R3 Flashcards
C Corporation Formation
Corporation - GR: no gain or loss - basis of property is greater of a) adjusted basis (NBV) or b) liability taken on by corp Shareholder - GR: no gain or loss (nontaxable) IF a) 80% control and b) no boot - basis of common stock: cash: amount contributed property: adjusted basis reduced by any debt assumed corp + add gain recognized by shareholder (to bring stock basis to zero) services: FMV (taxable as ordinary income)
if the GR for shareholders doesn’t apply, it’s taxable so property is at FMV
Boot
NBV Assets - Liabilities = boot if negative
Gross Income Differences
Temporary Differences (in tax not in GAAP)
- interest income in advance
- rental income in advance
- royalties in advance
Permanent Differences (in GAAP not in tax)
- interest income from state and municipal obligations
- federal income taxes
- life insurance proceeds on key officer
Form M1 & M3
know them
Domestic Production Deduction
- 9% deduction on less or
a) qualified production activities income (QPAI)
b) taxable income - QPAI = domestic gross receipts - COGS - other directly allocable expenses or losses - proper share of other deductions
- domestic gross receipts are sales of property that’s manufactured, produced, grown, extracted, constructed, etc. in the US
- total deduction may not exceed 50% of W2 wages paid by the corp for a year
Executive Compensation
not deductible over $1,000,000
Bonus Accruals
deductible if paid by 2 1/2 to 3 1/2 months after year end (april 15)
Bad Debts– Specific Charge off Method
- Accrual Basis must use charge-off method
- tax deduction when specific AR is written off
- Cash Basis was never “income” so no tax deduction
- except in case of uncollectible check that has been deposited and recorded
Business Interest Expense
on business: deduct when incurred and paid (same w prepaid)
on investments: up to net taxable investment income
tax-free stuff (like bonds): not deductible
Charitable Contributions
- max deduction of 10% of taxable income
- excess carry forward 5 years
- calculated from income before DRD or charitable cont.
- accruals must be paid by april 15 to be taxable
- taxable income calculation (in another slide)
total taxable income
calculated BEFORE the deduction of
- any charitable contribution deduction
- dividends received deduction
- NOL carry back
- capital loss carrybacks or
- US production activities deduction
Business Losses or Casualty Losses Related to Business
100% deductible
- no $100 reduction or 10% AGI reduction, just reduction for insurance proceeds
- partially destroyed: loss is lessor of
a) decline in value of property or
b) adjusted basis of property before casualty - fully destroyed: loss is adjusted basis
Organizational Expenditures and Start-up Costs
up to 5,000 of organizational expenditures and of start up costs each
- $5,000 + excess/180 months (15 yrs)
- includes: legal services drafting corporate charter, accounting services, and fees paid to the state
- excludes: costs of issuing and selling stock, commissions, underwriter’s fees, and costs incurred in transfer of assets to a corp
tax: 5000 + excess/180 months
GAAP: expense
Amortization, Depreciation, and Depletion
goodwill, covenants, franchises, trademarks, and trade names amortized on straight line basis over 15 years beginning w month intangible was acquired
tax: amortized over 15 year straight line
GAAP: not amortized
Life Insurance Premiums
- Corp named as beneficiary: not tax deductible
- Employee named as beneficiary: tax deductible
Business Gifts
deduct $25 per person per year
Business Meals and Entertainment
50% tax deductible
Penalties and Illegal Activities
Not deductible
Taxes
- state and local taxes and federal payroll taxes are deductible
- federal income taxes are not deductible (add back to book income)
- foreign income taxes may be used as a credit
Lobbying and Political Expenditures
generally not deductible except direct-type lobbying expenses for local governments
Capital Gains and Losses
- capital losses only offset capital gains (unlike individuals who have 3,000 capital loss deduction)
- 3 year carryback 5 year carryforward
- capital gains taxed at ordinary income rates
commonly tested
Net Operating Losses
- same NOL rules as individuals
- carryback 2 carryforward 20
- form 1120X must be filed w/i 3 years
- when calculating NOL don’t use charitable contribution deduction but can use DRD
Inventory Valuation Methods
all taxpayers who have inventory are required to use accrual basis of accounting
- tax method used for acct. purposes must be used for income tax purposes
- cost method
- lower of cost or market method
- rolling-average method
- retail method
- FIFO
- LIFO
- uniform capitalization rules
- more R3-21
General Business Credit
credit may not exceed net income tax less the greater of:
- 25% of regular tax liability above 25,000 or
- tentative minimum tax for the year
net income tax = regular tax + AMT - nonrefundable tax credits
- carryback 1 year carryforward 20 years
deferred taxes are only established for temporary differences
Dividends Received Deduction
- holding period 46 days
percentage ownership | DRD
0 to 20% 70%
20 to 80% 80%
80 to 100% 100% - 0 to 20% referred to as “unrelated”
- DRD is the lesser of:
a) % of dividends received or
b) % of taxable income including charity deduction - EXCEPTION if DRD results in NOL
entities DRD doesn’t apply to (dont take it “personally”)
- personal service corporations
- personal holding companies
- (personally taxed) S corporations
affiliated corporations that file consolidated returns can deduct dividends 100%
