C-Corp Flashcards
Forming the Corp
80% Rule:
If owner transfers property and get 80% or more of stock - property comes in at basis - no gain or loss (not treated as a sale)
- Even as partners: if both contribute and come away with more than 80% total - basis of property
- If services get more than 20% of stock, the 80% cannot be applied to the property - both will show ordinary income (service - full amount, property - gain to FMV)
Assets with Debt:
- Transferor’s New Basis (Form of Debt Relief) = Original Basis - Liability Assumed by Corp
- No gain even with debt relief (maybe in future because of lower basis)
- Company Basis in property is greater of: Debt Assumed OR Transferor’s Basis
- if debt is MORE than asset: Reduce the basis - if below zero = taxable gain to shareholder and 0 stock basis
M-1 Reconciliation
Bad Debt Expense:
- can only deduct what was actually written off in a year
- add back expense on books, deduct actual write off
Warranty Cost:
- can only deduct costs actually incurred
- add back expense on books, deduct only expenses incurred
Life Insurance:
- Beneficiary is corporation, NO DEDUCTION
- Beneficiary anyone else, can deduct
Capital Losses:
- all gains and losses are netted
- gain is taxed as ordinary income
- no deduction for capital loss (only carried back 3 years or forward 5 years to use against a capital gain)
Municipal Bond Interest:
- Not taxable on Fed Return
- if money is borrowed to buy these bonds, interest is NOT deductible (because money earned on that loan money is not taxed) – added back on
Provision for Fed Income Taxes:
- Fed Tax provision IS NOT DEDUCTIBLE
- State Tax Provision IS DEDUCTIBLE
Depreciation
- add back book depreciation
- deduct MACRS depreciation/tax depreciation
Dividends and Distributions
Dividend Payment:
- recipient is taxed dividend income
- company is not deductible
- for owner: any distribution in excess of the profits would simply reduce stockholder’s basis
- excess over capital is taxed as capital gain
Identifying a dividend:
ONE or BOTH
- company has profit (net income) for the year
- company has accumulated earnings and profits at the beginning of the year
– always use current earnings first:
–if profit is positive and AE if neg, dividend first
– if AE is positive and profit is neg, net them first
Assets as dividend:
- dividend will come out as FMV
- built in gain is added to the accumulated earnings and profits - distribution is taxable as a dividend up to new total, reminder is return of capital/reduction of basis (not taxed)
- if FMV is less: whole amount is issued as dividend as long as earnings and profits cover it
- loss for company can only be deducted if it is sold, not distributed
– shareholder to purchase must be =< 50% - related party loss, not deductible - related party gains do not exist (all gains are taxed)
Property distributed with debt:
Debt Assumed by Shareholder:
- value of property, net debt assumed, is amount eligible for dividend
- company has gain of mortgage over basis
- if mortgage is greater the FMV - No Tax
- basis to shareholder is greater of mortgage or FMV
Stock Redemptions and Liquidations
Redemption - Sale of stock back to the issuing corp
- shareholder wants sale to earn long term capital gain
– Rules - for LT capital gain not for dividend:
1. After redemption, shareholder must own less than 50%
AND
2. must be more than 20% drop in ownership
Partial Liquidation: treat as exchange qualifying as capital gain or loss
Complete Corporate Liquidation
- get cash but also inventory, car, or building in exchange for cancelling shares of stock
- double taxation when corp is liquidated:
Corporate Asset recognition:: - Corp recognizes Gains and Losses: Corp tax is paid on appreciated assets being distributed (not related parties for deduction)
- loss can be recognized on assets at liquidation to shareholders owning 50% or less
- not all is capital gain, need to look at the nature of the asset
- with liability (mortgage) - FV cannot be less than mortgage (FV will become mortgage if more)
AND
Shareholder Asset Recognition::
- shareholders are taxed on diff of FV and basis
- with liability - reduce the FV by liability before subtracting basis
Organization Costs
Costs to give birth to a new business
- up to $5000 immediately deducted
- over $50,000 you start to lose immediate deduction in increments of $1000, but can amortize everything above the immediate deduction over 15 year period: start in month when they “begin business” not comes into existence
What is included:
- Legal Fees
- State filing fees
- necessary fees to incorporate
- accounting and consulting services for choosing entity type
- expenses of initial meetings of directors and shareholders
- NOT DEDUCTIBLE stock issuance costs: printing stock certs, underwriter fees, commissions to broker
Start up costs
Next expenses incurred as part of the business cycle
- incurred AFTER business is born but BEFORE it begins active trade or business
- considered to be part of creating business
- up to $5000 immediately deducted
- over $50,000 you start to lose immediate deduction in increments of $1000, but can amortize everything above the immediate deduction over 15 year period: start in month when they “begin business” not comes into existence
Typical costs
- initial advertising and marketing
- salaries and benefits prior to starting production or generating revenue
- initial accounting and legal fees beyond the organization costs
- rent and utilities used in pre opening
Section 197 Property
Goodwill
- acquired when a company buys another company
- amortized over 15 years for tax
Considered a Capital Asset
Section 1231
Business Assets like equipment, machinery and buildings - long term tangible assets held longer than 12 years
Basis:
- cost at purchase and getting asset ready for intended use.
- further improvement is also capitalized
- basis is reduced with accumulated depreciation
Real Property:
- includes land and all items permanently affixed to the land
Capital Gain: stocks, bonds, etc
Section 1231 Gain: equipment and building
Dividends Received Deduction
Double Taxation:
- Corp Taxed at 21%
- when distribute earnings, taxed a second time to shareholders
If corporation gets the dividend:
- dividend received deduction
- 50% deduction (TCJA): must own less than 20% of the stock
- 65% deduction: own between 20% and 80%
- 100% deduction: 80% or more (affiliated group)
Gross business income
+ Dividend Income
= total Income
- Operating Expenses
= Taxable income before DRD
Lesser of Taxable income or ACTUAL dividend * % = DRD
Taxable income before DRD - DRD = Total Taxable Income
With NOL:
- take full DRD deduction and make NOL larger
Charitable Contributions
- Can deduct amount up to 10% tentative taxable income
- excess carried over for 5 years
- if approved pledge was made in one year and pd within 3.5 mos of next year - deduction can be taken on first year
Accumulated Earnings Tax
- If audited by IRS
- Imposed on C-Corp when Accumulated earnings are in excess of $250,000 of improperly retained instead of being distributed as dividends to high tax bracket shareholders
- regular corp $250,000 exemption (can be used once)
- service corp $150,000 exemption (can be used once)
- tax is 20%
- based on retained earnings in excess of “reasonable needs” of company
How to Avoid:
- pay enough dividends
- they need more earnings to grow
- pay late dividends (by April 15)
- consent dividends - hypothetical dividends treated as if they are paid on last day of year but not actually disbursed - shareholders increase stock basis by amount of consent dividends in gross income
Imposed regardless of # of shareholders
- never for S corp or Partnership
Personal Holding Company Tax
For small c-corps only
- not subject to both
- flat 20%
- Few owners: 5 or less hold half or more of the stock in the last half of the year
- passive and portfolio income: 60% is from dividends, interest, rent, royalties
- all objective and corp should self-assess
Tax Free Re-Org
For either full acquisition for assets of ‘target’ corp ‘stock for assets’ or “stock for stock”
Stock for Stock Reorg - Class B
- voting stock from acquiring org exchanged solely for target corp stock
- no boot is exchanged
- after - acquiring must own 80% or more
- shareholder basis stays the same and no gain is taxable to shareholders or corps
Stock for Assets - Class A (Statutory Merger or Consolidation)
- stock of acquiring corp is exchanged for all the assets of target corp
- no gains or losses are recognized on assets transferred from target to acquiring corp
- target corp must liquidate and dissolve
- 50% of consideration provided to target must be acquiring corp stock (rest can be cash)
- both voting and non-voting can be used
- other consideration besides equity is considered boot and triggers gain
Type C
- acquisition of SUBSTANTIALLY ALL of assets of target in exchanged for acquiring corp (90% of net assets or 70% of gross assets)
- target does not need to dissolve
- acquiring firm may use assets and stock, target distributes to shareholders
- boot is allowed but cannot exceed 20% of total consideration
- voting stock must be 80% of consideration to Target
Type D
- divisive not acquisitive - parent divides by transferring assets to a sub and becomes a stockholder in the sub (i.e. ebay and paypal)
Type E & F
Re-Capitalizations and small changes like change in name of corp or state of incorporation ‘mere change in place’
- swaps preferred stock for bonds outstanding
Type G - bankruptcy
Re-Org Tax Attributes
- if target disappears, then acquiring corp is entitled to tax attributes of target
- attributes include: earnings and profits, net operating loss carryovers, tax credit carryovers, charitable contribution carryovers, capital loss carry over, basis of assets
- if target survives as a sub (type B), then tax attributes remain with target.
Controlled Group
- A corp owns 80% or more of a corp
- NEGATIVE
- only 1 Section 179 deduction up to limit for all
- only 1 Accumulated Earnings Credit up to limit for all
Brother/Sister:
- 2 or more corps are owned by 5 or fewer persons (individuals, estates, trusts)
- Requirement 1: 2 or more corps owned by 5 or fewer persons with ownership of MORE THAN 50% total voting power OR MORE THAN 50% of value of shares
- TEST:
– 1. Add together the lowest ownership of all owners per business.
–Remove the companies that have least % per owner and recalculate
–If total is more than 50%, Step 2
– 2. Remove any owner who does not have common ownership in all companies. Ownership % by all remaining individuals (must be 80% or more)
