.. Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations WithTaxable Income per Return (see instructions)

Income (Loss) Items (a) (b) (c) (d)Income (Loss) per Temporary Permanent Income (Loss)

(Attach schedules for lines 1 through 11) Income Statement Difference Difference per Tax Return

1 Income (loss) from equity method foreign corporations2 Gross foreign dividends not previously taxed.3 Subpart F, QEF, and similar income inclusions4 Section 78 gross-up .

5 Gross foreign distributions previously taxed6 Income (loss) from equity method U.S. corporations7 U.S. dividends not eliminated in tax consolidation8 Minority interest for includible corporations

9 Income (loss) from U.S. partnerships .10 Income (loss) from foreign partnerships11 Income (loss) from other pass-through entities

12 Items relating to reportable transactions (attachdetails)

13 Interest income (attach Form 8916-A)14 Total accrual to cash adjustment.15 Hedging transactions16 Mark-to-market income (loss) .17 Cost of goods sold (attach Form 8916-A) ( ) ( )

18 Sale versus lease (for sellers and/or lessors)19 Section 481 (a) adjustments20 Unearned/deferred revenue21 Incorne recognition frorn long-terrn contracts22 Original issue discount and other imputed interest

23a Income statement gain/loss on sale, exchange,abandonment, worthlessness, or other disposition ofassets other than inventory and pass-through entities

b Gross capital gains frorn Schedule D, excludingamounts frorn pass-through entities.

c Gross capital losses from Schedule D, excludingarnounts from pass-through entities, abandonmentlosses, and worthless stock losses

d Net gain/loss reported on Form 4797, line 17,excluding amounts from pass-through entities,abandonment losses, and worthless stock losses

e Abandonment lossesf Worthless stock losses (attach details) .

9 Other gain/loss on disposition of assets other than inventory24 Capital loss limitation and carryforward used .25 Other income (loss) items with differences (attach schedule)26 Total income (loss) items. Combine lines 1 through 2527 Total expense/deduction items (from Part III, line 36)28 Other items with no differences29a Mixed groups, see instructions. All others, combine

lines 26 through 28

b PC insurance subgroup reconciliation totalsc Life insurance subgroup reconciliation totals .

30 Reconciliation totals. Combine lines 29a through 29cNote. Line 30, column (a), must equal the amount on Part I, line 11, and column (d) must equal Form 1120, page 1, line 28.

Schedule M-3 (Form 1120) 2009


WWW.BECKERCPA.COM


Schedule M-3 (Form 1120) 2009 Page 3Name of corporation (common parent, if consolidated return) I Employer identification number

Check applicable box(es): (1) D Consolidated group (2) D Parent corp (3) D Consolidated eliminations (4) D Subsidiary corp (5) D Mixed 1120lUPC group

Check if a sub-consolidated: (6) D 1120 group (7) D 1120 eliminations

Name of subsidiaty (if consolidated return) I Employer identification number

. Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With TaxableIncome per Return-Expense/Deduction Items (see instructions)

Expense/Deduction Items (al (b) (cl (d)Expense per Temporary Permanent Deduction per

Income Statement DiHerence DiHerence Tax Return

1 U.S. current income tax expense. I2 U.S. deferred income tax expense3 State and local current income tax expense4 State and local deferred income tax expense I5 Foreign current income tax expense (other than

foreign withholding taxes)

6 Foreign deferred income tax expense j

7 Foreign withholding taxes

8 Interest expense (attach Form 8916-A) .9 Stock option expense

10 Other equity-based compensation11 Meals and entertainment

12 Fines and penalties13 Judgments, damages, awards, and similar costs

14 Parachute payments .15 Compensation with section 162(m) limitation16 Pension and profit-shari ng .

17 Other post-retirement benefits18 Deferred compensation .19 Charitable contribution of cash and tangible

property .

20 Charitable contribution of intangible property21 Charitable contribution limitation/carryforward22 Domestic production activities deduction23 Current year acquisition or reorganization

investment banking fees

24 Current year acquisition or reorganization legal andaccounting fees

25 Current year acquisition/reorganization other costs26 Amortization/impairment of goodwill27 Amortization of acquisition, reorganization, and

start-up costs

28 Other amortization or impairment write-offs

29 Section 198 environmental remediation costs30 Depletion31 Depreciation32 Bad debt expense33 Corporate owned life insurance premiums

34 Purchase versus lease (for purchasers and/orlessees)

35 Other expense/deduction items with differences(attach schedule) .

36 Total expense/deduction items. Combine lines 1through 35. Enter here and on Part II, line 27,reporting positive amounts as negative andnegative amounts as positive .

Schedule M-3 (Form 1120) 2009



Regulation 3

2.


Trade or Business Deductions (ordinary and necessary expenses)

Those expenses that are attributable to the trade or business of the corporation aredeductible. All of the ordinary and necessary expenses paid or incurred during thetaxable year in carrying on a business are deductible. "Ordinary and necessary"means that the expenses are common (or accepted) in the particular business orprofession and that they relate to producing the current year's income.

EXAMPLE

Reasonable salaries, office rentals, office supplies, and traveling expenses are all deductible when

incurred for business purposes.

a. Domestic Production Deduction

(1) Overview

A business may deduct a specific percentage of their qualified productionactivities income. [Limitation: The deduction may not exceed 50% of theW-2 wages paid by the corporation for the year.]

(2) 9% Deduction

The deduction is 9% of the lesser of:

(a) Qualified production activities income (QPAI)

(b) Taxable income (disregarding the QPAI deduction)

(3) Calculating QPAI

<pomestic)production gross receipts

<Cost of goods sold>

<Other directly allocable expenses or losses>

<Proper share of other deductions>

Qualified production activities income

(4) Domestic Production Gross Receipts Defined

Domestic production gross receipts generally are gross receipts derived insignificant part within the United States from any disposition of qualifiedproduction property that is:

(a) Manufactured

(b) Produced

(c) Grown

(d) Extracted

(e) Constructed

(f) Engineering services

(g) Architectural services


WWW.BECKERCPA.COM


b. Executive Compensation

A publicly held corporation may not deduct compensation expenses in excess of$1,000,000 paid to the CEO or the four other most highly compensated officersunless based upon qualifying commissions or a performance based plan of thecompany.

Entertainment expenses for officers, directors, and 1O%-or-greater owners maybe deducted only to the extent that they are included in the individual's grossincome.

c. Bonus Accruals (non-shareholder/employees)

Bonuses paid by an accrual basis taxpayer are deductible in the tax year whenall events have occurred that establish a liability with reasonable accuracy, andprovided they are paid within 2% months after year end.

d. Bad Debts - Specific Charge-Off Method

(1) Accrual Basis ::: VeAL\ct whe\\ sred-Plc AIR is wVltte\\ o-P-P

Accrual method taxpayers must use the specific charge-off method (directwrite-off method) for tax purposes. Thus, most taxpayers will write-off baddebts as they become worthless or partially worthless. (The allowancemethod is still required for financial accounting purposes, but it is notallowed for calculating the income tax deduction.)

(2) Cash Basis ::: Not ~l1oweA ~ t~)C AeAL\cHo\\

A very important point for purposes of the CPA exam is to be aware of baddebts of cash-basis taxpayers. Because a cash-basis taxpayer has notincluded the amount in gross income, a bad debt is not deductible, exceptin the case of an uncollectible check that has been deposited and recordedas income.

e. Business Interest Expense

All interest paid or accrued during the taxable year on indebtedness incurred forbusiness purposes is deductible.

Interest on loans for investment is limited to "net investment income(taxable)." This is the same limitation on deductibility as an individual'sinvestment interest. (Interest on loans to purchase tax-free bonds is notdeductible.)

Interest Expense on Loans for Investment ::: L""","teA to \\et l\\Vest"",e\\tl\\CO"",e

(1 )

(2) Prepaid Interest Expense ::: l-i\L\st ~l1oc~te to covvect revloA

Prepaid interest expense must be allocated to the proper period to which it

is related. (I\\cL\vveA & r~lA)

(3)



Regulation 3

f.


Charitable Contributions (10% of adjusted taxable income limitation)

Corporations making contributions to recognized charitable organizations areallowed a maximum deduction of 10% of their taxable income, as defined below.Any disallowed charitable contribution may be carried forward for five years. Anyaccrual must be paid within 2 y" months of the taxable year-end to be deductible.

Total taxable income is calculated before the deduction of:

C~lCL\l~Ho\\0\\

r~~e 24

R3-16

(1) Any charitable contribution deduction;

(2) The dividends received deduction;

(3) Any net operating loss carryback;

(4) Any capital loss carryback; or

(5) U.S. production activities deduction.

Business Losses or Casualty Losses Related to Business ::: \ 00% AeAL\cHbleGenerally, any loss sustained during the taxable year and not compensated forby insurance or otherwise is deductible. The loss may be treated as an ordinaryloss or a capital loss, depending upon the type of asset involved in the casualty.Business casualty losses are treated slightly differently than for individuals.

PASS KEY

Business casualty differs from that of individual (personal) casualty in several ways. Twoimportant differences concerning business casualty are:

• No $100 reduction

• No 10% of AGI reduction

(1) Partially Destroyed

For property only partially destroyed, the loss is limited to the lesser of:

(a) The decline in value of the property, or

(b) The adjusted basis of the property immediately before the casualty.

(2) Fully Destroyed (NBV)

For property that has been fully destroyed (i.e., a total loss), the amount ofthe loss is the adjusted basis of the property.

EXAMPLE

1. Bad Luck, Inc. had a major casualty loss in Year 1. A warehouse building was seriously

damaged by a storm. The fair market value of the bUilding before the storm was $850,000;

the fair market value after the storm was $400,000. The adjusted basis of the property was

$600,000. Insurance reimbursements amounted to $300,000.

The amount of the casualty loss before insurance reimbursements is $450,000, which is the

decline in value of the property and is less than the adjusted basis of the property.

Subtracting the insurance reimbursement of $300,000, Bad Luck's deductible loss would be

$150,000.

2. Assume the same facts above except that the property was totally destroyed. The

deductible casualty loss would be $300,000 ($600,000 - $300,000). Note that the adjusted

basis is used to determine the casualty loss, not the decline in value.

©201O DeVry/Becker Educational Development Corp. All rights reserved.

WWW.BECKERCPA.COM


Cost O-PV'~iSi\\~ $

I~IDmID!IZD

Excluded Costs

The costs do not include costs of issuing and selling the stock,commissions, underwriter's fees, and costs incurred in the transfer ofassets to a corporation.

PASS KEY

Organizational Expenditures and Start-up Costs

(1) Calculation

The corporation may elect to deduct up to $5,000 of organizationalexpenditures and $5,000 of start-up costs. Each $5,000 amount isreduced by the amount by which the organizational expenditures or startup costs exceeds $50,000, respectively. Any excess organizationalexpenditures or start-up costs are amortized over 180 months (beginningwith the month in which the active trade or business begins).

I I d d C tE)C~\o"\ hie,,"

nc u e os s "11 1 '-" .C~V'e"t"L\ y oo~ "t"OV' \o"\o\\th bL\Sl\\eSS st~V'teA

Allowable organizational expenditures and start-up costs include fees paidfor legal services in drafting the corporate charter, bylaws, minutes oforganization meetings, fees paid for accounting services, and fees paid tothe state of incorporation.

(3)

(2)

h.

It is important for CPA candidates to remember the difference in the GAAP (financialstatements) and the tax (income tax return) rule for organizational and start-upexpenses.

Organizational and Start-up Expenses

• Tax Rule - $5,000 expense maximum/180 months amortization of remainder.

• GAAP Rule - Expense.

EXAMPLE

Kristi, a newly organized corporation, was formed on June 30, Year 1, and began doing businesson July 1, Year 1. The corporation will have a December 31 year end. Kristi Co. incurred thefollowing expenses in organizing the business:

Legal fees for drafting corporate charterFees paid for accounting servicesFees paid to state of incorporationCosts of selling shares of stock

$15,0005,0003,000

10.000$33.000

Amortization for the six months (July 1 to December 31, 20X5) will be $5,600, calculated asfollows:

Legal fees for corporate charterAccounting feesFees pa id to stateOrganization expenses

$23,000< 5.000>-----------..~ $5,000

$18000 -;- 180 mo. = $100 per mo. x 6 mo. = -----.2QQ~

$15,0005,0003.000

$23.000

The cost of selling the shares may not be amortized; it is a reduction in the capital stockaccount.




Amortization, Depreciation, and Depletion

Goodwill, covenants not-to-compete, franchises, trademarks, and trade names(all acquired after August 10, 1993) must be amortized on a straight-line basisover a 15-year period beginning with the month such intangible was acquired.For depreciation and depletion, corporations use the same rules (which arecovered later in this chapter) as individuals.

j.

PASS KEY

The CPA examination often tests the candidate's ability to distinguish the GAAP (financial

statements) and tax (income tax returns) rules. The difference in the treatment of purchased

goodwill (years 2002 and forward) should be noted:

Purchased Goodwill

• Tax Rule - Amortized on a straight-line basis over 15 years.

• GAAP Rule - Not amortized; test for impairment.

Life Insurance Premiums (expense)

(1) Corporation Named as Beneficiary (key person) ::: Not t~)C AeAL\cHblePremiums paid by the corporation for life insurance policies on keyemployees are not deductible when the corporation is directly or indirectlythe beneficiary.

(2) Insured Employee Named as Beneficiary (fringe benefit) ::: -r~)C AeAL\cHbleIf the premiums are paid on insurance policies where the beneficiary isnamed by the insured employee, such premiums are deductible as anemployee benefit.

k. Business Gifts ::: $2S'" rev reVSO\\/rev ye~v

Business gifts are deductible up to a maximum deduction of $25 per recipient peryear.

I. Business Meals and Entertainment ::: S"'O% t~)C AeAL\cHbleBusiness meals and entertainment expenses are 50% deductible to thecorporation.

R3-18

m.

n.

Penalties and Illegal Activities Not Deductible

Bribes, kickbacks, fines, penalties, and other payments that are illegal underfederal law or under a generally enforced state law are not deductible. Similarly,the top two-thirds of a treble damage payment are not deductible if the taxpayer

has been convicted of an antitrust violation. 'St4l'\te il.\co"",e ]T City il.\co"",e -r~)C AeAL\cHble

axes fe~ev4l'\l f4l'\yvollAll state and local taxes and federal payroll taxes are deductible when incurredon property or income relating to business. Federal income taxes are notdeductible. Foreign income taxes may be used as a credit.


WWW.BECKERCPA.COM


p.

o. Lobbying and Political Expenditures::: Not t~)C AeAL\cHbleLobbying expenses incurred in attempting to influence state or federal legislationare not deductible. Direct-type lobbying expenses in connection with localgovernmental lobbying are deductible. Political contributions are not deductible.

Capital Gains and Losses r O\\ly o-P-Pset c~rlt~l ~~l\\S I_I(1) Capital Losses Deduction Not Allowed

The $3,000 deduction for capital losses available to individuals is notallowed to corporations. Thus, a corporation can only use capital losses tooffset capital gains.

(2) Capital Loss Carryover ::: '3 b~c\c./S"" -PoV'w~V'A

Net capital losses are carried back three years and forward five years.They are carried over as short-term capital losses and are applied onlyagainst capital gains.

(3) Capital Gains Tax Calculation -r~)CeA ~t OV'Al\\~V'Y l\\Co\"'\e V'~tes

Capital gains are taxed at the same rate as ordinary corporate income (i.e.,no special capital gains rates apply, as with individual taxpayers).

q. Net Operating Losses ::: 2 b~c\c./20 -PoV'w~V'A

For years 2010 forward, corporations are entitled to the same net operating loss(NOL) rules as individuals. The carryback period is 2 years, and the carryforwardperiod is 20 years. A Form 1120X (Amended Corporate Income Tax Return)must be filed within three years of the due date (including extensions) of thereturn for the loss year. A corporation may elect to forgo the carryback periodand only carry the NOL forward. In this case, while there is no special form tofile, an election to forgo the carryback must be made on the tax return for theyear of loss.

The following additional points should be noted when calculating thecorporate NOL:

(1) No charitable contribution deduction is allowed in calculating the NOL.

(2) The dividends received deduction is allowed to be deducted beforecalculating the NOL.

PASS KEY

The CPA examination often provides answers, which relate to capital loss rules, to questions

concerning net operating losses. It is important to be able to distinguish all of these tax rules:

Offset Other Income Carryback Carryforward

Net operating loss: N/A 2 20

Corporate net capital loss: - 0- 3 5

Individual net capital loss: $3,000 maximum 0 Unlimited



(3)

Regulation 3

R3-20

r.


Inventory Valuation Methods

In general, the tax method used for accounting purposes can be used for incometax purposes; provided the method clearly reflects income and is consistent inapplication (i.e., opening and closing inventories must use the same valuationmethod). Further, all taxpayers who have inventory are required to use theaccrual basis of accounting for purchases and sales. A change in inventorymethod is considered a change in accounting method and must be approved bythe IRS.

(1) Basic Valuation Methods

(a) Cost Method: Inventories are valued at cost (including direct labor,direct materials, and attributable indirect costs), less discounts, plusfreight-in. The cost methods of "prime cost" (no overhead) and"direct cost" (which includes variable overhead only) are notallowable for tax purposes.

(b) Lower of Cost or Market Method: Inventories are valued at the lowerof cost (per above) or market, which, for normal goods is generallythe current bid price at the date of inventory per each item ininventory (i.e., the lower amount is determined based on each item,not based on the aggregate value of the inventory).

(c) Rolling-Average Method: This method will generally not be allowedwhen inventories are held for long periods of time in somecircumstances or when costs tend to fluctuate significantly (unlessthe taxpayer regularly re-computes costs and makes certainadjustments), as the method may not clearly reflect income in certaincases,

(d) Retail Method: In general, the retail method will approximate the costor the market of items in inventory by subtracting the mark-uppercentage to retail from the retail price, typically from inventory thathas a large volume of items.

(2) Common Inventory Identification Methods (Cost-Flow Assumptions)

(a) FIFO (First-in, First-out) Method: FIFO is the most commonly usedmethod unless the inventory can be specifically identified.

(b) LIFO (Last-in, First-out) Method: LIFO must be elected by thetaxpayer in the first year it is used, and the taxpayer must use thesame method for its financial statement purposes. Significantadjustments to inventory valuations may be required to use LIFO.

(c) Specific Identification Method [R""Uniform Capitalization Rules Impact::: ~;HCertain methods of accounting for inventory (such as the strict costmethod) do not provide for the capitalization of the inventory costs that arerequired by the uniform capitalization rules (presented in the R1 lecture).Thus, taxpayers who are subject to the uniform capitalization rules may notuse some valuation methods.


WWW.BECKERCPA.COM


(4) Unsalable or Unusable Goods

When inventories are deemed to be unsalable or unusable, they must bevalued at their expected selling price ("bona fide selling price") within 30days minus the costs to dispose of them.

s. General Business Credit

(1) Included Credits

The general business credit consists of a combination of the following:

(a) Investment credit;

(b) Work opportunity credit;

(c) Alcohol fuels credit;

(d) Increased research credit (generally 20% of the increase in qualifiedresearch expenditures over the base amount for the year);

(e) Low-income housing credit;

(f) Small employer pension plan start-up costs credit;

(g) Alternate motor vehicle credit;

(h) Worker retention credit (allowed for each qualified worker for the firstyear of eligibility - lesser of $1 ,000 or 6.2% of qualified wages perqualified worker in 2011); and

(i) Other infrequent credits.

(2) Formula

The credit may not exceed "net income tax" (regular tax plus alternativeminimum tax less nonrefundable tax credits, other than the alternativeminimum tax credit) less the greater of:

(a) 25% of regular tax liability above $25,000.

(b) "Tentative minimum tax" for the year.

(3) Unused Credit Carryover

Although some limits must be applied separately, unused credits maygenerally be carried back one year and forward twenty years.

Remember, deferred taxes are only established for temporary differences.



Regulation 3

M-'3 c:l\~~

Becker ProfessiW-4d~~sPAExam Review

IDe{!evve.,\

COR P 0 RAT ETA X A T ION SUM MAR V r<,\)<es

GROSS INCOME:

GAAPFINANCIAL STATEMENTS

IRCTAX RETURN

Gross sales Income Income ./

Installment sales Income Income when received ./

Rents and royalties in advance Income when earned Income when received ./

State tax refund Income Income ./

Dividends

Equity method Income is subsidiary's earnings Income is dividends received ./

100/80/70% exclusion No exclusion Excluded forever ./

ITEMS NOT INCLUDIBLE IN "TAXABLE INCOME":

State and municipal bond interest

Life insurance proceeds

Income

Income

Not taxable income

Not taxable income

_G_a_in_I_lo_s_s_o_n_tr_e_as_u_ry_s_to_c_k N_o_t_re_p_o_rt_ed N_o_t_re_p_o_rt_e_d ./__.~ H~eAe l-rORDINARY EXPENSES:

Cost of goods sold Uniform capitalization rules Uniform capitalization rules ./

Officers' compensation ,top) Expense $1,000,000 limit ./

Bad debt Allowance (estimated) Direct write-off ./

Estimated liability for contingency (e.g., warranty] Expense (accrue estimated) No deduction until paid ./

Interest expense

Business loan Expense Deduct./

Tax-free investment Expense Not deductible ./

Taxable investment Expense Deduct up to taxable income ./

Contributions All expensed Limited to 10% of adj. taxable income ./ ./ ./

Loss on abandonment / casualty Expense Deduct ./

Loss on worthless subsidiary Expense Deduct ./

Depreciation

Ge~evc:l\l v",1eMACRS vs. straight line Slow depreciation Fast depreciation ./

Section 179 depreciation Not allowed (must depreciilte] 2008-2010 = $250,000 ./

GAAP - f\J ~ Different basis of asset Use GAAP basis Use tax basis ./

-rc:l\)C - NBV Amortization

Start up/organizational expenses Expense $5,000 maximum/iS year excess ./

Franchise Amorti2e Amorti2e over 15 years ./

Goodwill Impairment Test Amorti2e over 15 years ./

Depletion

Percentage vs. straight line least) Cost over yeelrs Percentage of sales ./

Percentage in excess of cost Not allowed Percentage of sales ./

Profit and pension expense Expense accrued No deduction until paid ./

Accrued expense (500h owner I family) Expense accrued No deduction until paid ./

State taxes (paid) Expense Deduct ./

Meals and entertainment Expense Generally 50% deductible ./

GAAP EXPENSE ITEMS THAT ARE NOT TAX DEDUCTiONS:

R3-22

Life insurance expense lcorporation)

Penalties

Lobbying/political expense

Federal income taxes

SPECIAL ITEMS:

Net capital gain

Net capital loss

Carryback / carryover {3 years back} 5years forward]

Related shareholder

Net operating loss

Research and development

Expense

Expense

Expense

Expense

Income

Report as loss

Not applicable

Report as a loss

Report as a loss

Expense

Not deductible

Not deductible

No deduction

Not deductible

Income ./

Not deductible ./

Unused loss allowed as a STCL ./

Not deductible ./

Carryback 2 or carryover 20 ./

Expense/ Amortize /Capitalize ./ ./ ./

©2010 DeVryjBecker Educational Development Corp. All rights reserved.

WWW.BECKERCPA.COM


Dividends Received Deductionc. •••••a •• _.

Domestic corporations are allowed dividends received deduction. The purpose of •..

this deduction is to prevent triple taxation of earnings. The amount of the dividends received

deduction allowed is dependent upon the percentage of the investee corporation owned by

the investor corporation. The percentage allowed may be either 70%,80%, or 100%. The

corporate shareholder must own the investee stock for more than 46 days during the 91-day

period beginning on the date 45 days before the ex-dividend date of the stock to qualify for

the dividends received deduction. Below is the percentage deductions based upon stock

ownership:

PercentageOwnership

0% to < 20%

20% to < 80%

80% or more

Dividends ReceivedDeduction

70%

80%

100%

Big I / \corP.~ LittleStock~ Corp.~'"~ '~

,-------------"

LittleCorp.Stock

Income

< Deductions >

Taxable Income< Tax>

Net Income (after tax)Dividend _-----t--t'


IncomeDividend Income

< Deductions>

<'DlVl~e~~vec.~e~l.\cHo~;>


Net Income lafter tax)Dividend

IncomeDividend Income

< Deductions >


Net Income lafter tax)

R3-23


Regulation 3

GROSS INCOME

< DEDUCTIONS>

A< CHARITY>

B

<DIVIDENDS RECEIVED DEDUCTION>

TAXABLE INCOME OR LOSS

{

{


(Includes dividend income)

SPECIAL DEDUCTIONS (NOT INCLUDED)

• Charity deduction

• Dividends received deduction

• Not gifts ($25 for business gifts)

• Not political (none)

• Maximum allowed is 10% of A*

• 5 year carryforward

• Accrued amounts are deductible if paid within2-1/2 months after year end

REQUIREMENTS

1) 1st corporation is taxed

2) Owned 45 days before or after

DIVIDEND INCOME

• 100% (own 80%-100%) (consolidate)

• 80% (own 20%-under 80%) (large investment)**

• 70% (own under 20%) (small investment)** ~IIV~velc:l\te~I'

• Limited to % of B

• Except: if taking the full % of dividend income, itcreates or adds to corp. loss.

NET OPERATING LOSS:

Carryback 2 years

Carryforward 20 years

* The chart indicates that the corporate charitable deduction is limited to 10% of "A." "A" is defined here as gross income minus

deductions, with the two "special deductions" not included. This is the same definition as that presented earlier in this chapter; the

material is simply shown differently.

** The 70% and 80% deductions operate exactly the same except, of course, for the percentage differences.

1. Taxable Income Limitation

The dividends received deduction (ORO) equals the lesser of:

R3-24

a.

b.

70% (or 80%) dividends received, or

70% (or 80%) of taxable income computed without regard to the ORO, any NOLdeduction, or capital loss carryback.


WWW.BECKERCPA.COM


2. Exception to Taxable Income Limitation

The taxable income limitation above does not apply if, after taking into account the fulldividends received deduction, the result is a net operating loss (NOL). See example #3below.

EXAMPLE

The Duffy Corporation owns 30% of the Fox Corporation (80% deduction applies). Below are

alternative situations for the year. The dividends received deduction and taxable income would be

calculated as follows: Ge~evc:l\l liB II •

vl.\le lllMH·c:l\Ho~ E)Ccefho~

Gross Income (}) 0 (],)Operations

Dividends received

Total

250

100

350

250

100

350

250

100

350

Deductions

Total, including charitablecontributions (200) (260) (280)

70

I80l~

90

I80llEJ

150

I80l~

TI before ORO

Tentative ORO (80% x $100)

Percentage limit (80% DfTl)

ORO

Taxable income ~i'Limited tD lesser Df 80% Df dividends received ($100) Dr TI ($90) and nD NOL created~"When subtracting the full 80% DRD, an NOL is created, thus 80% DfTI dDes nDt apply.....""'~-----

3. Entities for Which the DRD Does Not Apply

The dividends received deduction does not apply to:

a. Personal service corporations.

b. Personal holding companies.

c. (Personally taxed) S corporations.

PASS KEY

An easy way to remember the entities not eligible for the dividends received deduction:

Oon't take it "personally"



Regulation 3

4.


100% Dividends Received Deduction

a. Affiliated Corporations - 100% DRD ~ Co~soll~c:l\te

Dividends from affiliated corporations (80% or more common ownership) that fileconsolidated returns qualify for a 100% deduction.

b. Small Business Investment Corporations (SBICs) - 100%

A 100% deduction is allowed for dividends received by a small businessinvestment company. An SBIC makes equity and long-term credit available tosmall business concerns.

SCHEDULE M-l

Reconciliation of Income (Loss) per Books to Taxable Income

1 Net Income (or Loss) Per Books $875,000 7 Income recorded on books this year

2 + Federal Income Tax [per books] $384,500not included on this return:

3 + Excess Capital Losses over Gains $5,000Tax-exempt Interest $3,500

4 + Income subject to tax not recorded onLife Insurance Proceeds $100,000

books this year:

+ Installment Sale Income $8,500

+ Rents Received in Advance $15,000

5 + Expenses recorded on books this year 8 Deductions on this return not chargednot on the tax return: against book income this year:

+ Book Depreciation $14,000 Tax Depreciation $28,000

+ Contribution Carryover $0 Contribution Carryover $0

+ Meals & Entertainment [50%] $4,200 Section 179 Deduction $20,000

+ Allowance for Doubtful Accts. [Incr.] $15,000 Direct Bad Debt Write-offs $8,650

+ Warranty Accrual $8,500 Actual Warranty Costs $7,500

+ Different Basis of Assets $0 Different Basis of Assets $0

+ Expense of Organizational Costs $0 Amortization of Organizational Cost $500

+ Goodwill Impairment per Books $5,000 Goodwill Amortization per Return $9,200

+ Pension Expense Accrued $12,000 Pensions Paid $11,350

+ Penalties $1,000

6 Add lines 1 through 5 $1,347,700 9 Add Lines 7 and 8 $188,700

10 Income (Line 28 Page 1) L6- L9 $1,159,000

!This is taxable income per page 1 of the tax return, before

the dividends received deduction and the NOL

carryforward deduction.


WWW.BECKERCPA.COM


III. DEPRECIATION

Regulation 3

Depreciation is an annual allowance given to a trade or business for exhaustion, wear and tear, andnormal obsolescence. An asset's basis must be reduced by the depreciation allowed (or allowable)for a particular year, even if depreciation was not claimed by the taxpayer for that particular year.The Modified Accelerated Cost Recovery System (MACRS) is used for the majority of depreciationexpense for taxation.

A. MACRS - Property Other than Real Estate

1. Types of Property

3-year 200% Class: ADR (Asset Depreciation Range) midpoints of 4 years and less. Excludes

automobiles and light trucks, includes racehorses more than 2 years old and

other horses more than 12 years old, and special tools.

5-year 200% Class: ADR midpoints of more than 4 years and less than 10 years. Includes

automobiles, light trucks, computers, typewriters, copiers, and duplicating

equipment.

7-year 200% Class: ADR midpoints of 10 years and more, and less than 16 years. Includes office

furniture and fixtures, equipment, property with no ADR midpoint not

classified elsewhere, and includes railroad track.

10-year 200% Class: ADR midpoints of 16 years and more, and less than 20 years.

15-year 150% Class: ADR midpoint of 20 years and more, and less than 25 years including sewage

treatment plants, telephone distribution plants, and comparable equipment

use for the two-way exchange of voice and data communications.

20-year 150% Class: ADR midpoint of 25 years and more, other than real property with an ADR

midpoint of 27.5 years and more, including sewer pipes.

•...., ... ".• a •••

2. MACRS Depreciation Rules (1987 and beyond)

MACRS stands for Modified Accelerated Cost Recovery System. For 3-,5-,7-, and 10-year MACRS property (other than real property) placed inservice after January 1, 1987, MACRS is computed using the 200% declining balancemethod. For 20-year property, MACRS is computed using the 150% declining balancemethod.

4.

3.

©2010 DeVry/Becker Educational Developme~tsreser/

g7~~

Mc:l\cl-\l~evy

c:l\~~

eql.\lflMe~t

Salvage Value (ignored)

Salvage value is ignored under this method.

Half-year Convention

In general, a half-year convention applies to personal property, under which suchproperty placed in service or disposed of during a taxable year is treated as havingbeen placed in service or disposed of at the midpoint of the year.

5. Mid-quarter Convention

If more than 40% of depreciable property is placed in service in the last quarter of theyear, the mid-quarter convention must be used.

<ED ~O ® @J) 02-~O�-----�------+�------1�f-----~1

""/""/""~'2~~ ~7~~ 12~~


2.


B. MACRS - Real Estate (salvage value ignored/subtract land cost)

1. Residential Rental Property (27.5-year straight-line)

Examples of residential rental property include apartments and duplex rental homes.

Non-residential Real Property (39-year straight-line)

Examples of non-residential real property (real property that is not residential rentalproperty and that does not have an ADR midpoint of more than 27.5 years) includeoffice buildings and warehouses. Tenant improvements made to the interior of certainnonresidential real property and restaurant renovations qualify for depreciation over 15years.

3. Mid-month Convention

Straight-line depreciation is computed based upon the number of months the propertywas in service. One half month is taken in the month the property is placed in service.

One half month is taken for the month in which the property is disposed of. IE)C4l'\lM hid:. IC. Expense Deduction in Lieu of Depreciation (§179) Cc:l\ve-Pl.\l1y loo\::. -Pov "",o~tl-\ c:l\Sset l.\Se~

Each tax year, a taxpayer may deduct a fixed amount of depreciable (machinery andequipment) property.

1. 2010 Rules and Likely Rules for 2011 and Forward if Small Business PermanencyAct (5. 2822) Passes

The limit is $250,000 of new or used property that is acquired from an unrelated partyduring the year.

a. The maximum amount is reduced dollar for dollar by the amount of propertyplaced in service during the taxable year that exceeds $800,000.

b The deduction is not permitted when a net loss exists or if the deduction wouldcreate a net loss.

c. SUVs: Section 179 limits the cost of a sport utility vehicle (SUV) that may beexpensed to $25,000. This does not eliminate the exemption from the luxuryauto depreciation limits for SUVs or other vehicles with a gross vehicle weightrating in excess of 6,000 pounds. For this purpose, an SUV is defined as a fourwheeled vehicle with a gross vehicle weight of more than 6,000 pounds, but lessthan 14,000 pounds. Because this definition would include heavy pickup trucks,vans, and small buses in addition to SUVs, the term "sport utility vehicle" isfurther defined to exclude any of the following vehicles:

(1) A vehicle designed to have a seating capacity of more than nine personsbehind the driver's seat.

(2) A vehicle equipped with a cargo area of at least six feet that is an openarea and is not readily accessible directly from the passengercompartment.

2. 2011 and Forward Rules in Effect as of the Date of this Publication

The limit is $25,000 of new or used property that is acquired during the year.

R3-28

a.

b.

The maximum amount is reduced dollar for dollar by the amount of propertyplaced in service during the taxable year that exceeds $200,000.

The deduction is not permitted when a net loss exists or if it would create a netloss.


WWW.BECKERCPA.COM


D. Straight-line in Lieu of Accelerated Depreciation Election

A taxpayer may choose to depreciate property on a straight-line basis. If a taxpayer choosesstraight-line, he may choose the regular recovery period or a longer alternative depreciationsystem (ADS) recovery period.

EXAMPLE

The following example illustrates the factors that are used to calculate MACRS depreciation expense under

the half-year convention. Remember that salvage value is ignored. Generally, the calculation of MACRS

depreciation expense for an entity that has been in operation for the entire year is to take the purchase price

(plus improvements) and multiply that amount by the applicable MACRS factor. Proration is not applicable in

the general case and only applies to short tax years (i.e., when the entity begins operations some period of

time into the tax year).

Assume a company that started business in 20x6 purchased office furniture on February 14, 20x8, at a price of

$10,000. Further assume that this was the only purchase of assets in the year (reason: avoid possibly applying

the mid-quarter convention rules) and that no special depreciation rule apply. Office equipment is MACRS 7

year property. The depreciation expense for the year 20x8 for the office equipment would be $10,000 x .1429

(per the table, below) = $1,429. The depreciation expense for 20x9 would be $10,000 x .2449 = $2,449. Note

that the expense is lower in the first year due to the half-year convention. The sum of the factors for a type of

asset will equal 100. Note that the calculation of MACRS depreciation expense is quite simple once you can

identify the applicable factor.

MACRS DEPRECIATION TABLE

General depreciation system

Applicable depreciation method:

Applicable recovery period:

Applicable convention:

200 or 150 percent declining balance switch ing to straight line

3,5, 7, 10, 15, 20 years

Half-year Mc:l\cl-\l~evy I,( eql.\lp"",e~+-

IF THE RECOVERY YEAR IS: AND THE RECOVERY PERIOD IS:

3-vear 5-year 7-year lO-year l5-year 20-year

3.757.2196.6776.1775.7135.2854.8884.5224.4624.4614.4624.4614.4624.4614.4624.4614.4624.4614.4624.4612.231

59.5

8.557.7

6.936.23

5.95.9

5.915.9

5.915.9

5.915.9

5.912.95

1018

14.411.52

9.227.376.556.556.566.553.28

14.2924.4917.4912.498.938.928.934.46

PASS KEY

2032

19.211.5211.525.76

33.3344.4514.81

7.41

12

3456789101112

131415161718192021

It is important for CPA Examination candidates to remember the following concepts:

Machinery and Equipment Real Estate

• Half-year convention Mid-month convention

• Mid-quarter convention

~o+-e

Hc:l\l-P-yec:l\vco~ve~Ho~




IV. DEPLETION

I_I Depletion is allowed on exhaustible natural resources, such as timber, minerals, oil, and gas.The two methods of depletion are (i) cost depletion and (ii) percentage depletion.

A. Cost Depletion (GAAP)

Under cost depletion, the remaining basis of the property is divided by the remaining numberof recoverable units (tons of ore, barrels of oil) to arrive at the unit depletion rate. Thededuction for depletion is the depletion unit rate multiplied by the number of units sold for theyear.

EXAMPLE

Oil property having an estimated 1,000,000 barrels cost $1,000,000. In 200X, 50,000 barrels were sold.

The depletion deduction for 200X is $50,000 calculated as follows:

$1,000,000 $ b I-,-------'---'--------'----- = 1 per arre$1,000,000 barrels

$1 per barrel x 50,000 = $50,000

B. Percentage Depletion (non-GAAP) ~ IIPve-Peve~cell -Pov AM-rUnder this method, the deduction is limited to 50% of taxable income (excluding depletion)

-rc:l\)C o~ly from the well or mine. The allowable percentages range from 5% to 22% depending uponthe mineral or substance being extracted. Percentage depletion may be taken even aftercosts have been completely recovered and there is no basis.

For oil and gas properties only, the overall limitation of 50% of taxable income from theproperty is increased to 100%.

V.Dl-P-Peve~t vl.\les

AMORTIZATION -rc:l\)C ~ 1S""-yec:l\v stvc:l\l8l-\t-1l~e

A. Intangibles GAAP ~ IlMfc:l\lVlMe~t test/~ot c:l\lMovHz.e~

1="====1 Intangibles such as goodwill, licenses, franchises, and trademarks may be amortized using. . .• straight-line basis over a period of 15 years, starting with the month of acquisition. [Note

the difference for GAAP purposes: Intangible assets with indefinite lives are subject only toan impairment test, and intangible assets with finite lives are amortized over those lives andalso subject to an impairment test.]

Others

Business start-up expenses or organization costs. Each is permitted to first take off$5,000 to be expensed, and the remainder is amortized over 180 months. (The $5,000is reduced as total cost exceeds $50,000 for each item);

Research expenses (existing trades or businesses may amortize research expensesover a 50-month period); and

Pollution-control facilities.

1.

Certain items can be expensed and/or amortized on a straight-line basis over a period ofyears, regardless of their useful life. These include:

3.

B.l)l.p.peve~t vl.\les

GAAP :: E)Cre~se-rc:l\)C :: $5'",000

+ Re,"",4l'\l",~eV

ovev 18'0 ,"",os.2.


WWW.BECKERCPA.COM


VI. SUMMARY OF SECTION 1231, 1245, AND 1250 ASSETS

A. Section 1231

Regulation 3

1-·····1"... .

Section 1231 assets are comprised principally of depreciable personal and real property usedin the taxpayer's trade or business and held for over twelve months. Trade or businessproperty and capital assets (held over twelve months) that have been involuntarily converted(e.g., fire, etc.) are also included in this section.

1. Capital Gain Treatment

Section 1231 provides a special benefit by allowing capital gain treatment (tax rates of5% or 15%) on net Section 1231 gains from sales, exchanges, or involuntaryconversions of certain "non-capital" assets, subject to Section 1245 and Section 1250provisions because certain gains for Section 1231 assets fall under Sections 1245 or1250.

2. Ordinary Loss Treatment

Net Section 1231 losses (Section 1231 losses less Section 1231 gains) are treated asordinary losses. (Note that there are no Section 1245 or Section 1250 losses.) Theadvantages of an ordinary loss over a capital loss are:

a. A capital loss cannot be deducted in excess of capital gains (except for the$3,000 per year allowance for individual taxpayers), and

b. A Section 1231 net loss is deducted immediately in full without consideration ofcapital gains.

B. Section 1245 (machinery and equipment) - Gains Only

1. Personal Business Property

Section 1245 assets are personal properties used in a trade or business for over twelvemonths (e.g., autos).

2. Recapture all Accumulated Depreciation

Upon the sale of a Section 1245 asset (depreciable personal property):

a. The lesser of gain recognized or all accumulated depreciation is recaptured asordinary income under Section 1245, and

b. Any remaining gain is capital gain under Section 1231.

C. Section 1250 (buildings) - Gains Only

1. Real Business Property

Section 1250 assets are real properties used in a trade or business over twelve months(e.g., a warehouse).

2. Recapture Difference Between Straight-line and Depreciation Taken

Section 1250 rules differ slightly from Section 1245 in that Section 1250 recapturesonly that portion of depreciation taken on real property that is in excess of straight line.(Note: This only applies to assets placed into service under the old acceleratedmethods of depreciation for real property. The current law requires real property to bedepreciated under the straight-line method.) For corporations, the total amount of thetaxable recapture as ordinary income for a corporation subject to the provisions ofSection 1250 is equal to the amount of the ordinary income under the general Section1250 rules (above) plus 20% of the straight-line depreciation that was not recapturedunder the general rules. Of course, the total depreciation recaptured is limited to therecognized gain.



C~rlt~l ~~l\o\ :: § \2'3 \

~~le Acc\A-\. OvAl\o\~vy Very.

Regulation 3rVlCe Aerv. l\o\cO\A-\e :: Vec~rtL\V'e

QliililiF I2rofessional Education I CPA Exam Review

NB\r LOSt'No GIL:: vecovevy

3. Straight-line Depreciation Taken

The amount of straight-line depreciation taken results in the overall gain being taxed at25% (this is called "unrecaptured Section 1250 gains").

4. Excess Gain is Section 1231 Gain (capital gain treatment)

Any gain in excess of original cost less straight-line depreciation would be allowedcapital gain treatment under Section 1231.

FLOWCHART OF GAIN OR LOSS FROM SECTION 1231 AND 1245 ASSETS

Sale or exchange of depreciable property, or land,used in trade or business and held for more than one

year*

I

I GAIN I LOSS I

I IIf personal tperty, Section If real property,

1245 de rmines the Section 1250 determines the

charactEj of the gain. character of the gain.

I. IGain =

Accelerated depreciation in excess of

ordinary income to thestraight line depreciation is

extent of all accumulated"recaptured" as ordinary income, and

depreciationthe remaining depreciation is taxed at a

25% maximum rate.

l\ IThe remaining gain is treated ~ I The losses are to be netted with ~

under Section 1231. Section 1231 gains.,

\COMPARE

jIf the result is a GAIN, then treat

If the result is a LOSS, then treatit as a Section 1231 (ordinary)

it as a Section 1231 (capital) gain.loss.

* This illustrates the general rules. Special rules are applicable to casualty and theft, involuntary conversion situations,

and low-income housing.

PASS KEY

The CPA Examination infrequently tests on the depreciation recapture rules. However, when tested, the

personal property (machinery and equipment) rules are typically the area. A simple rule of thumb for

personal property recapture is:

• Loss = Treat as ordinary loss (no limitation).

• Ordinary income = Gain to extent of accumulated depreciation.

• Section 1231 (capital) gain = Gain for sale price in excess of original cost.


WWW.BECKERCPA.COM


EXAMPLE OF APPLICATION OF 1231, 1245, AND 1250

FACTS:

Roberts Printing, Inc. sold the following assets during the year:

Regulation 3

Accumulated RecognizedDescription Selling Price Cost Depreciation Gain/Loss

Printing press $4,000 $6,800 $3,200 ::: '3 '00 ::: $400 gain Ov~i,.,4l'\vy il.\C( ""'e

Photocopier $2,600 $2,500 $500::: 2 000 ::: . <500 ov~il.\4l'\v, il.\co"",e$600 gain \ 00 C4l'\fit4l'\l ~4l'\il.\

Delivery van $500 $15,000 $13,000::: 2000 :::$1,500 loss 1)e~l. ct/ov~i 'l4l'\vy loss

STEP 1: Calculate Gain or Loss

Gain or loss is calculated by the following formula:

Cost - accumulated depreciation = adjusted basis

Compare the selling price to the adjusted bases = gain or loss

STEP 2: Calculate Depreciation Recapture

Both the printing press and photocopier are Section 1245 personal property sold at a gain; thus, for each asset, the

lesser of gain recognized or all accumulated depreciation must be recaptured as ordinary income:

Ordinary Income(depreciation recapture)

Printing Press

Photocopier

$400

$500*

'Only $500 of the $600 gain is ordinary income because the ordinary income recapture is the lesser of the accumulated depreciation ($500)

or gain recognized ($600).

STEP 3: Remaining Gain or Loss

Any remaining gain after calculating the ordinary income recapture is first netted with any Section 1231 losses:

C4l'\pit4l'\l OvAil.\4l'\vySec. 1231 Gain Sec. 1231 Loss

Photocopier $100 500Delivery Van $1,500

Pvil.\Hl.\~ pvess - - 400The net result is a loss of $1,400, which is treated as a Section 12311055 and deducted as an ordinary loss.

\00


\,500 '00

R3-33



Form 4797Department of the TreasuryInternal Revenue Service (99)

Name(s) shown on return

Sales of Business Property(Also Involuntary Conversions and Recapture Amounts

Under Sections 179 and 280F(b)(2»~ Attach to your tax return. ~ See separate instructions.

OMS No.1 545-0184

~@09AttachmentSequence No. 27

Identifying number

Enter the gross proceeds from sales or exchanges reported to you for 2009 on Form(s) 1099-B or 1099-5 (or

substitute statement) that you are including on line 2, 10, or 20 (see instructions) 1

DIlIII~S~a~le;s~o;r~E~x~c~h~a-;;n~g~e;s~oJfFP;;:ro;Pp~ertrtyy~UJ;s~e~djjir;:n~a~T~ra~d~e~o~rBB~u~si-;;n~e~ss~a;:;-nddlln;:;-v~o~ll;:u;;:nrtt-;;a~ry~cco~nv~e~r~sJ<io;n:;-;s;lFF;r~o~m~o)itth;-;;e~r----'-----,\..~ tThan Casualty or Theft-Most Property Held More Than 1 Year (see instructions) O~8 ev'M

Ie) Depreciation (I) Cost or other(g) Gain or (loss)

2 (a) Description (b) Date acquired (c) Date sold (d) Gross allowed or basis, plus Subtract if) from theof property (mo., day, yr.) (mo., day, yr.) sales price allowable since improvements and sum of (d) and Ie)

acquisition expense of sale

3 Gain, if any, from Form 4684, line 43 . 3

4 Section 1231 gain from installment sales from Form 62S2, line 26 or 37 . 4

5 Section 1231 gain or (loss) from like-kind exchanges from Form 8824 5

6 Gain, if any, from line 32, from other than casualty or theft. 6

7 Combine lines 2 through 6. Enter the gain or (loss) here and on the appropriate line as follows: . 7

Partnerships (except electing large partnerships) and S corporations. Report the gain or (loss) following theinstructions for Form 1065, Schedule K, line 10, or Form 1120S, Schedule K, line 9. Skip lines 8, 9, 11, and 12 be low.

Individuals, partners, Scorporation shareholders, and all others. If line 7 is zero or a loss, enter the amount fromline 7 on line 11 below and skip lines 8 and 9. If line 7 is a gain and you did not have any prior year section 1231losses, or they were recaptured in an earlier year, enter the gain from line 7 as a long-term capital gain on theSchedule D filed with your return and skip lines 8, 9,11, and 12 below.

8 Nonrecaptured net section 1231 losses from prior years (see instructions) 8

9 Subtract line 8 from line 7. If zero or less, enter -0-. If line 9 is zero, enter the gain from line 7 on line 12 below. If line

9 is more than zero, enter the amount from line 8 on line 12 below and enter the gain from line 9 as a long-term

ca itaI aain on the Schedule D filed with vaur return (see instructions) 9.. Ordinary Gains and Losses (see instructions) 'Sk10 Ordinary gains and losses not Included on lines 11 through 16 (Include property held 1 year or less):

11 Loss, if any, from line 7 . 11 ( )

12 Gain, if any, from line 7 or amount from line 8, if applicable 12

13 Gain, if any, from line 31 13

14 Net gain or (loss) from Form 4684, lines 3S and 42a 14

1S Ordinary gain from installment sales from Farm 62S2, line 25 or 36 15

16 Ordinary gain or (loss) from like-kind exchanges from Form 8824. 16

17 Combine lines 10 through 16 17

18 For all except individual returns, enter the amount from line 17 on the appropriate line of your return and skip lines a

and b below. For individual returns, complete lines a and b below:

a If the loss on line 11 includes a loss from Form 4684, line 39, column (b)(ii), enter that part of the loss here. Enter the part

of the loss from income-producing property on Schedule A (Form 1040), line 28, and the part of the loss from property

used as an employee on Schedule A(Form 1040), line 23. Identify as from "Form 4797, line 18a." See instructions 18a

b Redetermine the gain or (loss) on line 17 excluding the loss, if any, on line 18a. Enter here and on Form 1040, line 14 18b

For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 130861 Form 4797 (2009)


WWW.BECKERCPA.COM


Form 4797 (20_0_9.:.)."--.,----::-_.,---::-:-__.,---__:-=- ---.,..,----,--.,---::-.,---__,....,--:-::.,---...,....,,..,,..--,-,..-,,,.,,--..,--,..,,....,----_...,--,..,,..= .:.Pa",9c::e_2=-_ Gain From Disposition of Property Under Sections 1245, 1250, 1252, 1254, and 1255

(see instructions)

19 (a) Description of section 1245, 1250, 1252, 1254, or 1255 property:(b) Date acquired (c) Date sold (mo.,

(mo., day, yr.) day, yr.)

A

B

C

D

Property A Property B Property C Property DThese columns relate to the properties on lines 19A throuqh 19D .~

20 Gross sales price ( Note: See line 1 before completing. ) 20

21 Cost or other basis plus expense of sale. 21

22 Depreciation (or depletion) allowed or allowable. 22

23 Adjusted basis. Subtract line 22 from line 21 . 23

24 Total gain. Subtract line 23 from line 20 24

25 If section 1245 property:

a Depreciation allowed or allowable from line 22 25a

b Enter the smaller of line 24 or 25a 25b

26 If section 1250 property: If straight line depreciation was used,

enter -0- on line 26g, except for acorporation subject to section 291.

a Additional depreciation after 1975 (see instructions) 26a

b Applicable percentage multiplied by the smaller of line

24 or line 26a (see instructions) 26b

c Subtract line 26a from line 24. If residential rental property

or line 24 is not more than line 26a, skip lines 26d and 26e 26c

d Additional depreciation after 1969 and before 1976. 26d

e Enter the smaller of line 26c or 26d . 26e

f Section 291 amount (corporations only) 26f

g Add lines 26b, 26e, and 261. 260

27 If section 1252 property: Skip this section if you did not

dispose of farmland or if this form is being completed for a

partnership (other than an electing large partnership).

a Soil, water, and land clearing expenses . 27a

b Line 27a multiplied by applicable percentage (see instructions) 27b

c Enter the smaller of line 24 or 27b 27c


a Intangible drilling and development costs, expenditures

for development of mines and other natural deposits,

mining exploration costs, and depletion (see

instructions) 28a

b Enter the smaller of line 24 or 28a 28b


a Applicable percentage of payments excluded from

income under section 126 (see instructions) . 29a

b Enter the smaller of line 24 or 29a (see instructions) 29b

Summary of Part III Gains. Complete property columns A through D through line 29b before gOing to line 30.

30 Total gains for all properties. Add property columns A through D, line 24 30

31 Add property columns A through D, lines 25b, 26g, 27c, 28b, and 29b. Enter here and on line 13 31

32 Subtract line 31 from line 30. Enter the portion from casualty or theft on Form 4684, line 37. Enter the portion from

other than casualty or theft on Form 4797, line 6 32. Recapture Amounts Under Sections 179 and 280F(b)(2) When Business Use Drops to 50% or Less

(see instructions)

(a) Section (b) Section179 280F(b)(2)

33 Section 179 expense deduction or depreciation allowable in prior years. 33

34 Recomputed depreciation (see instructions) . 34

35 Recapture amount. Subtract line 34 from line 33. See the instructions for where to report 35

Form 4797 (2009)




Formation

Operations

Taxation

Distributions

Liquidation

VII. TAXATION OF A C CORPORATION

A. Filing Requirements ~ Mc:l\vcl-\ 1$" (yec:l\v e~~ 12/31)A C corporation is required to file a U.S. Corporation Income Tax Return, Form1120, by the 15th day of the third month after the close of its tax year (for aDecember 31 corporation, the return is due by March 15).

1. Legal Holiday or Weekend

When the due date falls on a legal holiday or weekend, the tax return is due on the nextbusiness day.

2. Extension (Form 7004)

An extension of six months is available by filing Form 7004.

3. Accrual Basis vs. Cash Basis

While the cash basis of accounting is used for tax purposes by most individuals,qualified personal service corporations (which are treated as individuals for purposes ofthese rules), and taxpayers whose average annual gross receipts do not exceed$1,000,000, the accrual basis method of accounting for tax purposes is required for thefollowing:

a. The accounting for purchases and sales of inventory (and inventories must bemaintained);

b. Tax shelters;

R3-36

B.

c. Certain farming corporations (other farming or tree-raising businesses maygenerally use the cash basis); and

d. C corporations, trusts with unrelated trade or business income, and partnershipshaving a C corporation as a partner provided the business has greater than $5million of average annual gross receipts for the three-year period ending with thetax year.

4. Statute of Limitations

The statute of limitations on assessments is the statutory period during which thegovernment can assess additional tax. For corporations (as with individuals), it is threeyears (six years for a 25% misstatement) from the later of the due date of the return orthe date the return is filed (includes amended returns). To mitigate the unfair effects ofthe statute of limitations in some rare cases, a tax year can be reopened to avoidhardship for the taxpayer or the IRS. In the case in which an item is ruled deductible ina subsequent year after having been taken in a year now closed by the statute oflimitations, the IRS will reopen the statute of limitations to disallow the deduction in theprevious year.

Estimated Payments of Corporate Tax

Corporations are required to pay estimated taxes on the fifteenth day of the fourth, sixth,ninth, and twelfth months of their tax year. One-fourth of the estimated tax is due with eachpayment. Unequal quarterly payments may be made using the annualized income method.An underpayment penalty will be assessed if these payments are not made and the amountowed on the return is $500 or more.


WWW.BECKERCPA.COM


1. Corporations other than Large Corporations (<S""'c:l\11 Covf.)

Corporations not classified as large corporations are required to pay the lesser of:

•a.

b.

100% of the tax shown on the return for the current year, or

100% of the tax shown on the return for the preceding year

Note: This alternative cannot be used if the corporation owed no tax for thepreceding year or the preceding tax year was less than 12 months.

Regular Tax

MinimumTaxAccumulatedEarnings Tax

orPersonalHolding

Companies Tax

2. Large Corporations

A large corporation (a corporation whose taxable income was $1 million or more in anyof its three preceding tax years):

a. Must pay 100% of the tax as shown on the current year return.

b. May not use the second payment alternative above (item 1.b).

C. Graduated Tax Rates and Taxable Income

The taxable income of a corporation is arrived at by taking gross income(basically the same items that would be included in an individual's gross income)and deducting the same business expenses that an individual would deduct. Acorporation, however, receives no exemptions. A corporation's taxable incomeis subject to the following graduated tax schedule:

Taxable Income 2010 Rates Of the amount over

$ 1 - $ 50,000 15% $ 0

50,001 75,000 $ 7,500 + 25% 50,000

75,001 100,000 13,750 + 34% 75,000

100,001 335,000 22,250 + 39% 100,000

335,001 10,000,000 113,900 + 34% 335,000

10,000,001 15,000,000 3,400,000 + 35% 10,000,000

$15,000,001 - $18,333,333 $ 5,150,000 + 38% $15,000,000

$18,333,333 over 35% $ 0

The rate brackets above 35% result from a phase-out of lower brackets such that corporations with taxable

income above $18,333,333 will have all income tax at a flat 35%.

D. Consolidated Tax Returns ~ 100% ~lVl~e~~ vec. ~e~l.\cHo~An affiliated group of corporations may elect to be taxed as a single unit,thereby eliminating intercompany gains and losses.

1. Requirements

To be entitled to file a consolidated return, all the corporations in the group (i) musthave been members of an affiliated group at some time during the tax year and (ii)each member of the group must file a consent. Note that the act of filing a consolidatedreturn by all the affiliated corporations will satisfy the consent requirement.

2. Affiliated Group Defined

An affiliated group means that a common parent directly owns:

a. (80o/~or more of the voting power of all outstanding stock, and




b. {80%)or more of the value of all outstanding stock of each corporation.

Note: Filing a consolidated return is a privilege afforded to affiliated groups ofcorporations (Code Sections 1501 and 1504(b)), and it can only be filed if all of theaffiliated corporations consent to such a filing. An affiliated group has ownershipthrough a common parent. As discussed above, the common parent must directly ownat least 80% of the voting power of at least one of the affiliated (includible) corporationsand at least 80% of the value of the stock of that corporation, and the othercorporations not controlled by the parent must be controlled under the 80% ownershiptest by an includible corporation. Not all corporations are allowed the privilege of filinga consolidated return. Examples of those denied the privilege include S corporations,foreign corporations, most real estate investment trusts (REITs), some insurancecompanies, and most exempt organizations.

3. Brother-Sister Corporations --_""-

Corporations where an individual (not a rporation) owns 80% or more of the stock oftwo or more corporations may not file con olidated returns.

Consolidated Return NOT Brother/Sister Co~soll~c:l\+-e

GAAP ~ Ovev ~O%-rc:l\)C ~ g0%- 100%

4. Advantages of Filing Consolidated Return

Among the advantages of filing a consolidated return are:

a. Capital losses of one corporation offset capital gains of another corporation;

b. Operating losses of one corporation offset the operating profits of anothercorporation;

c. Dividends received are 100% eliminated in consolidation because they areintercompany dividends; and

d. A corporation's NOL carryover may be applied against the income of theconsolidated group.

5. Disadvantages of Filing Consolidated Return

The disadvantages of filing a consolidated return include:

a. Mandatory compliance with complex regulations;

b. In the initial consolidated tax return year, a double counting of inventory canoccur if group members had intercompany transactions;

R3-38

c.

d.

Tax credits may be limited by operating losses of other members; and

The election to file consolidated returns is binding for future years and may onlybe terminated by disbanding the group or seeking permission of the InternalRevenue Service.


WWW.BECKERCPA.COM


E. Corporate Alternative Minimum Tax

Corporations are subject to a minimum tax (AMT) of 20% on alternative minimumtaxable income (AMTI), less an exemption amount. The objective of thecorporate AMT, like that of the individual AMT, is to ensure that every corporationwith substantial economic income pays at least some minimum amount of taxdespite the use of exclusions, deductions, and credits.

PASS KEY

Regulation 3

Regular Tax

Minimum Tax

AccumulatedEarnings Tax

orPersonalHolding

Companies Tax

The CPA examination has focused the majority of their questions concerning corporate minimum tax on the

following four areas:

• Distinguishing "adjustments", "preferences", and "ACE"

• The exemption formula

• Credits - available to reduce the minimum tax

• The minimum tax credit carryforward - to reduce future regular tax

REGULAR TAXABLE INCOME

Long-term contracts

Installment sale dealer

Excess depreciation (post 1986)

Percentage depletion

Private activity - issued post '86

Tax-exempt interest income

Pre '87 ACRS excess depreciation

}}

Add or minus

ADJUSTMENT A~jl.\s+- -Pov l'LIE I1

items to income

Addback

PREFERENCES Pve-Peve~ces ~ IIpllitems to increase income

Muni interest income

Tax exempt interest income

Increase CSV life insurance

Non S/L depreciation (after 1989; excess overalt. depr. sys. life)

Dividends received deduction (under 20%ownership)

< A.M.T. NOL DEDUCTION>

MINIMUM TAXABLE INCOME

< A.M.T. EXEMPTION>

A.M.T.

x 20%

GROSS ALTERNATIVE MINIMUM TAX

< FOREIGN TAX CREDIT>

TENTATIVE MINIMUM TAX

< REGULAR TAX LIABILITY >

ALTERNATIVE MINIMUM TAX

{

Adjusted

Current

Earnings

Increase/Decrease (neg. adj.limited to past positive)

$40,000 less 25% of MTI

over $150,000

If a corporation's tentative minimum tax exceeds the regular tax, the excess amount is the alternativeminimum tax, which is payable in addition to the regular tax.



® (3)

Regulation 3

1.


Calculation

a. Regular Taxable Income

Alternative minimum taxable income begins with regular taxable income or (loss)before NOL, which is then modified by adjustments, tax preference items, andthe adjusted current earnings (ACE) adjustment.

b. Adjustment

CD (1) Long-term Contracts

An adjustment is calculated for the difference between revenue calculatedunder the completed contract method and revenue calculated under thepercentage-of-completion method.

CD (2) Installment Sales - Dealer

An adjustment is calculated for the difference between full accrual revenueand installment sales revenue.

Excess of depreciation of tangible property placed in service after1986 over:

(a) Straight-line for real property using a 40-year life; or

(b) 150% declining balance (with a switch to straight-line) for personalproperty using the applicable class life.

c. Preferences

® (1) Percentage Depletion

A preference exists for the excess of percentage depletion over theadjusted basis of the property.

® (2) Private Activity Bonds

A preference exists for tax-exempt interest from certain private activitybonds issued after August 7, 1986.

® (3) Pre-1987 ACRS Depreciation

A preference exists for the excess of ACRS accelerated depreciation overstraight-line on pre-1987 property.

d. Adjusted Current Earnings (ACE)

The adjusted current earnings (ACE) adjustment equals 75% of the difference(positive or negative) between ACE and AMTI before this adjustment and thealternative tax NOL deduction. The ACE calculation is very similar to thecalculation of earnings and profits (presented later in this outline):

R3-40

~®®

(1 )

(2)

(3)

(4)

Municipal bond interest.

Increase life insurance cash surrender value.

Non-straight-line depreciation after 1989 vs. ADS.

Dividends received deduction (less than 20% ownership/70% deduction).


WWW.BECKERCPA.COM


Exemption Amount

The exemption amount is $40,000 less 25% of AMTI in excess of $150,000. Asa result, the exemption amount is completely eliminated at AMTI in excess of$310,000.

EXAMPLE

Assume alternative minimum taxable income is $210,000.

ExemptionMinimum Taxable Income

AllowableExcess

DisallowedExemption-Allowed

210,000<$150,000>

60,000x 25%

40,000

Regular Tax

Minimum TaxAccumulatedEarnings Tax

orPersonalHolding

Companies Tax

f. Tax Rate ~ 20%The tax rate on the alternative minimum taxable income is a flat 20%.

g. Credits

The foreign tax credit is the only credit (for corporate alternative minimum tax)that the CPA exam requires a candidate to know for purposes of corporateminimum tax.

h. Minimum Tax Credit (MTC)

(1) Credit against Future Regular Tax

The AMT system is actually an alternative tax system and, in a true sense,just an acceleration of the payment of a corporation's income taxes. Forthis reason, a corporation that pays AMT in one year may use this AMT asa credit in future years against the corporation's regular income tax liability.

(2) Carryforward: ~o+- bc:l\c\::.The MTC may be carried forward indefinitely, but it may not be carriedback.

F. Accumulated Earnings Tax

1. The accumulated earnings tax is imposed on regular C corporationswhose accumulated (retained) earnings are in excess of $250,000 ifimproperly retained instead of being distributed as dividends to (high taxbracket) shareholders.

a. Regular corporations are entitled to $250,000 of (lifetime) accumulated earnings.

b. Personal service corporations are entitled to only $150,000 of(lifetime) accumulated earnings.

c. The accumulated earnings tax is not imposed on personal holding companies(PHCs), tax-exempt corporations, or passive foreign investment corporations.

2. The additional tax rate for accumulated earnings is a flat 15%.




3. To avoid unreasonable accumulation of earnings, there must be:

a. A demonstrated specific, definite, and feasible plan for the use of accumulation(reasonable needs); or

b. A need to redeem the corporate stock included in a deceased stockholder'sgross estate.

4. Just because the stock is widely held does not exempt it from the accumulatedearnings tax. The accumulated earnings tax is not self-assessed by the corporation; itis IRS-assessed as a result of an IRS audit of the corporation.

5. A dividend paid by the due date of the tax return or hypothetical "consent" dividendsmay reduce or eliminate the tax.

6. Calculation

E)Cc

('3v,.,\) ,. BEFORE:~~ Dividends received deduction

TAXABLE INCOME .. Net operating loss

Charity deduction

~... Ca loss carryover

< ALL CHARITY >

< ALL CAPITAL LOSSES>

~ses < TAXES> (2\\"'\){ During tax year

u,rnM''''~®< DIVIDENDS PAID> Within 2-)1, months

Accumulated Consent dividends

Taxable Income

250,000 (Regular corp.) BUSINESS NEED

OR

150,000 (Service corp.) BEG. E&P

< CORP. NEEDS>

< BEG. EXCESS> BEG. EXCESS

< REMAINING CREDIT> REMAINING CREDIT

CURRENT ACCM TAXABLE INC.

x lS%

ACCUMULATED EARNINGS TAX

G.

II····.... ..

Personal Holding Company Tax

Personal holding companies (PHCs) are really corporations set up by high tax brackettaxpayers to channel their investment income into a corporation and shelter that income bythe low normal tax (15%-25%) of the corporation, instead of paying their higher individual taxrates on that income.

Regular Tax

Minimum Tax

AccumulatedEarnings Tax

orPersonalHolding

Companies Tax


1. Definition of Personal Holding Company

The tax law criteria define personal holding companies as corporationsmore than 50% owned by 5 or fewer individuals (either directly or indirectlyat any time during the last half of the tax year) and having 60% of adjustedordinary gross income consisting of:

Net rent (if less than 50% of ordinary gross income);

Interest that is taxable (nontaxable is excluded);

Royalties (but not mineral, oil, gas, or copyright royalties); or

Dividends from an unrelated domestic corporation.

® a.

CD b.

® c.

® d.

R3-42

WWW.BECKERCPA.COM


2. Additional Tax Assessed

Corporations deemed to be personal holding companies are taxed an additional 15%on personal holding company net income not distributed.

a. Taxable income must be reduced by federal income taxes and net long-termcapital gain (net of tax) to determine the undistributed personal holding companyincome prior to the dividend paid deduction.

b. There is no penalty if net income is distributed (i.e., in the form of actualdividends or consent dividends).

c. PHCs are not subject to the accumulated earnings tax.

3. Self-assessed Tax

The tax is self-assessed by filing a separate Schedule 1120 PH along with Form 1120.

H. Personal Service Corporations Denied Graduated Rates

A personal service corporation (PSC) is primarily involved in the performance of one of thefollowing fields: accounting, law, consulting, engineering, architecture, health, and actuarialscience. PSCs are denied the right to use the graduated corporate rates. Rather, they aretaxed at a flat 35%.

VIII. CORPORATE EARNINGS AND PROFITS (E&P)

Although similar in many respects and in concept, corporate earnings and profits (E&P) are notexactly the same as retained earnings. Earnings and profits are calculated according to the rules offederal income taxation, and retained earnings is calculated according to Generally AcceptedAccounting Principles (GAAP). (For example, while non-taxable dividends reduce retainedearnings, they have no effect on E&P.)

A. General I I1. Required for Corporate Income Tax Return Preparation --

The calculation of E&P (both the current and prior accumulated amounts) is required inthe preparation of the corporate income tax return. E&P is calculated by adjusting thetaxable income of the corporation.

2. Impact on Corporate Distributions and Other Activities

While retained earnings (GAAP-based) presents the net financial position of theshareholders of a corporation and is often used in the valuation of the corporation'scommon stock, a corporation's E&P is a major factor in determining the ability of thecorporation to pay a dividend to the shareholders. The calculation of E&P is alsocritical to the tax impact of corporate distributions, or non-liquidating dividends (notethat special rules exist for 20% shareholders). Further, E&P is a factor in thedetermination of corporate reorganizations, accumulated earnings tax, stockredemptions, partial liquidations, and the tax status of certain S corporations that havepreviously been C corporations (e.g., passive income limit rules).

3. Start with Corporate Taxable Income

The starting point for the calculation of E&P is corporate taxable income for the year.Adjustments are then applied in accordance with the tax code. Thus, any items thathave not been reflected in the corporation's taxable income but may have an impact onthe corporation's ability to pay dividends are included in the calculation of E&P.




B. Adjustments

1. Positive and Negative Adjustments

The adjustments applied to the starting amount of corporate taxable income can bealways positive, always negative, or either positive or negative.

2. Temporary or Permanent

Differences may be temporary or permanent in nature, and they follow the rulesdiscussed in the textbook in the section that presents the corporate Schedule M-1.

C. Current Earnings and Profits General Calculation

Corporate taxable income (positive or negative taxable income):

1. Negative Adjustments ~ Re~l.\ce Cl.\vve~+- E&Pa. Federal income tax expense

b. Non-deductible penalties, fines, political contributions, etc. M&Ec. Officer life insurance premiums [corporation is the beneficiary]

d. Expenses for production of tax-exempt income

e. Non-deductible charitable contributions

f. Non-deductible capital losses

2 Positive Adjustments ~ I~cvec:l\se Cl.\vve~+- E&Pa. Refunds of federal income tax paid

b. Tax-exempt income

c. Refunds of items that were not subject to regular tax under the tax benefit rule

d. NOL deductions

e. Life insurance proceeds where corporation is the beneficiary/l~cvec:l\Se C-SV

f. Dividends received deduction used to calculate regular taxable income

g. Carryovers of capital losses that impacted taxable income

h. Carryovers of charitable contributions that impacted taxable income

i. Non-taxable cancellation of debt not used to reduce basis of property

3. Positive or Negative Adjustments

a. Losses and gains that have different effects on taxable income vs. E&P

b. Changes in the cash surrender value of certain life insurance policies

c. Excess depreciation for E&P over that for regular income tax

d. Differences in allowable deductions for organizational and start-up expenses

e. Installment income method adjustments

f. Completed contract income vs. percentage-of-completion income adjustments

g. Amortization of intangible drilling costs adjustments

h. Section 179 expense per regular tax vs. ratable depreciation on the sameproperty using a five-year life:

= CURRENT EARNINGS AND PROFITS (E&P)


WWW.BECKERCPA.COM


D. Accumulated Earnings and Profits

As mentioned above, the preparation of the corporate income tax return requires thecalculation of current and prior (accumulated) earnings and profits of the company.Generally, the amount of "accumulated E&P" is the amount of E&P that exists as of the endof the tax year that proceeds the current year. Therefore, "Accumulated E&P" (E&P as of thebeginning of the tax year) and "current E&P" are presented as separate amounts for aspecific tax year. For any given year, the distinction is necessary for the classification ofcorporate distributions (discussion follows).

1. General Calculation

The following formula is used to calculate the accumulated E&P to carry forward to thetax year after the current year:

Accumulated E&P as of the beginning of the year

+/- Current E&P for the tax year less any distributions deemed from current E&P

Distributions from accumulated E&P

Accumulated E&P as of the end of the year

2. Classification of Distribution

Corporate distributions are first applied to current E&P, then to accumulated E&P, andthen to return of capital. If any excess remains, it is classified as "excess distributions"and reported as capital gain distributions (taxable income) by the shareholder.Distributions within the year are allocated based on the ratio of each distribution to thetotal distribution. Note that the allocation of the excess distribution to return of capitaland capital gain distributions depends on the stock basis of the shareholder. (Seefurther detailed discussion of this subject in the next section.)

IX. CORPORATE DISTRIBUTIONS

Distributions from corporations to shareholders are taxable to such shareholders if thedistributions are classified as dividends.

A. Dividends Defined

A dividend is defined by the Internal Revenue Code as a distribution of propertyby a corporation out of its earnings and profits (E&P):

IIFormation

OperationsTaxation

DistributionsLiquidation

Current E&P (by year-end) ~

Accumulated E&P (distribution date) ~

Return of capital (no E&P) ~

Capital gain distribution (no E&P/no basis) ~

Taxable diVidend]Taxable dividend 'Sepc:l\Vc:l\te/tAo ~ot ~etTax free and reduces basis of common stock

Taxable income as a capital gain

1. General Netting Rules

The general rule is that current and accumulated E&P are not netted. Dividends comefrom current E&P and then from accumulated E&P. If both are positive, there are noissues; distributions are dividends to the extent of the total of current and accumulatedE&P. If current E&P is positive and accumulated E&P is negative, distributions aredividends to the extent of current E&P only. If current and accumulated E&P arenegative, distributions are not dividends at all. However, if current E&P is negative andaccumulated E&P is positive, the two amounts are netted, and distributions aredividends if the net is positive.




2.

R3-46

Dividends to Preferred vs. Common Shareholders

A dividend to a preferred shareholder is based on that shareholder's fixed percentageat purchase. Preferred shareholders are not common equity owners of a corporation,and they only get paid based on their preferred percentage; therefore, any dividendpayments to a preferred shareholder are considered dividend income to theshareholder. Preferred shareholders are paid in full before common shareholdersreceive dividends. Common shareholders are residual owners of a corporation andshare in the earnings and profits of the corporation as well as the net assets.

B. Source of Distributions

1. Order of Distribution Allocation

Distributions are deemed to come from current E&P first and then from accumulatedE&P. Any distribution in excess of both current and accumulated E&P is treated as anontaxable return of capital that reduces the shareholder's basis in the stock.

EXAMPLE

At December 31, Year 1, the Julie Corporation had $20,000 of accumulated E&P. For the taxable year,

Year 1, Julie had current E&P (before distributions) of $25,000.

(1) If Julie makes distributions in Year 2 of $25,000 or less, the distribution would be a dividend out of

current E&P.

(2) If the distribution is greater than $25,000, but less than or equal to $45,000, the distribution

would be a dividend as follows: $25,000 out of current E&P and up to $20,000 out of accumulated

E&P.

(3) If the distribution is greater than $45,000, the distribution would be a dividend of $45,000, and

the excess over $45,000 is a nontaxable return of capital.

2. Matching Cash Dividends to Source

It is sometimes necessary to allocate cash dividends paid during the year to earningsand profits in order to determine the taxable income for each payment. Whendividends are in excess of earnings and profits, the following allocation applies:

Current Earnings and Profits

Current earnings and profits are allocated on a pro rata basis to each distribution.

Accumulated Earnings and Profits

Accumulated earnings and profits are applied in chronological order, beginningwith the earliest distribution.

EXAMPLE

In Year 1, Linda Corp. had current earnings and profits of $15,000. It paid four cash dividends during

the year of $7,500 each for a total of $30,000. Half of each dividend ($3,750) will be treated as having

been made from current earnings and profits taxable to the shareholder to that extent.


WWW.BECKERCPA.COM


C. Constructive Dividends

Some transactions, while not in the form of dividends, are treated as such when thepayments are not in proportion to stock ownership. Examples include:

1. Excessive salaries paid to shareholder employees

2. Excessive rents and royalties

3. "Loans" to shareholders where there is no intent to repay

4. Sale of assets below fair market value

Regulation 3

D. Stock Dividends

1. Definition

A stock dividend is a distribution by a corporation of its own stock to its shareholders.

2. Generally Not Taxable

Stock dividends are generally not taxable unless the shareholder has a choice ofreceiving cash or other property.

3. Determination of Value

The value of the taxable stock dividend is the fair market value on the distribution date.

4. Allocation of Basis

The basis of a nontaxable stock dividend, where old and new shares are identical, isdetermined by dividing the basis of the old stock by the number of old and new shares.

EXAMPLE

In Year 1, Linda purchased 100 shares of Conduf stock for $18,000 ($180 per share). In Year 2, thecorporation declared a 50% stock dividend and Linda received 50 new shares. After the stockdividend, the basis of each new share is $120 ($18,000';- 150 shares).

E. (Shareholder)raxable Amount

The taxable amount of a dividend from a corporation's earnings and profits depends upon thetype of entity the shareholder is:

1. Individual Shareholder

a. Cash dividends - amount received

b. Property dividends - FMV of property received

2. Corporate Shareholders (subject to the dividends received deduction)

a. Cash dividends - amount received

b. Property dividends - FMV of property received




F. (Corporation~aying Dividend - Taxable Amount

1. General Rule

The general rule is the payment of a dividend does not create a taxable event. Adividend is a reduction of earnings and profits (retained earnings).

-ta 2. Property Dividends

If a corporation distributes appreciated property, the tax results are as follows:

a. The corporation recognizes gain as if the property had been sold (i.e., FMV lessadjusted basis). The gain increases current E&P.

FMV Property

< Net Book Value>

Corp. Gain - E&P

The recipient shareholder includes the FMV of property in income as a dividend(to the extent of E&P).

PASS KEY

When the CPA examination has tested on the taxation of corporations paying propertydividends, an unusual chain of events needs to be understood. The following illustrates theseconsequences:

1. Corporation has no E&P (dividend would not be taxable income)

2. Corporation distributes appreciated property as a dividend

3. Corporation has a recognized gain (on property dividend)

4. Corporate gain increase/creates corporate E&P

5. Dividend to shareholder is now taxable income (to extent of E&P)

c. When depreciable property is distributed, the corporation cannot recognize aloss.

G. Stock Redemption

Stock redemptions occur when a corporation buys back stock from its stockholders. If thestock redemption qualifies for sale or exchange treatment, gain or loss is recognized by theshareholder. If not, the redemption is treated as a dividend to the extent of the corporation'sE&P. The corporation can recognize gain (but not loss) on any appreciated propertydistributed as though it had sold the property for its FMV.

R3-48

1.

2.

Proportional- Taxable dividend income (to shareholder-ordinary income). Generally,the corporation either redeems or cancels the stock pro-rata for all shareholders.

Disproportional (substantially disproportionate) - Sale by shareholder subject totaxable capital gain/loss to shareholder. Disproportional means that there has been ameaningful reduction in the shareholder's ownership interest. The percentageownership after the redemption must be less than 50% and must be less than 80% ofthe percentage ownership before the redemption. Percentage ownership includeswhat is owned by certain family members (only spouse, children, grandchildren, andparents). Regardless of family ownership, a complete 100% termination ofshareholder's interest is considered disproportional.


WWW.BECKERCPA.COM


3. Partial liquidation of corporation (stock held by a non-corporate shareholder) - Treatedas an exchange of stock, not as a dividend.

4. Complete buy-out of shareholder- Shareholder's entire interest is redeemed, and thetransaction is treated as an exchange of stock.

5. Redemption not essentially equivalent to a dividend - Treated as an exchange ofstock.

6. Redemption to pay estate taxes-or expenses - Treated as an exchange when thecorporation redeems stock that has been included in the decedent's gross estate(subject to dollar and time limitations).

X. CORPORATE LIQUIDATION Formation

Operations

Taxation

Distributions

Liquidation

If a corporation is liquidated, the transaction is subject to double taxation (that is, thecorporation and the shareholder must generally recognize gain or loss). Note that thecorporation generally deducts its liquidation expenses (e.g., filing fees, andprofessional fees) on its final tax return. Corporation liquidations take two general forms and arediscussed below.

1. Corporation recognizes gain or loss (as normal) on the sale of the assets, and

2. Shareholders recognize gain or loss to extent cash exceeds adjusted basis of stock.

Corporation(Sells Assets}md Distributes Cash to Shareholders

The result of this transaction is:

~....-Sale Price

<Basis>

Proceeds

<Stock Basis>

Taxable Gain/Loss

Taxable Gain/Loss

/A.

'Sc:l\tMevesl.\H·

2 tc:l\)Ces

\B. Corporation(Distributes Asset~o Shareholders

The result of this transaction is:

1. Corporation recognizes gain or loss as if it sold the assets for the FMV, and

FMV<Basis>

Taxable Gain/Loss

2. Shareholders recognize gain or loss to extent FMV of assets received exceeds theadjusted basis of stock.

FMV<Stock Basis>

Taxable Gain/Loss




C. Tax-free Reorganizations

1. Reorganization Defined

1'-_=·.=.=,=.=.=.=1 Reorganization includes the following:

a. Mergers or consolidations (Type A);

b. The acquisition by one corporation of another corporation's stock, stock for stock(Type B);

c. The acquisition by one corporation of another corporation's assets, stock forassets (Type C);

d. Dividing of the corporation into separate operating corporations (Type D);

e. Recapitalizations (Type E); and

f. Mere change in identity, form, or place of organization (Type F).

2. Parent/Subsidiary Liquidation

No gain or loss is recognized by either the parent corporation or the subsidiarycorporation when the parent, who owns at least 80%, liquidates its subsidiary. Parentassumes the basis of the subsidiary's assets as well as any unused NOL or capital lossor charitable contribution carryovers.

3. Nontaxable Event

a. Corporation - Nontaxab/e

(1) The reorganization is a nontaxable transaction.

(2) All tax attributes remain.

b. Shareholder - Nontaxable

(1) The reorganization is a nontaxable transaction.

(2) The shareholder continues to retain his/her original basis.

(3) The shareholder recognizes gain to the extent he/she receives boot (cash)in the reorganization.

PASS KEY

The general rule for taxable events and basis applies to reorganizations:

Taxpayer

Corporation

Shareholder

Event

Nontaxable

Nontaxable

Income

N-O-N-E

N-O-N-E

Basis

NBV

NBV

Tax Attributes

No Change

No Change

R3-S0

4.

5.

Continuity of Business

A reorganization is treated as a nontaxable transaction because it results in thecontinuation of a business in a modified form. In order to meet the "continuityrequirement," the acquiring corporation must continue the business of the old entity (orentities) or use a significant portion of the old corporation's assets.

Control Requirement

In addition to the continuity requirement, there is a control test. Control is defined as atleast 80% of the total voting power of all classes of stock and at least 80% of all otherclasses of stock. This is the same requirement as that of a tax-free incorporationdiscussed above.


WWW.BECKERCPA.COM


6. Tax Status of Reorganizations

Reorganizations are nontaxable (except to the extent of boot received) because theshareholders have not liquidated their investment but have continued operations in amodified form.

PASS KEY

To distinguish the liquidation and reorganization rules, review the following:

Liquidation

Reorganization

BusinessActivity

Completely ceases

Continues

CorporationConsequence

Taxable

Nontaxable

ShareholderConsequence

Taxable

Nontaxable

D. Worthless Stock - Section 1244 Stock (small business stock)

When a corporation's stock is sold or becomes worthless, an original stockholder can betreated as having an ordinary loss (fully tax deductible), instead of a capital loss, up to$50,000 ($100,000 if married filing jointly). Any loss in excess of this amount would be acapital loss, which would offset capital gains and then a maximum $3,000 per year would bedeductible.

1. Maximum Ordinary Loss Deduction

a. Married-$100,000

b. Single - $50,000

2. Qualifications

a. Cash or property paid to the corporation in exchange for its first $1,000,000 ofcapital stock.

b. The stock must have been issued to an individual stockholder (or a partnership)for money or other property but not stock or securities or services rendered.

E. Small Business Stock - 50% Exclusion of Gain

A noncorporate shareholder, who holds qualified small business stock for more than 5 years,may generally exclude 50% (75% for the period 2/18/09-12/31/10) of the gain on the sale orexchange of the stock.

1. Maximum exclusion and limited to 50% of the greater of:

a. 10 times the taxpayer's basis in the stock, or

b. $10 million dollars (shareholder by shareholder basis).

2. Qualified corporation and must have the following:

a. Stock issued after August 10, 1993.

b. Acquired at the original issuance.

c. C corporation only (not an S corporation).

d. Have less than $50 million of capital as of date of stock issuance.

e. 80% (or more) of the value of the corporation's assets must be used in the activeconduct of one or more qualified trades or businesses.

3. Taxable Portion

Includible portion of the gain is taxed at 28% rate.




SMALL BUSINESS CORPORATIONS (5 CORPORATIONS)

Small closely-held corporations may elect to be treated in a manner similar to partnerships. In effect, all the earnings or

losses of the corporation are passed through to the shareholders.

This results in no corporate-level tax; however, the individuals are taxed on their share of the corporate earnings regardless

of whether the corporation actually distributes the earnings to them.

I. ELIGIBILITY

1.'.)1.1.1;;'[.1"41 To qualify as a small business corporation, the following requirements must be met:

A. Qualified Corporation

The corporation must be a domestic corporation. An S corporation may own any interest in aC corporation (even 100%), but the S corporation may not file a consolidated tax return withthe C corporation. An S corporation may also create a qualified S subsidiary in which it owns100% of the stock; the two S corporations would file as one entity for tax purposes.

B. Eligible Shareholders

1. Eligible shareholders must be an individual, estate, or certain types of trusts.

2. An individual shareholder may not be a nonresident alien.

100 V..S.A.people c:l\Ve

co"'"""'o~

3.

4.

5.

Qualified retirement plans, trusts, and 501 (c)(3) charitable organizations may beshareholders.

Neither corporations nor partnerships are eligible shareholders.

Grantor and voting trusts are permissible shareholders.

C. Shareholder Limit

There may not be more than 100 shareholders. Family members may elect to be treated asone shareholder. Family members include common ancestors, lineal descendants ofcommon ancestors, and their current or former spouses.

D. One Class of Stock

There may not be more than one class of stock outstanding. However, differences incommon stock voting rights are allowed. Preferred stock is not permitted.

II. ELECTING S CORPORATION STATUS

A. When Election Takes Effect ~ By Mc:l\vcl-\ 1$'" (vetvoc:l\c+-lve to be8. o-P yec:l\v)All shareholders (voting and nonvoting) must consent to a valid election. If the election ismade at any time during the entire preceding year or on or before the fifteenth day of the thirdmonth of the election year, the election would be effective on the first day of the tax year(e.g., January 1 for a calendar year corporation).

B. New Shareholders

After the election is made, the consent of a new shareholder is not required. TheS corporation status continues unless a shareholder(s) who owns more than 50% of the stockaffirmatively acts to terminate the election.


WWW.BECKERCPA.COM


Ge~evc:l\l vl.\le B.

III. EFFECT OF 5 CORPORATION ELECTION ON CORPORATION Ge~evc:l\l vl.\le

A. 5 Corporation Tax Year Dec. '31 l$ veq. yec:l\V e~~

S corporations file Form 1120S and must adopt the calendar year, unless a valid businesspurpose for a different taxable year (fiscal year) is established. The return is due by the 15thday of the third month (March 15) after the close of the tax year.

No Tax on Corporation

Generally, there is no tax at the corporation level; all earnings are passed through toshareholders. There are certain exceptions (see item C, below).

Certain Corporation-level Taxes

There are three principal taxes imposed upon S corporations.

1. LIFO Recapture Tax

C corporations that elect S status must include in taxable income for the lastC corporation year the excess of inventory computed under FIFO over LIFO(cumulative basis). The resulting tax on the C Corporation may be paid in four equalinstallments, the first of which is due with the final C corporation return. The remaininginstallments are paid by the S corporation.

2. Built-in Gains Tax

a. Overview1-:mUiUMij,t·1

Ge~evc:l\l vl.\lee)CCefHo~

(<5 COvf. tc:l\)c)

E)CcefHo~

to tl-\ee)CcefHo~

(~O COvf. tc:l\)c)

A distribution or sale of an S corporation's assets may result in a tax on any"built-in gain" at the corporate-level. An unrealized "built-in gain" results whenthe following two conditions occur:

(1) A C corporation elects S corporation status, and

(2) The fair market value of the corporate assets exceeds the adjusted basisof corporate assets on the election date.

The net unrealized built-in gain is the excess of the fair market value of corporateassets over adjusted basis of corporate assets at the beginning of the year ofwhich S corporation status is elected. The amount of "built-in gain" recognized inanyone year is limited to the net unrealized "built-in gain" less any "built-in gain"previously recognized.

Exemptions from Recognition of Gain

An S corporation is exempt from a tax on "built-in gains" under any of thefollowing circumstances:

(1) The S corporation was never a C corporation.

(2) The sale or transfer does not occur within 10 years (7 years for the period1/1/09-12/31/10) of the first day of the first year that the S election is made.

(3) The S corporation can demonstrate that the appreciation occurred after theSelection.

(4) The S corporation can demonstrate that the distributed asset was acquiredafter the Selection.

(5) The net unrealized built-in gain has been completely recognized in prior taxyears.



c.


Calculation of Tax

The tax is calculated by multiplying 35% (the highest corporate tax rate) by thelesser of the following:

(1) Recognized built-in gain for the current year, or

(2) The taxable income of the S corporation if it were a C corporation.

3. Tax on Passive Investment Income

An S corporation is subject to an income tax imposed at the highest corporate rate(35%) on the lesser of net income or excess passive investment income if the followingtwo tests are met:

a. The S corporation has accumulated C corporation earnings and profits (i.e.,accumulated earnings attributable to prior periods in which the corporation was aC corporation), and

b. Passive investment income (e.g., royalties, dividends, interest, rents, andannuities but not gains on sales of securities) exceeds 25% of gross receipts.

IV. EFFECT OF S CORPORATION ELECTION ON SHAREHOLDERS

A. Pass-through of Income and/or Losses (to shareholder/K-1)111II1 Net income (or loss) is passed-through to shareholders as follows:

1.

Pc:l\vh\evsl-\lf vl.\les 2.c:l\Ve ~l.p.peve~+- 3.

(llc:l\bmHes l~CVec:l\Se

fc:l\v+-~evs bc:l\SlS)

4.

Like partnerships, S corporations report both separately and non-separately stateditems of income and/or loss. Separately stated income items include dividends,interest, capital gains and losses, Section 1231 gains and losses, etc. Separatelystated deductions include charitable contributions, Section 179 expenses, etc.

Allocations to shareholders are made on a per-share, per-day basis.

Losses are limited to a shareholder's adjusted basis in S corporation stock plus directshareholder loans to the corporation. Shareholder guarantees do not increase basis.Any losses disallowed may be carried forward indefinitely and will be deductible as theshareholder's basis is increased.

The following S corporation items flow through to the shareholder in a manner similarto a partnership (see Schedule K-1, p. 50, for complete list):

R3-54

a.

b.

c.

-ta d.

e.

f.

g.

h.

i.

Ordinary income (not subject to FICA)

Rental income/loss

Portfolio income (including interest, dividends, royalties, and all capital gains (losses)).

Tax-exempt interest

Percentage depletion

Foreign income tax

Section 1231 gains and losses

Charitable contributions

Expense deduction for recovery property (Section 179)


WWW.BECKERCPA.COM


5. Fringe Benefits

a. Deductible Fringe Benefits

Fringe benefits are deductible for non-shareholder employees and thoseemployee shareholders owning 2% or less of the S corporation.

b. Non-deductible Fringe Benefits

The cost of fringe benefits for shareholders owning over 2% is not deductible tothe S corporation, unless the corporation includes the benefits in theemployee/shareholder's W-2 income.

EXAMPLE

The Duffy Corporation, an Scorporation, is owned equally by three shareholders, Rick, Tim,

and Peter. The corporation is on a calendar year basis. On February 1, 20X5, Peter sold his 1/3

interest in Duffy Corporation to George. For the year ended December 31, 20X5, the

corporation had non-separately stated ordinary income of $120,000. For 20X5, the income of

the corporation should be allocated as follows:

Rick ($120,000 x 1/3)

Tim ($120,000 x 1/3)

Peter (31/365 x $40,000)

George (334/365 x $40,000)

Total

$ 40,000

40,000

3,397

36,603

$120,000

PASS KEY

-rc:l\)Ce~ ll~e c:l\

"c:l\~~ c:l\CCOl.\~t

6.

Similar to a partnership, shareholders in an Scorporation must include on their personalincome tax return their distributive share of each separate "pass-thru" item.

Shareholders are taxed on these items, regardless of whether or not the items have been+--+ distributed (withdrawn) to them during the year.

Accumulated Adjustments Account ("AAA")

The tax effects of distributions paid to shareholders of an S corporation that hasaccumulated earnings and profits since inception (or since the most recent electing of Sstatus) are computed by using the accumulated adjustments account (AM). The AAAis zero at the inception of the S corporation.

a. Increases to the AAA

The AAA is essentially increased by separately and non-separately statedincome and gains (except tax-exempt income and certain life insuranceproceeds).

b. Decreases to the AAA

The AAA is essentially decreased by corporate distributions (distributions maynot reduce the AAA below zero), separately and non-separately stated expenseitems and losses (except for certain non-deductible items that do not affect thecapital account), and non-deductible expenses (except life insurance premiumson a contract that is owned by the corporation and that identifies the corporationas beneficiary) that relate to income other than tax-exempt income.




671109D Final K 1 D AmendedK 1 OMB No 1545 0130

Schedule K-1

~@O9 'pm'"' Shareholder's Share of Current Year Income,(Form 11205) Deductions, Credits, and Other ItemsDepartment of the Treasury

For calendar year 2009, or tax 1 Ordinary business income (loss) 13 CreditsInternal Revenue Service

year beginning ,2009

ending ,20 2 Net rental real estate income (loss)---

Shareholder's Share of Income, Deductions, 3 Other net rental income (loss)

Credits, etc. .... See back of form and separate instructions.

Ipm•• 4 Interest incomeInformation About the Corporation

A Corporation's employer identification number Sa Ordinary dividends

B Corporation's name, address, city, state, and ZIP code Sb Qualified dividends 14 Foreign transactions

6 Royalties

7 Net short-term capital gain (loss)

C IRS Center where corporation filed return 8a Net long-term capital gain (loss)

Ipml', 8b Collectibles (28%) gain (loss)Information About the Shareholder

D Shareholder's identifying number 8c Unrecaptured section 1250 gain

E Shareholder's name, address, city, state, and ZIP code 9 Net section 1231 gain (loss)

10 Other income (loss) 15 Alternative minimum tax (AMn items

F Shareholder's percentage of stockownership for tax year %

11 Section 179 deduction 16 Items affecting shareholder basis

12 Other deductions

2:-c0OJ:s

V1!f(; 17 Other information

LL

* See attached statement for additional information.

For Paperwork Reduction Act Notice, see Instructions for Form 11205. Cat. No. 11520D Schedule K-1 (Form 11205) 2009


WWW.BECKERCPA.COM


Form 1116, Part I

Form 1116, Part I

See the Shareholder'sInstructions

See theShareholder'sInstructions andthe Instructions forForm 6251

See the Shareholder'sInstructions

Form 1040, line 8b

Form 8611, line 8

See the Shareholder's Instructions

Form 8611, line 8See Form 4255See the Shareholder's Instructions

Form 1116, Part IIForm 1116, Part II

See Form 8866

Form 1116, line 12Form 8873Form 8873See the Shareholder's Instructions

See Form 8697

Form 8846, line 5Form 1040, line 61See the Shareholder's Instructions

Report on

1

1

GHI

J

Q

RS

MNoP

Code

M Credit for increasing researchactivities

N Credit for employer social securityand Medicare taxes

o Backup withholdingp Other credits

14. Foreign transactionsA Name of country or U.S.

possessionB Gross income from all sourcesC Gross income sourced at

shareholder levelForeign gross income sourced at corporate levelo Passive category }E General category Form 1116, Part IF Other

Deductions allocated and apportioned at shareholder feve!G Interest expense Form 1116, Part IH Other Form 1116, Part IDeductions allocated and apportioned at corporate level to foreign sourceIncomeI Passive categoryJ General categoryK OtherOther informationL Total foreign taxes paidM Total foreign taxes accruedN Reduction in taxes available for

credito Foreign trading gross receiptsP Extraterritorial income exclusionQ Other foreign transactions

15. Alternative minimum tax (AMT) itemsA Post-1986 depreciation adjustment}B Adjusted gain or lossC Depletion (other than oil & gas)o Oil, gas, &geothermal-gross incomeE Oil, gas, & geothennal-deductionsF Other AMT items

16. Items affecting shareholder basisA Tax-exempt interest incomeB Other tax-exempt incomeC Nondeductible expenseso Property distributionsE Repayment of loans from

shareholders

17. Other informationA Investment income Form 4952, line 4aB Investment expenses Form 4952, line 5C Qualified rehabilitation expenditures

(other than rental real estate) See the Shareholder's Instructionso Basis of energy property See the Shareholder's InstructionsE Recapture of low-income housing

credit (section 42U)(5))F Recapture of low-income housing

credit (other)Recapture of investment creditRecapture of other creditsLook-back interest-completedlong-term contractsLook-back interest-income forecastmethod

K Dispositions of property withsection 179 deductions

l Recapture of section 179deductionSection 453(1)(3) informationSection 453A(c) informationSection 1260(b) informationInterest allocable to productionexpendituresCCF nonqualified withdrawalsDepletion information-oil and gasAmortization of reforestationcosts

T Section 108(i) informationU Other information

Form 1040, line 70, box a

Form 8586, line 11

Form 8844, line 3

See the Shareholder's InstructionsSee the Shareholder's InstructionsForm 6781, line 1See Pub. 535See the Shareholder's Instructions


Schedule E, line 28, column (g)See the Shareholder's Instructions

Form 1040, line 8aForm 1040, line ga

Form 1040, line 9b

Schedule E, line 4

Schedule D, line 5, column (I)

Schedule D, line 12, column (I)

28% Rate Gain Worksheet, line 4(Schedule D instructions)



Form 6478, line 7Form 5884, line 3See the Shareholder's Instructions

JKl

1. Ordinary business income (loss). Determine whether the income (loss) ispassive or nonpassive and enter on your return as follows:

Report onSee the Shareholder's InstructionsSchedule E, line 28, column (g)Schedule E, line 28, column (h)Schedule E, line 28, column OJSee the Shareholder's Instructions

Passive lossPassive incomeNonpassive lossNonpassive income

2. Net rental real estate income (loss)

3. Other net rental income (loss)Net incomeNet loss

4. Interest incomeSa. Ordinary dividends

5b. Qualified dividends

6. Royallies

7. Net short-term capilal gain (loss)

sa. Net long-term capital gain (loss)

8b. Collectibles (28%) gain (loss)

Schedule K-l (Form 1120S) 2009 Page 2This list identifies the codes used on Schedule K-1 for all shareholders and provides summarized reporting information for shareholders whofile Form 1040. For detailed reporting and filing information, see the separate Shareholder's Instructions for Schedule K-1 and theinstructions for your income tax return.

Be. Unrecaptured section 1250 gain

9. Net section 1231 gain (loss)

10. Other income (loss)

CodeA Other portfolio income (loss)B Involuntary conversionsC Sec. 1256 contracts & straddlesD Mining exploration costs recaptureE Other income (loss)

11. Section 179 deduction

12. Other deductionsA Cash contributions (50%) }B Cash contributions (30%)C Noncash contributions (50%)D Noncash contributions (30%) See the Shareholder'sE Capital gain property to a 50% Instructions

organization (30%)F Capital gain property (20%)G Contributions (100%)H Investment interest expense Form 4952, line 1I Deductions-royalty income Schedule E, line 18

J Section 59(e)(2) expenditures See the Shareholder's InstructionsK Deductions-portfolio (2% floor) Schedule A, line 23l Deductions-portfolio (other) Schedule A, line 28

M Preproductive period expenses See the Shareholder's InstructionsN Commercial revitalization deduction

from rental real estate activities See Form 8582 instructionsa Reforestation expense deduction See the Shareholder's InstructionsP Domestic production activities

information See Form 8903 instructionsQ Qualified production activities income Form 8903, line 7R Employer's Form W-2 wages Form 8903, line 155 Other deductions See the Shareholder's Instructions

13. CredilsA Low-income housing credit (section

42(j)(5») from pre-2008 buildings See the Shareholder's InstructionsB Low-income housing credit (other) from

pre-2008 buildings See the Shareholder's InstructionsC Low-income housing credit (section

42(j)(5») from post-2007 buildings Form 8586, line 11o Low-income housing credit (other)

from post-2007 buildingsE Qualified rehabilitation }

expenditures (rental real estate) See the Shareholder'sF Other rental real estate credits InstructionsG Other rental creditsH Undistributed capital gains creditI Alcohol and cellulosic biofuel fuels

creditWork opportunity creditDisabled access creditEmpowerment zone and renewalcommuntiy employment credit




B. Computing Shareholder Basis in S Corporation Stock

The rules for determining a shareholder's basis in S corporation stock are generally the sameas for partnerships, as follows:

Initial Basis

Endin Basis

®® + Income items (separately and non-separately stated items) '*"" I~Cll.\~l~8V \..l~e c:l\ "c:l\~~ c:l\CCOl.\~t,

+ Additional shareholder investments in corporation stock tc:l\)C-Pvee tc:l\)Ce~ w""e~ ec:l\v~e~,

® - Distribution to shareholders l~CO"",e ~ot w""e~ veCelVe~

_-----'L=>o""s"'-s-"o"-r-"e-"-x""e"-'n-"s"'e'-'i"'te'"'-m'-'s=--o,; _

®PASS KEY

An 5 corporation shareholder is permitted to deduct (on their personal income tax return) their pro rata shareof the 5 corporation loss subject to the following limitation:

Loss limitation = Basis + Direct shareholder loans - Distributions

1st To extent of basis in stock Not subject to tax, reduces basis in stock Return of capital

TreatmentTax result

s COR P 0 RAT ION WIT H (N 0 C COR P 0 RAT ION E & p)

Distribution

C. Taxability of Distributions to Shareholders

1'·lf1bi@,i,J,t11 Because S corporations are only subject to a single level of tax, distributions from an Scorporation are generally not subject to taxation for shareholders. However, the rules for

determining the taxability of distributions are presented below.

2nd In excess of basis of stock Taxed as long-term capital gain Capital gain distribution(if stock held for> year)

EXAMPLE

Feliine Corporation, a calendar year 5 corporation since its formation in Year 1, has two equal shareholders,

Carlin and Radon. During Year 5, Carlin received distributions from Feline Corporation of $22,000. At

December 31, Year 5, after all adjustments to basis had been made, except for distributions; Carlin's basis in

his Feline stock was $18,000. For Year 5, Carlin will treat $18,000 as a nontaxable return of capital (reduction

of basis of stock) and a $4,000 long-term capital gain.

S CORPORATION WITH(C CORPORATION E&P}

R3-58

Distribution Tax result Treatment

1st To extent of AAA Not subject to tax, reduces S-corporation (already taxed) profits

( basis in stock

2nd To extent of C corporation Taxed as a dividend, does not Old C-corporation taxable dividendE&P reduce basis in stock

3rd To extent of basis in stock Not subject to tax, reduces Return of capitalbasis in stock

4th In excess of basis in stock Taxed as long-term capital gain Capital gain distribution


WWW.BECKERCPA.COM

Regulation 3

•••••'. ...As previously presented, "AAA" stands for Accumulated Adjustments Account,which essentially means the cumulative amount of S corporation income orloss (separately and non-separately stated items, excluding tax-exemptincome) since the corporation most recently elected S status, less all cumulative distributions.Distributions may not reduce AAA below zero; however, AAA may be negative from Scorporation losses.

Becker Pr essional Education I CPA Exam Review

EXAMPLE

The New Elect Corporation was a C corporation until it elected S status on January 1, Year 2. New Elect had

accumulated E&P of $20,000 at December 31, Year 1. For the period Year 2 - Year 8, New Elect had ordinary

income of $100,000 and had made shareholder distributions of $60,000. Thus, New Elect's AAA balance at

December 31, Year 8 was $40,000. In Year 9, New Elect had ordinary income of $40,000 and made

distributions to shareholders of $110,000. The tax result of these Year 9 items are as follows:

(1) To extent of AAA ($40,000 + $40,000 = $80,000L Tax-free

(2) To extent of C corporation E&P ($20,000l. Dividend

(3) Excess ($10,000L Reduces basis in stock, if in excess of basis, LTCG

v. TERMINATING THE ELECTION

A. When S Corporation Status Terminates

The S corporation status will terminate as a result of any of the following:

1. Holders of a majority of the corporation's stock (any combination of voting and nonvoting common stock) consent to a voluntary revocation;

More than 25% of the corporation's gross receipts come from passive investmentincome for three consecutive years and the corporation had C corporation earningsand profits at the end of each year. The S corporation status is terminated as of thebeginning of the fourth year.

The corporation fails to meet any or all of the eligibility requirements (qualifications) forS corporation status; or - COYf. O\N\\ey

- foYei~\\ O\N\\ey

2.

3.

"3 stvikes ~\\A

Y0l.\lye Ol.\t

B. Re-electing - 5 years

Once an S corporation election is terminated or revoked, a new election cannot be made forfive years unless the IRS consents to an earlier election. If the termination occurs in midyear, the corporation will have two short years, a short S year and a short C year. Earningsare prorated on a daily basis to each of the short years. A special election may be made to"cut off' net income at the exact date of conversion.




EXEMPT ORGANIZATIONS

R3-60

While not generally subject to income taxation, most exempt organizations are still required to file information returns with

the Department of the Treasury and have other detailed reporting and record-keeping requirements. Further, instances will

exist in which the exempt organization will owe tax for certain types of "unrelated" income the organization derives.

I. TYPES OF EXEMPT ORGANIZATIONS ALLOWED UNDER THE INTERNAL REVENUE CODE

A. Section 501(c)(1) - Act of Congress

This type of corporation is organized under an act of Congress as a U.S. instrumentality anddoes not require an application; however, it must be declared exempt under the InternalRevenue Code or the organizing legislation.

Note: Almost all other exempt organizations must make written application for exempt status,be approved by the IRS, become incorporated, and issue capital stock. Further, the Articlesof Organization must limit the purpose of the entity to the charitable/exempt purpose.

B. Section 501 (c)(2) - Application Form 1024

This type of corporation is that organized for the exclusive purpose of holding title to property,collecting income from that property, and turning over the net income to an exemptorganization. A 501 (c)(2) corporation issues capital stock and otherwise acts as acorporation (e.g., there is no limit on salaries, other than "reasonableness").

C. Section 501 (c)(3) Corporation

1. General

This type of corporation includes a community chest; a community fund; a foundationorganized and operated exclusively for religious, charitable, scientific, public safetytesting, literary, or educational purposes; or a foundation organized to foster national orinternational amateur sports competitions (only if none of the activities involve theproviding of athletic facilities or equipment) or to prevent cruelty to children or animals.They must apply and be approved by the IRS to be listed as an exempt organization bythe IRS.

2. Requirements (penalty is loss of tax exempt status)

a. No part of the net earnings may inure to the benefit of any private shareholder orindividual.

b. No substantial part of the activities may be non-exempt activities (e.g., carryingon propaganda or otherwise attempting to influence legislation).

c. The organizations may not directly participate or intervene in any politicalcampaign.

PV'ohibH-eA Tvel\\\SeI\Ci-lO\\S

- 1\\~l"e\\ci\\~ le~isle1\i-lo\\

- 1)iV'ecHy pel\V'i-lcipel\i-l\\~ OV' i\\i-evve\\i\\~ i\\ eI\\\Y polli-lceI\l Cel\tMpel\i~\\

- E\\AoV'Si\\~ CeI\\\AiAeI\i-es

- E\\~eI\~i\\~ i\\ ~"\\A V'eI\iSi\\~ ~OV' polli-lCeI\L~~~~~E~a~t~l~mentCorPAlirightsreserved

WWW.BECKERCPA.COM


D. Section 509 Private Foundations

Regulation 3

1. Included Organizations

Section 509 private foundations include all Section 501 (c)(3) corporations other thanthose specifically excluded. A foreign corporation may qualify as a private foundation.

2. Excluded Organizations ("public organizations")

The following four distinct categories are NOT private foundations:

a. Maximum (50%-type) charitable deduction donees.

b. Broadly publicly-supported organizations receiving more than 1/3 of their annualsupport from members and the public and less than 1/3 from investment incomeand unrelated business income.

c. Supporting organizations.

d. Public safety testing organizations.

3. Required Returns

An annual information return (Form 990-PF) that discloses substantial contributors andamounts of contributions received is required.

4. Termination

a. Involuntary Termination

Private foundations will terminate when they become public charities (theycannot be both!). Further, termination by the IRS will result if the foundationcommits repeated violations or a willful and flagrant violation of any of the privatefoundation provisions.

b. Voluntary Termination

Private foundation status need not be permanent. Voluntary termination may beachieved by notifying the IRS of the plan to terminate, subject to a termination taxpayback of the value of its aggregate tax benefits or its net assets, whichever islower. Alternatively, without a tax payback, a foundation may elect to distributeall of its assets to an organization qualifying for the maximum 50% deduction or itmay operate as a public charity itself for at least five (5) years.

Note: Private foundations may have a charter that limits its exempt purpose, and it is not

required to distribute.!ill of its net assets to any public charity




II. UNRELATED BUSINESS INCOME (UBI)

A. Definition

Unrelated business income (UBI) is the gross income from any unrelated trade or business"regularly" carried on, minus business deductions directly connected therewith. UBI is:

1. Derived from an activity that constitutes a trade or business,

2. Regularly carried on, and

3. Not substantially related to the organization's tax exempt purposes.

Note: The CPA exam will attempt to confuse the candidate by asking questions regarding "unrelated" activities.

Be aware that an unrelated business does not include any activity where all of the work is performed by unpaid

workers (volunteers); thus, the fact that the organization uses unpaid workers makes the business or activity

"related" and not taxable. Further, articles made by disabled persons as part of their rehabilitation are deemed

"related" and are not taxable.

B. Ownership Limitation

Statutory restrictions on unrelated business ownership limit to 20% the combined ownershipof a business enterprise by a private foundation and all disqualified persons. Further, anyexcess holdings that are not divested are taxed. If third parties (those who are notdisqualified persons) have effective control of the business enterprise, the foundation(together with the disqualified persons) may own up to 35%.

C. Taxation of UBI

Although an organization may have tax exempt status, it may become subject to regularcorporate income tax on income from a business enterprise that is not related to its taxexempt purpose (UBI). Note that the fact that an activity results in a loss does not excludethat activity from the definition of an unrelated business (if expenses exceed income, a netoperating loss exists, which is subject to carryback and carryover provisions of net operatinglosses).

1. Tax Filing and Estimated Taxes

When subject to tax (filing of a Form 990-T), the exempt organization must comply with

code provisions regarding installment payments of estimated income tax bycorporations.

2. $1,000 Specific Deduction

A corporation is allowed a $1,000 deduction from unrelated business income; thus, onlyUBI in excess of $1 ,000 is subject to tax.

3. Excluded Items of Income

In addition to the $1,000 specific deduction, the following types of income are excludedfrom tax:

R3-62

a.

b.

Royalties, dividends, interest, and annuities (except those derived fromcontrolled organizations).

Rents from real property, rents from personal property leased with real property(if less than 50% is attributable to the personal property), and income from debtfinanced property.


WWW.BECKERCPA.COM


F.

c. Gains and losses on the sale or exchange of property not held primarily for saleto customers in the ordinary course of trade or business.

d. Income from research of a college or hospital.

e. Income of labor unions (and agricultural or horticultural organizations) used toestablish a retirement home, hospital, or similar exclusive-use facilities.

f. Activities limited to exempt organizations by state law (e.g., bingo games).

g. The value of securities loaned to a broker and the income received by a lender ofsecurities to a broker, provided the identical securities are returned to the lender.

h. Income from the exchange or rental of membership lists of tax-exempt charitableorganizations.

D. Membership Organizations

Certain membership organizations (e.g., social clubs and homeowners' associations) areusually taxed on gross income less deductions for "exempt function income" (dues, fees, andcharges for providing facilities and services for members, dependents, and guests). Thus, ifa social club makes a profit, that profit is generally taxable.

E. "Feeder Organizations"

An organization operated primarily for the purpose of carrying on a trade or business for profitcannot claim tax exemption on the grounds that all of its profits are payable to exemptorganizations. It must rely on its own activities and exempt nature to gain tax exemption.This type of "feeder organization" is taxed on its entire income - not just the portion itdesignates as unrelated business income.

Annual Return Requirement

1. General

An annual information return (Form 990) stating gross income, receipts, contributions,disbursements, etc. is required of most organizations exempt from tax under CodeSection 501 and is open to public inspection. Section 501 (c)(3) organizations mustalso include a Schedule A - Supplementary Information. Form 990 is due by the 15thday of the fifth month following the close of the tax year. An extension of up to sixmonths is generally allowed by the IRS (three months are automatic with a Form 8868,and an additional three months is allowed if the organization explains in detail on aForm 8868 to the IRS why it needs more time and the IRS accepts the application). AForm 990-EZ may be filed if the exempt organization has gross receipts less than$200,000 and total year-end assets of less than $500,000 (for tax years 2010 forward).

2. Exceptions

There are three types of exempt organizations that do not have an annual filingrequirement of Form 990/990-EZ information return with the IRS.

a. Religious or Internally-Supported Organizations

Churches and exclusively religious activities of a religious order or internallysupported auxiliaries are exempt.



Regulation 3

b.

c.

G. Penalties


Certain Organizations that Normally Have Less than $5,000 in GrossReceipts

Certain organizations that have less than $5,000 in gross receipts (and it isnormal for that to be the case) for the year are exempt from filing an annualinformation returns. Those organizations include educational organizations,religious organizations, public-type charities, fraternal organizations, and thoseorganized to prevent cruelty to children or animals. While they do not have anannual information filing requirement of a Form 990/990-EZ, there may be otherreporting requirements (similar to those for the Form 990-N, discussed below)they must comply with.

Organizations that Normally Have Less than $50,000 in Gross Receipts

If an organization has gross receipts of less than $50,000 (years 2010 and later),a Form 990 or 990-EZ is not required to be filed. A simple electronic "postcard"(Form 990-N) is filed with the IRS and requires only the following information: (1)the tax identification number of the organization, (2) the tax year of theorganization, (3) the legal name, physical address, and internet address (ifapplicable) of the organization, (4) the name and address of the principal officerof the organization, and (5) a statement that the annual gross receipts of theorganization regularly do not exceed the $50,000 limit.

R3-64

Penalties apply for failure to file a required tax form (including the 990-N) and failing tocomply with the requirements and disclosures of the exempt organization. Further, if anorganization fails to file the required return for three consecutive years, the tax-exempt statusof the organization will be revoked.

$5"0,000 ov less ~voss veceipi-s

Chl,\V'ches

Hi~h schools - vell~ioL\s

Rell~ioL\s ovAevs

I\\i-ev\\eI\l SL\ppovi- el\L\)Cillel\vies

Societies - tMiSSiO\\eI\vy velel\i-eA-reI\)C e)CetMpi- - OV~eI\\\iz.eA by Co\\~vess


WWW.BECKERCPA.COM


~@09

20

OM B No. 1545-0047

Return of Organization Exempt From Income Tax990Form

, , ,B Check if applicable: Please C Name of organization 0 Employer identification number

D Address changeuse IRS Doing Business Aslabel or

D Name changeprint or Number and street (or P.O. box if mail is not delivered to street address) IRoom/suite E Telephone number

type.

D Initial return See ( )

o TerminatedSpecific

City or town, state or country, and ZIP + 4Instruc-

o Amended returntions_ G Gross receipts S

o Application pending F Name and address of principal officer: H(a) Is this a group return for affiliates7DVes ONoH(b) Are all affiliates included? OYes ONo

I Tax-exempt status: o 501 (c) ( ).... (insert no.) o 4947(a)(1) or 0527 If "No," attach a list. (see instructions)

J Website: ~ H(c) Group exemption number ...

K Fonn of organization: 0 Corporation 0 Trust 0 Association o Other ~ IL Year of formation: M State of legal domicile:(;lm Summary

1 Briefly describe the organization's mission or most significant activities: ----------------------------------------------------

'" -- - -- - - - -- - - - -- - - - - - --- - - --- - - --- -- - - - -- - - - --- - - --- -- - - - -- - - - -- - - - - - - -- - - - -- - - - -- -- - - - - -- - - - -- - - --- -- - - - --- - - --- - - - -- -- - - - -- - - - --- - - - -- -- - - --

"c -- - -- - - - -- - - - -- - - - - - --- - - --- - - --- -- - - - -- - - - --- - - --- -- - - - -- - - - -- - - - - - - -- - - - -- - - - -- -- - - - - -- - - - -- - - --- -- - - - --- - - --- - - - -- -- - - - -- - - - --- - - - -- -- - - --C1I

E -- - -- - - - -- - - - -- - - - - - --- - - --- - - --- -- - - - -- - - - --- - - --- -- - - - -- - - - -- - - - - - - -- - - - -- - - - -- -- - - - - -- - - - -- - - --- -- - - - --- - - --- - - - -- -- - - - --- ------ -- -- -- - - --'"> 2 Check this box ~ 0 if the organization discontinued its operations or disposed of more than 25% of its net assets.0Cl

3 Number of voting members of the governing body (Part VI, line 1a). 3od

'" 4 Number of independent voting members of the governing body (Part VI, line 1b) 4.~

'" 5 Total number of employees (Part V, line 2a) . 5>

~ 6 Total number of volunteers (estimate if necessary) 6

7a Total gross unrelated business revenue from Part VIII, column (C), line 12. 7ab Net unrelated business taxable income from Form 990-T, line 34. 7b

Prior Year CUlTent Year

'"8 Contributions and grants (Part VIII, line 1h)

:::I9 Program service revenue (Part VIII, line 2g)c

'"> 10 Investment income (Part VIII, column (A), lines 3, 4, and 7d)'"a:11 Other revenue (Part VIII, column (A), lines 5, 6d, 8c, 9c, 10c, and 11 e)12 Total revenue-add lines 8 through 11 (mus1 equal Part VIII, column (A), line 12 )

13 Grants and similar amounts paid (Part IX, column (A), lines 1-3)14 Benefits paid to or for members (Part IX, column (A), line 4)

'"'" 15 Salaries, other compensation, employee benefits (Part IX, column (A), lines 5-10)'"c'" 16a Professional fundraising fees (Part IX, column (A), line 11e)a.

I>< b Total fundraising expenses (Part IX, column (D), line 25) ~ __________________________w

17 Other expenses (Part IX, column (A), lines 11 a-11 d, 11f-24f)18 Total expenses. Add lines 13-17 (must equal Part IX, column (A), line 25).19 Revenue less exoenses. Subtract line 18 from line 12

~~

Beginning 01 Current Year End of Yearo~~c

~..!!:! 20 Total assets (Part X, line 16)~~

~'"""." 21 Total liabilities (Part X, line 26)'Q;cz& 22 Net assets or fund balances. Subtract line 21 from line 20 .. Si!:mature Block

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledgeand belief, it is true, correct, and complete. Declaration of preparer (other than officer) is based on all information of which preparer has any knowledge.

Sign~

IHere Signature of officer Date

~ Type or print name and title

Preparer's ~ IDate ICheck if Preparer's identifying numbersel1- (see instructions)

Paidsignature employed ~ 0

Preparer'sFirm's name (or yours ~ I EIN ~ :

Use Only if self-employed),I Phone no.address, and ZIP + 4 ~( )

Under section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except black lungbenefit trust or private foundation)

Department of the TreasuryIntemal Revenue Service ~ The organization may have to use a copy of this return to satisfy state reporting requirements.

A For the 2009 calendar year or tax year beginning 2009 and ending

May the IRS diSCUSS thiS return with the preparer shown above? (see Instructions) DYes D No

For Privacy Act and Paperwork Reduction Act Notice, see the separate instructions. Cat. No. 11282Y Form 990 (2009)



Regulation 3

Form 990 (2009)

':Milill Statement of Program Service AccomplishmentsBriefly describe the organization's mission:


Page 2

2 Did the organization undertake any significant program services during the year which were not listed onthe prior Form 990 or 990-EZ? . DYes D NoIf "Yes," describe these new services on Schedule O.

3 Did the organization cease conducting, or make significant changes in how it conducts, any programservices? DYes D NoIf "Yes," describe these changes on Schedule O.

4 Describe the exempt purpose achievements for each of the organization's three largest program services by expenses.Section 501(c)(3) and 501(c)(4) organizations and section 4947(a)(1) trusts are required to report the amount of grants andallocations to others, the total expenses, and revenue, if any, for each program service reported.

4a (Code: J (Expenses $ including grants of $ J (Revenue $ J

4b (Code: ) (Expenses $ including grants of $ ) (Revenue $ )

4c (Code: ) (Expenses $ including grants of $ ) (Revenue $ )

4d Other program services. (Describe in Schedule 0.)(Expenses $ including grants of $ ) (Revenue $

4e Total program service expenses ~

Form 990 (2009)


WWW.BECKERCPA.COM


Form 990 (2009)

Regulation 3

Page 3. Checklist of Required SchedulesYes No

1 Is the organization described in section 501 (c)(3) or 4947(a)(1) (other than a private foundation)? If "Yes,"complete Schedule A 1

2 Is the organization required to complete Schedule S, Schedule of Contributors? 2

3 Did the organization engage in direct or indirect political campaign activities on behalf of or in opposition tocandidates for public office? If "Yes," complete Schedule C, Part I 3

4 Section 501 (c)(3) organizations. Did the organization engage in lobbying activities? If "Yes," completeSchedule C, Part /I 4

5 Section 501(c)(4), 501(c)(5), and 501 (c)(6) organizations. Is the organization subject to the section 6033(e)notice and reporting requirement and proxy tax? If "Yes," complete Schedule C, Part III . 5

6 Did the organization maintain any donor advised funds or any similar funds or accounts where donors havethe right to provide advice on the distribution or investment of amounts in such funds or accounts? If "Yes,"complete Schedule D, Part I 6

7 Did the organization receive or hold a conservation easement, including easements to preserve open space,the environment, historic land areas, or historic structures? If "Yes," complete Schedule D, Part /I 7

8 Did the organization maintain collections of works of art, historical treasures, or other similar assets? If "Yes,"complete Schedule D, Part /II . 8

9 Did the organization report an amount in Part X, line 21; serve as a custodian for amounts not listed in PartX; or provide credit counseling, debt management, credit repair, or debt negotiation services? If "Yes,"complete Schedule D, Part IV 9

10 Did the organization, directly or through a related organization, hold assets in term, permanent, orquasi-endowments? If "Yes, " complete Schedule D, Part V. 10

11 Is the organization's answer to any of the following questions "Yes"? If so, complete Schedule D, Parts VI,V/I, VIII, IX, or X as applicable 11

• Did the organization report an amount for land, buildings, and equipment in Part X, line 1O? If "Yes," completeSchedule D, Part VI.

• Did the organization report an amount for investments-other securities in Part X, line 12 that is 5% or moreof its total assets reported in Part X, line 16? If "Yes," complete Schedule D, Part V/I.

• Did the organization report an amount for investments-program related in Part X, line 13 that is 5% or moreof its total assets reported in Part X, line 16? If "Yes," complete Schedule D, Part VIII.

• Did the organization report an amount for other assets in Part X, line 15 that is 5% or more of its total assetsreported in Part X, line 16? If "Yes," complete Schedule D, Part IX.

• Did the organization report an amount for other liabilities in Part X, line 25? If "Yes," complete Schedule D, Part X.

• Did the organization's separate or consolidated financial statements for the tax year include a footnote that addressesthe organization's liability for uncertain tax positions under FIN 48? If "Yes," complete Schedule D, Part X.

12 Did the organization obtain separate, independent audited financial statements for the tax year? If "Yes," completeSchedule D, Parts XI, XII, and XIII. 12

12A Was the organization included in consolidated, independent audited financial statements for the tax year? I Yes I No

If "Yes," completing Schedule D, Parts XI, XII, and XIII is optional.. . . . . . . . . . . . 112AI I13 Is the organization a school described in section 170(b)(1 )(A)(ii)? If "Yes, " complete Schedule E 13

14a Did the organization maintain an office, employees, or agents outside of the United States? 14a

b Did the organization have aggregate revenues or expenses of more than $10,000 from grantmaking, fundraising,business, and program service activities outside the United States? If "Yes," complete Schedule F, Part I . 14b

15 Did the organization report on Part IX, column (A), line 3, more than $5,000 of grants or assistance to anyorganization or entity located outside the United States? If "Yes," complete Schedule F, Part II. 15

16 Did the organization report on Part IX, column (A), line 3, more than $5,000 of aggregate grants or assistanceto individuals located outside the United States? If "Yes," complete Schedule F, Part III . 16

17 Did the organization report a total of more than $15,000 of expenses for professional fundraising serviceson Part IX, column (A), lines 6 and 11 e? If "Yes," complete Schedule G, Part I 17

18 Did the organization report more than $15,000 total of fundraising event gross income and contributions onPart VIII, lines 1c and 8a? If "Yes," complete Schedule G, Part /I . 18

19 Did the organization report more than $15,000 of gross income from gaming activities on Part VIII, line 9a?If "Yes, " complete Schedule G, Part III. 19

20 Did the oraanization ooerate one or more hosoitals? If "Yes" comDlete Schedule H 20

Form 990 (2009)



Regulation 3

Form 990 (2009)


Page 4. Checklist of Reauired Schedules (continued)Yes No

21 Did the organization report more than $5,000 of grants and other assistance to governments and organizationsin the United States on Part IX, column (A), line 1? If "Yes, " complete Schedule I, Parts I and II. 21

22 Did the organization report more than $5,000 of grants and other assistance to individuals in theUnited States on Part IX, column (A), line 2? If "Yes," complete Schedule I, Parts I and //1 22

23 Did the organization answer "Yes" to Part VII, Section A, line 3, 4, or 5 about compensation of theorganization's current and former officers, directors, trustees, key employees, and highest compensatedemployees? If "Yes," complete Schedule J 23

24a Did the organization have a tax-exempt bond issue with an outstanding principal amount of more than$100,000 as of the last day of the year, that was issued after December 31, 2002? If "Yes," answer lines24b through 24d and complete Schedule K. If "No," go to line 25. 24a

b Did the organization invest any proceeds of tax-exempt bonds beyond a temporary period exception? . 24b

c Did the organization maintain an escrow account other than a refunding escrow at any time during the yearto defease any tax-exempt bonds? . 24c

d Did the organization act as an "on behalf of" issuer for bonds outstanding at any time during the year? 24d

25a Section 501 (c)(3) and 501 (c)(4) organizations. Did the organization engage in an excess benefit transactionwith a disqualified person during the year? If "Yes," complete Schedule L, Part I 25a

b Is the organization aware that it engaged in an excess benefit transaction with a disqualified person in aprior year, and that the transaction has not been reported on any of the organization's prior Forms 990 or990-EZ? If "Yes," complete Schedule L, Part I 25b

26 Was a loan to or by a current or former officer, director, trustee, key employee, highly compensated employee, ordisqualified person outstanding as of the end of the organization's tax year? If "Yes," complete Schedule L, Part " 26

27 Did the organization provide a grant or other assistance to an officer, director, trustee, key employee,substantial contributor, or a grant selection committee member, or to a person related to such an individual?If "Yes, " complete Schedule L, Part //1 . 27

28 Was the organization a party to a business transaction with one of the following parties (see Schedule L, jPart IV instructions for applicable filing thresholds, conditions, and exceptions):

a A current or former officer, director, trustee, or key employee? If "Yes," complete Schedule L, Part IV 28a

b A family member of a current or former officer, director, trustee, or key employee? If "Yes," completeSchedule L, Part IV . 28b

c An entity of which a current or former officer, director, trustee, or key employee of the organization (or afamily member) was an officer, director, trustee, or direct or indirect owner? If "Yes," complete Schedule L,Part IV 28c

29 Did the organization receive more than $25,000 in non-cash contributions? If "Yes," complete Schedule M 29

30 Did the organization receive contributions of art, historical treasures, or other similar assets, or qualifiedconservation contributions? If "Yes," complete Schedule M 30

31 Did the organization liquidate, terminate, or dissolve and cease operations? If "Yes," complete Schedule N,Part I. 31

32 Did the organization sell, exchange, dispose of, or transfer more than 25% of its net assets? If "Yes," completeSchedule N, Part // 32

33 Did the organization own 100% of an entity disregarded as separate from the organization under Regulationssections 301.7701-2 and 301.7701-3? If "Yes," complete Schedule R, Part I . 33

34 Was the organization related to any tax-exempt or taxable entity? If "Yes," complete Schedule R, Parts II,III, IV, and V, line 1 34

35 Is any related organization a controlled entity within the meaning of section 512(b)(13)? If "Yes," completeSchedule R, Part V, line 2 . 35

36 Section 501 (c)(3) organizations. Did the organization make any transfers to an exempt non-charitable relatedorganization? If "Yes," complete Schedule R, Part V, line 2 . 36

37 Did the organization conduct more than 5% of its activities through an entity that is not a related organizationand that is treated as a partnership for federal income tax purposes? If "Yes," complete Schedule R,Part VI 37

38 Did the organization complete Schedule 0 and provide explanations in Schedule 0 for Part VI, lines 11 and19? Note. All Form 990 filers are required to complete Schedule 0 .. 38

Form 990 (2009)


WWW.BECKERCPA.COM


Form 990 (2009) Page 5Statements Regarding Other IRS Filings and Tax Compliance

Yes No

8

2b

7e

7c

9b9a

4a

7h

7b

7f

3b

7a

7a

3a

6b

1c

12a

11a

10b[10a I

. I 7d'i .

1a Enter the number reported In Box 3 of Form 1096, Annual Summary and Transmittal of I IU.S. Information Returns. Enter -0- If not applicable .. ........, f---'-1.::a+ --i

b Enter the number of Forms W-2G included in line 1a. Enter -0- if not applicable L....:.1.::b'--L --1

C Did the organization comply with backup withholding rules for reportable payments to vendors and reportable 1--/--1-......gaming (gambling) winnings to prize winners?

2a Enter the number of employees reported on Form W-3, Transmittal of Wage and Tax I IStatements, filed for the calendar year ending with or within the year covered by this return L""2...a'--L --! /,__I~_.....

b If at least one is reported on line 2a, did the organization file all required federal employment tax returns?

Note. If the sum of lines 1a and 2a is greater than 250, you may be required to e-file this return. (seeinstructions)

3a Did the organization have unrelated business gross income of $1,000 or more during the year covered bythis return? .

b If "Yes," has it filed a Form 990-T for this year? If "No," provide an explanation in Schedule 0,4a At any time during the calendar year, did the organization have an interest in, or a signature or other authority

over, a financial account in a foreign country (such as a bank account, securities account, or other financialaccount)?

b If "Yes," enter the name of the foreign country: ~ _

See the instructions for exceptions and filing requirements for Form TD F 90-22.1, Report of Foreign Bankand Financial Accounts.

5a Was the organization a party to a prohibited tax shelter transaction at any time during the tax year? . 5ab Did any taxable party notify the organization that it was or is a party to a prohibited tax shelter transaction? r--=5=b-+_-+__

c If "Yes" to line 5a or 5b, did the organization file Form 8886-T, Disclosure by Tax-Exempt Entity RegardingProhibited Tax Shelter Transaction?, 5c

6a Does the organization have annual gross receipts that are normally greater than $100,000, and did the r--=6.::a-+_-+__organization solicit any contributions that were not tax deductible?

b If "Yes," did the organization include with every solicitation an express statement that such contributions orgifts were not tax deductible?

7 Organizations that may receive deductible contributions under section 170(c).a Did the organization receive a payment in excess of $75 made partly as a contribution and partly for goods

and services provided to the payor?

b If "Yes," did the organization notify the donor of the value of the goods or services provided? .

c Did the organization sell, exchange, or otherwise dispose of tangible personal property for which it wasrequired to file Form 8282?

d If "Yes," indicate the number of Forms 8282 filed during the year

e Did the organization, during the year, receive any funds, directly or indirectly, to pay premiums on a personalbenefit contract? .

f Did the organization, during the year, pay premiums, directly or indirectly, on a personal benefit contract?g For all contributions of qualified intellectual property, did the organization file Form 8899 as required?

h For contributions of cars, boats, airplanes, and other vehicles, did the organization file a Form 1098-C asrequired?

8 Sponsoring organizations maintaining donor advised funds and section 509(a)(3) supportingorganizations. Did the supporting organization, or a donor advised fund maintained by a sponsoringorganization, have excess business holdings at any time during the year? .

9 Sponsoring organizations maintaining donor advised funds.a Did the organization make any taxable distributions under section 4966?b Did the organization make a distribution to a donor, donor advisor, or related person?

10 Section 501 (c)(7) organizations. Enter:a Initiation fees and capital contributions included on Part VIII, line 12.b Gross receipts, included on Form 990, Part VIII, line 12, for public use of club facilities

11 Section 501 (c)(12) organizations. Enter:a Gross income from members or shareholders

b Gross income from other sources (Do not net amounts due or paid to other sources againstamounts due or received from them.) L1'--1...b".L --! /,__I~_.....

12a Section 4947(a)(1) non-exempt charitable trusts. Is the organization filing Form 990 in lieu of Form 1041?b If "Yes," enter the amount of tax-exempt interest received or accrued during the year, ·[12b I

Form 990 (2009)




Form 990 (2009) Page 6l::Mii11 Governance, Management, and Disclosure For each "Yes" response to lines 2 through 7b below, and

for a "No" response to line 8a, 8b, or 10b below, describe the circumstances, processes, or changes inSchedule O. See instructions.

Section A. Governina Bodv and ManaaementYes No

1a Enter the number of voting members of the governing body I 1a Ib Enter the nurnber of voting members that are independent I 1b I

2 Did any officer, director, trustee, or key employee have a family relationship or a business relationship withany other officer, director, trustee, or key employee? 2

3 Did the organization delegate control over management duties customarily performed by or under the directsupervision of officers, directors or trustees, or key employees to a management company or other person? . 3

4 Did the organization make any significant changes to its organizational documents since the prior Form 990 was filed? 4

5 Did the organization become aware during the year of a material diversion of the organization's assets? 5

6 Does the organization have members or stockholders? 6

7a Does the organization have members, stockholders, or other persons who may elect one or more membersof the governing body? 7a

b Are any decisions of the governing body subject to approval by members, stockholders, or other persons? 7b

8 Did the organization contemporaneously document the meetings held or written actions undertaken duringthe year by the following:

a The governing body? 8ab Each committee with authority to act on behalf of the governing body? 8b

9 Is there any officer, director, trustee, or key employee listed in Part VII, Section A, who cannot be reachedat the organization's mailing address? If "Yes," provide the names and addresses in Schedule 0 9a

Section B. PoliCies (ThiS Section B requests information about poliCies not reqUired by the InternalRevenue Code.)

Yes No

10a Does the organization have local chapters, branches, or affiliates? 10a

b If "Yes," does the organization have written policies and procedures governing the activities of such chapters,affiliates, and branches to ensure their operations are consistent with those of the organization? 10b

11 Has the organization provided a copy of this Form 990 to all members of its governing body before filing theform? 11

11A Describe in Schedule 0 the process, if any, used by the organization to review this Form 990. I12a Does the organization have a written conflict of interest policy? If "No," go to line 13 . 12a

b Are officers, directors or trustees, and key employees required to disclose annually interests that could giverise to conflicts? 12b

c Does the organization regularly and consistently monitor and enforce compliance with the policy? If "Yes,"describe in Schedule 0 how this is done 12c

13 Does the organization have a written whistleblower policy? 13

14 Does the organization have a written document retention and destruction policy? 14

15 Did the process for determining compensation of the following persons include a review and approval by Iindependent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?a The organization's CEO, Executive Director, or top management official 15a

b Other officers or key employees of the organization 15b

If "Yes" to line 15a or 15b, describe the process in Schedule O. (See instructions.) I16a Did the organization invest in, contribute assets to, or participate in a joint venture or similar arrangementwith a taxable entity during the year? 16a

b If "Yes," has the organization adopted a written policy or procedure requiring the organization to evaluate Iits participation in joint venture arrangements under applicable federal tax law, and taken steps to safeguardthe organization's exempt status with respect to such arrangements? 16b

Section C. Disclosure17 List the states with which a copy of this Form 990 is required to be filed ~ _

18 Section 6104 requires an organization to make its Forms 1023 (or 1024 if applicable), 990, and 990-T (501 (c)(3)s only)available for public inspection. Indicate how you make these available. Check all that apply.D Own website D Another's website D Upon request

19 Describe in Schedule 0 whether (and if so, how), the organization makes its governing documents, conflict of interestpolicy, and financial statements available to the public.

20 State the name, physical address, and telephone number of the person who possesses the books and records of theorganization: ~ _

Form 990 (2009)


WWW.BECKERCPA.COM


Form 990 (2009) Page 7

lilMMIl Compensation of Officers, Directors, Trustees, Key Employees, Highest CompensatedEmployees, and Independent Contractors

Section A. Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees

1a Complete this table for all persons required to be listed. Report compensation for the calendar year ending with or within theorganization's tax year. Use Schedule J-2 if additional space is needed.

• List all of the organization's current officers, directors, trustees (whether individuals or organizations), regardless of amountof compensation. Enter -0- in columns (D), (E), and (F) if no compensation was paid.

• List all of the organization's current key employees. See instructions for definition of "key employee."• List the organization's five current highest compensated employees (other than an officer, director, trustee, or key employee)

who received reportable compensation (Box 5 of Form W-2 and/or Box 7 of Form 1099-MISC) of more than $100,000 from theorganization and any related organizations.

• List all of the organization's former officers, key employees, and highest compensated employees who received more than$100,000 of reportable compensation from the organization and any related organizations.

• List all of the organization's former directors or trustees that received, in the capacity as a former director or trustee ofthe organization, more than $10,000 of reportable compensation from the organization and any related organizations.

List persons in the following order: individual trustees or directors; institutional trustees; officers; key employees; highestcompensated employees; and former such persons.o Check this box if the organization did not compensate any current officer, director, or trustee.

(AI (6) eC) (0) IE) (F)

Name and Title Average Position (check all that apply) Reportable Reportable Estimatedhours per

~~:J 0 '" <DI ." compensation compensation amount of

week S: 3! <D 3<6' 0 from from related other'< 3@" 6: 0CD

"0:0-the organizations compensation

~ ~ OCD~

S~ 0' 3 ~$i organ ization (W-2/1099-MISC) from the:J

"0 CDO~ ~ !!C 0 0 (W-2/1099-MISC) organization

'<2 CD 3 and related~ 2 CD "0

~ ~ ~ organizations~ '"

*Q.

Form 990 (2009)



Regulation 3

Form 990 (2009)


Page 8Section A. Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees (continued)

(A) IB) (C) (D) (E) (F)

Name and title Average Position (check all that apply) Reportable Reportable Estimatedhours per

Q~ => a '" roI "compensation compensation amount of

week !!l. =I: ro 3«5" 0 from from related otherQ, <. n· '< Uor :3roo.: e: ~ ro

~!! ~the organizations compensation

o co g 3 organization ryJ-2/t 099-MISC) from theo~ U=> 0 roo (W-2/t 099-MISe) organization.... 2 !!!. 0

'< 3ro and related1t 2 ro U

ro organizationsro 1t iil

ro Sro0.

1b Total . ~

2 Total number of individuals (including but not limited to those listed above) who received more than $100,000 inreportable compensation from the organization ~

Yes No

3 Did the organization list any former officer, director or trustee, key employee, or highest compensated Iemployee on line 1a? If "Yes, " complete Schedule J for such individual 3

4 For any individual listed on line 1a, is the sum of reportable compensation and other compensation from Ithe organization and related organizations greater than $150,000? If "Yes, " complete Schedule J for suchindividual. 4

5 Did any person listed on line 1a receive or accrue compensation from any unrelated organization for Iservices rendered to the organization? If "Yes, " complete Schedule J for such person 5

Section B. Independent Contractors

1 Complete this table for your five highest compensated independent contractors that received more than $100,000 ofcompensation from the organization.

(A) (B) (e)Name and business address Description of services Compensation

2 Total number of independent contractors (including but not limited to those listed above) who received Imore than $100,000 in compensation from the organization ~

Form 990 (2009)


WWW.BECKERCPA.COM


Form 990 (2009)

Regulation 3

Page 9.. Statement of Revenue(A) (B) (e) (0)

Total revenue Related or Unrelated Revenueexempt business excluded from taxfunction revenue under sectionsrevenue 512 513 or 514

.l!l.l!l 1a Federated campaigns 1ac c~:::> b Membership dues. 1b010.E

Fundraising events 1c"'''' c~J!! d Related organizations 1duf'E e Government grants (contributions). 1ec'-0'"

~~ f All other contributions, gifts, grants,.0_ and similar amounts not included above 1f:soc"C 9 Noncash contributions included in lines 1a-1f: $ ... _._ .... _._---oc0'" h Total. Add lines 1a-1 f ~.. Business Code

:::lc2a..

> -------------------------------------------..a:: b ------_._-_._-------_._---------_._------.-..() C.~ -------------------------------------------.. dCI) -------------------------------------------E e -------_._---------------------------------~Cl f All other program service revenuee Total. Add lines 2a-2f ~Q. 9

3 Investment income (including dividends, interest, andother similar amounts) ~

4 Income from investment of tax-exempt bond proceeds ~

5 Royalties. ~

(i) Real (ii) Personal

6a Gross Rentsb Less: rental expensesc Rental income or (loss)d Net rental income or (loss) ~

7a Gross amount from sales of (i) Securities (ii) Other

assets other than inventory

b Less: cost or other basisand sales expenses

c Gain or (loss)d Net gain or (loss) ~

Q) 8a Gross income from fundraising::ls:: events (not including $ --------------Q)> of contributions reported on line 1c).Q)II: See Part IV, line 18... aQ)

b Less: direct expenses b.r=0 c Net income or (loss) from fund raising events. ~

9a Gross income from gaming activities.See Part IV, line 19 a

b Less: direct expenses. bc Net income or (loss) from gaming activities ~

10a Gross sales of inventory, lessreturns and allowances a

b Less: cost of goods sold bc Net income or (loss) from sales of inventory . ~

Miscellaneous Revenue Business Code I11a -------------------------------------------

b -------------------------------------------

c -------------------------------------------

d All other revenuee Total. Add lines 11a-11d ~

12 Total revenue. See instructions. ~

Form 990 (2009)




Form 990 (2009) Page 10

151f31 Statement of Functional ExpensesSection 501 (c)(3) and 501 (c)(4) organizations must complete all columns.

All other organizations must complete column (A) but are not required to complete columns (8), (e), and (0).

Do not include amounts reported on lines 6b, (A) (6) (C) (0)Total expenses Program service Management and Fundraising

7b, 8b, 9b, and 10b of Part VIII. expenses aeneral expenses expenses

1 Grants and other assistance to governments andorganizations in the U.S. See Part IV, line 21

2 Grants and other assistance to individuals inthe U.S. See Part IV, line 22

3 Grants and other assistance to governments,organizations, and individuals outside theU.S. See Part IV, lines 15 and 16

4 Benefits paid to or for members .

5 Compensation of current officers, directors,trustees, and key employees

6 Compensation not included above, to disqualifiedpersons (as defined under section 4958(f)(1)) andpersons described in section 4958(c)(3)(B)

7 Other salaries and wages

8 Pension plan contributions (include section 401 (k)and section 403(b) employer contributions) .

9 Other employee benefits10 Payroll taxes11 Fees for services (non-employees):

a Managementb Legalc Accountingd Lobbyinge Professional fundraising services. See Part IV, line 17f Investment management feesg Other.

12 Advertising and promotion.13 Office expenses14 Information technology15 Royalties16 Occupancy.17 Travel

18 Payments of travel or entertainment expensesfor any federal, state, or local public officials

19 Conferences, conventions, and meetings20 Interest21 Payments to affiliates22 Depreciation, depletion, and amortization.23 Insurance

24 Other expenses. Itemize expenses notcovered above. (Expenses grouped togetherand labeled miscellaneous may not exceed5% of total expenses shown on line 25 below.)

a ---------------------------------------------------

b -----_._._._---------_._._----_._ .... _._._--_._._.-c ---------------------------------------------------

d -----_._._._---------_._._----_._ .... _._._--_._._.-e ---------------------------------------------------

f All other expenses -----------------------------25 Total functional expenses. Add lines 1 through 24f26 Joint costs. Check here ~ D if following

SOP 98-2. Complete this line only if theorganization reported in column (B) joint costsfrom a combined educational campaign andfundraising solicitation

Form 990 (2009)


WWW.BECKERCPA.COM


Form 990 (2009)

Regulation 3

Page 11.. Balance Sheet

(AI (BIBeginning of year End of year

1 Cash - non-interest-bearing 1

2 Savings and temporary cash investments. 2

3 Pledges and grants receivable, net 3

4 Accounts receivable, net 4

5 Receivables from current and former officers, directors, trustees, key Iemployees, and highest compensated employees. Complete Part II ofSchedule L . 5

6 Receivables from other disqualified persons (as defined under section I4958(f)(1)) and persons described in section 4958(c)(3)(B). CompletePart II of Schedule L . 6

1/1 7 Notes and loans receivable, net 7....QI1/1 8 Inventories for sale or use . 81/1« 9 Prepaid expenses and deferred charges 9

10a Land, buildings, and equipment: cost or 10a Iother basis. Complete Part VI of Schedule D

b Less: accumulated depreciation 10b 10c

11 Investments-publicly traded securities 11

12 Investments-other securities. See Part IV, line 11 12

13 Investments-program-related. See Part IV, line 11 13

14 Intangible assets 14

15 Other assets. See Part IV, line 11 1516 Total assets. Add lines 1 through 15 (must equal line 34) 16

17 Accounts payable and accrued expenses . 17

18 Grants payable 18

19 Deferred revenue . 19

20 Tax-exempt bond liabilities 201/1

21 Escrow or custodial account liability. Complete Part IV of Schedule D 21QI

~ 22 Payables to current and former officers, directors, trustees, key I:cIII employees, highest compensated employees, and disqualified:::i persons. Complete Part II of Schedule L 22

23 Secured mortgages and notes payable to unrelated third parties 23

24 Unsecured notes and loans payable to unrelated third parties 24

25 Other liabilities. Complete Part X of Schedule D 2526 Total liabilities. Add lines 17 through 25 . 26

1/1 Organizations that follow SFAS 117, check here ~ Dand IQI complete lines 27 through 29, and lines 33 and 34.(,)l:

27III 27 Unrestricted net assets .(ijI:lI 28 Temporarily restricted net assets. 28'0 29 Permanently restricted net assets 29l::::l

Organizations that do not follow SFAS 117, check here ~ D Iu... and complete lines 30 through 34.01/1 30 Capital stock or trust principal, or current funds 30....QI

311/1 31 Paid-in or capital surplus, or land, building, or equipment fund1/1« 32 Retained earnings, endowment, accumulated income, or other funds 32....QI 33 Total net assets or fund balances 33z

34 Total liabilities and net assets/fund balances 34

Form 990 (2009)



Regulation 3

Form 990 (2009)


Page 12. Financial Statements and ReportingYes No

1 Accounting method used to prepare the Form 990: D Cash D Accrual D OtherIf the organization changed its method of accounting from a prior year or checked "Other," explain inSchedule O.

2a Were the organization's financial statements compiled or reviewed by an independent accountant? 2a

b Were the organization's financial statements audited by an independent accountant? 2b

c If "Yes" to line 2a or 2b, does the organization have a committee that assumes responsibility for oversight ofthe audit, review, or compilation of its financial statements and selection of an independent accountant? 2c

If the organization changed either its oversight process or selection process during the tax year, explain inSchedule O.

d If "Yes" to line 2a or 2b, check a box below to indicate whether the financial statements for the year wereissued on a consolidated basis, separate basis, or both:D Separate basis D Consolidated basis D Both consolidated and separate basis

3a As a result of a federal award, was the organization required to undergo an audit or audits as set forth inthe Single Audit Act and OMB Circular A-133? 3a

b If "Yes," did the organization undergo the required audit or audits? If the organization did not undergo therequired audit or audits, explain why in Schedule a and describe any steps taken to undergo such audits. 3b

Form 990 (2009)


WWW.BECKERCPA.COM

Documents

reg3