Corp / Entity Taxation Flashcards Preview

REG > Corp / Entity Taxation > Flashcards

Flashcards in Corp / Entity Taxation Deck (110):
1

Expense Deduction in lieu of Depreciation

(Section 179 expense)

Limit = $510k for new/used personal property

Phase out dollar for dollar after $2,030,000

Deduction not permitted when net loss exists or if deduction would create a net loss

2

Corp Tax

Executive Compensation Deduction

Max = $1M (fixed / base salary)

3

Form 709

Gift tax form

*tax paid by person giving the gift*

4

Tax Due on Current Gifts

Formula...

Gross gifts in a calendar year (@FMV)
- exclusion of $14k per donee per year
- unlimited marital deduction
- unlimited charitable gifts
= taxable gifts this year

+ taxable gifts of prior years
= cumulative lifetime gifts

x tax rate
- tax paid
- credits
= tax due on current gifts

5

Estate Expenses and Deductions

Medical expenses
Administrative expenses
*above = expense or liability, but not both*

Unlimited charitable deduction
Unlimited marital deduction
*above = discretionary deductions*

6

Estate Transfer Tax

Formula...

gross estate
- non discretionary deductions
= adjusted gross estate
- discretionary deductions
= taxable estate
+ adjusted taxable gifts
= tentative tax base at death
x uniform tax rates
= tentative estate tax
- gift taxes payable
= gross estate tax
- applicable credit
= estate tax due

7

Form 706

Filed if gifts exceed 2017 limit ($5,490,000)

Due in 9 months after death

8

Property transfers to corporations

Non-taxable upon formation, if resulting in 80% ownership

Taxable if not 80%, or subsequent to formation

Treated like a sale of property to corp at FMV

9

Corp Tax

Shareholder Tax Consequences

No gain/loss if:
1 - 80% control
2 - no receipt/loot

2...
- no cash withdrawn
- excess debt put into corp

NBV assets - liabilities = gain/loss

10

Amortization

GAAP not equal to Tax

Tax = 15 yr SL

GAAP =
- public = impairment test / not amortized
- private = option to amortize over 10 years

11

Form 1041

US income tax return for estates and trusts

12

Complex Trusts

May accumulate current income

May distribute principle

May deduct charitable contributions

Permitted a $100 exemption in arriving at taxable income

13

Grantor Trust

Individual who established the trust retains control

Income tax of the grantor

Can be qualified shareholder of an S Corp

Typically included in the taxable estate of the grantor upon his/her death

14

Simple Trusts

Only make disbursements out of current income

Required to distribute all of its income currently

Cannot take a deduction for charitable contributions

Entitled to a $300 exemption

15

Trusts and Estates

Annual Estate Income Tax
(Form 1041)

Required when income exceeds $600
- exemptions for estates = $600
- no standard deduction allowed

Tax year return due 15th day of 4th month

Estate exempted from making estimated tax payments for first two tax years

16

Trusts and Estates

Income Distribution Deduction

Lessor of:
1 - actual distribution to beneficiary
2 - DNI (less adjusted tax-exempt interest)

17

Distributable Net Income

(DNI) formula...

estate / trust gross income (includes cap gains)
- estate / trust deductions
= Adjusted Total Income

+ adjusted tax exempt interest
- capital gains (attributable to corpus)
= DNI

18

Nontaxable Liquidation of a Partnership

"complete withdrawal"

beg. capital account
+ % of income/loss up to withdrawal
= Partners capital account

+ % of liabilities
= Adjusted basis at date of withdrawal

- cash withdrawn
= Remaining basis to be allocated to assets withdrawn

Gain recognized exception = $ > basis
Loss recognized exception = $ < basis (no other items)

19

LLC Key Points

Protects from liabilities like a corporation

Unlimited members

Sole prop can be single member LLC

Can't IPO

LLC members can make changes / manage but shareholders generally cannot

20

Taxable Income to Partners

Income = taxable = increases basis

Withdrawal = nontaxable = decreases basis

21

Partnership Terminates when...

Ops cease

50% of cap and profits is sold or exchanged

Less than 2 partners

22

Partnerships

Property Subject to an (excess) liability

If debt relieved (negative basis) exceeds basis once everything is factored in, it results in a 0 basis and taxable gain as boot/loot to the partner

23

Partnership Initial Basis Calculation

Cash contributed
+ NBV property contributed
- Liabilities assumed by partnership
+ Services rendered FMV (taxable as income to partner)
+ Share of partnership liabilities

24

How to lose S Corp Status

Voluntary revocation

Failure to meet eligibility requirements
- corp or foreign owner

+ 25% gross receipts from passive investment income for 3 consecutive years and had C corp E/P at end of each year

*can re-apply in 5 years*

25

S Corp Shareholder

Loss Limitation Formula

Basis
- Direct shareholder loans
- Distributions
= Loss Limitation

26

Computing Shareholder Basis in S Corp

initial basis
+ income items (separate, non-separate, tax free income)
+ additional shareholder investments in corp stock
- distributions to shareholders
- loss or expense items
= ending basis

27

1120

Schedule E

Ordinary business income (including S Corp)

Net rental real estate income/loss

28

S Corp

Pass-through of income/losses to SH

K1 - on per share, per day basis

Losses limited to basis

Deduct up to = basis + direct loans

Disallowed losses can be carried forward indefinitely

Cost of fringe benefits over 2% not deductible
- include in K1

29

S Corp

Passive Investment Income taxed if...

S Corp has accumulated C Corp E/P

Passive income exceeds 25% of gross receipts investment

30

S Corp

Exemptions from Recognizing Gain

No tax on "built-in-gain" if:

S Corp was never a C Corp

Sale / xfer doesn't occur within 10 years of S Corp election

Appreciation occurred after S election

Distributed asset was acquired after S election

Net unrealized gain (built-in) has been completely recognized in prior tax years

31

S Corp

Eligible Shareholders

1 class of stock / 100 shareholders max

Must be an individual, estate, or certain type of trust

Can't be nonresident alien

Qualified retirement plans, trusts, 501c3's okay

No corporations or partnerships

Grantor and voting trusts okay

32

S Corporations

Shareholders pay tax

Avoids 2x taxation

Form C corp and then apply for S corp election

33

Liquidation and Reorganization Rules

Liquidation

Business activity completely ceases

Corp consequence = taxable

Shareholder consequence = taxable

34

Liquidation and Reorganization Rules

Reorganization

Business activity continues

Nontaxable to both corp and shareholders

35

Tax Free Reorganizations

Type F

Change in form, identity, or place or organization

36

Tax Free Reorganizations

Type E

Recapitalizations

37

Tax Free Reorganizations

Type D

Dividing of the corp into separate operating corporations

38

Tax Free Reorganizations

Type C

Acquisition by one corp of another corps assets, stock for assets

39

Tax Free Reorganizations

Type B

Acquisition by one corp of another corps stock, stock for stock

40

Tax Free Reorganizations

Type A

Mergers or consolidations

41

Corporation Paying Dividend Exceptions

Does not create a taxable event

*exception: property dividends = taxable event*

FMV property
- NBV
= corp gain

42

Stock Dividends

Generally not taxable

Value is FMV at distribution date

Basis = basis of old stock / (old + new shares)

43

Constructive Dividends

Excessive salaries paid to shareholder employees

Excessive rents and royalties

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

Sale of assets below FMV

44

Dividends Defined

Current E/P (by year end) = taxable div

Accumulated E/P (distribution date) = taxable div

Return of capital (no E/P) = tax free, reduces basis

Capital gains distribution (no E/P/no basis) =
taxable income as capital gain

45

Capital Loss Carryover

Capital loss = only offset capital gains of corp

"Short term"
- carried back = 3 years
- carried forward = 5 years

Capital gains = no lower tax rate / taxed at ordinary rates

46

Net Operating Losses

1 - no charitable contribution deduction allowed
2 - no dividends received deduction
3 - no domestic production activities
4 - nothing counts from previous NOLs to current
5 - Can't deduct capital loss carry back against net cap gain

Carry back = 2 years
Carry forward = 20 years

47

Consolidated Taxable Income Calculation

1 - calculate stand-alone taxable income
2 - remove inter-company transactions (sales, adjustments, dividends)
3 - determine gains, losses, deductions at consolidated level
4 - taxable income combined
5 - taxable income adjusted for items from 3 above

48

Disadvantages of Filing Consolidated Return

Mandatory compliance with complicated regs

Possible 2x counting of inventory

Inter-company tx losses can be deferred

Have to have same tax year

Tax credits may be limited

Binding for future years

Some states don't allow

49

Advantages of Filing Consolidated Return

Offset capital losses

Offset operating losses

Dividends received 100% removed

Tax deductions

NOL carry-overs

Some deferred inter-company sales

50

Affiliated Group Defined

Conslidated tax return when:
- 80%+ voting power and 80% value of stock

Consolidate:
- GAAP = over 50%
- Tax = 80-100%

51

Bonus Depreciation

New property only

50% = 2015-2017 (placed in service)
40% = 2018 ("")
30% = 2019 ("")

Claimed after section 179 and before regular

Example assets:
- 1st < Section 179 >
- 2nd < Bonus Depreciation >
- 3rd < Regular >

52

Corporate Capital Gain / Loss

No lower / special tax rate

Net Cap Loss = only to be used to offset cap gains
- back 3 years
- forward 5 years

53

Corp AMT

Minimum Tax Credit (MTC)

Credit against future regular tax

Carry forward of MTC (not back)

*carry forward forever*

54

Corp AMT

Foreign Tax Credit

Only credit allowed against Tentative Minimum Tax

Can be carried back 1 year / forward 10

55

Corp AMT

Tax Rate

Flat 20%

56

Corp AMT

AMT Exemption Amount

$40,000

25% of AMTI over $150,000

57

Corp AMT

Alternative Tax Net Operating Loss Deduction
(ATNOLD)

Generally limited to 90% of AMTI

58

Corp AMT

Adjusted Current Earnings ("ACE")

(MOLDD)

Municipal bond interest added back
Organizational expense amortization added back
Life insurance proceeds on key employees added back
Difference between AMT and ACE depreciation
Dividends received deduction

ACE = 75% of difference between ACE and AMTI*

ACE can be negative, but can't exceed bet positive ACE from prior periods

59

Corp AMT

Preferences
(PPP)

*added back to income*

Percentage depletion
Private activity bonds
Pre-1987 ACRS depreciation

60

Corp AMT

+/- Adjustments

(ALIE)

Adjustments for gain/loss
Long-term contracts
Installment sales-dealer
Excess depreciation

61

Corporations Exempt from AMT

If gross receipts from previous 3 periods is:
- 7.5 million or less

62

C Corp

Foreign Tax Credit

Choose annually to take either a credit or a deduction

Calculated:
1 - determine qualified foreign income tax paid
2 - compute foreign tax credit limitation
3 - determine lesser of the two above

Unused foreign tax credits:
- carry back = 1 year
- carry forward = 10 years

63

C Corp

Research and Development Tax Credit

20% of the increase in qualified research expenses over defined base amount

Small businesses able to use R/O credit to offset AMT

64

Up to 3 taxes on C Corp

1 - Regular tax
2a - Accumulated earnings OR
2b - Personal holding company tax
3 - AMT

65

1120

Schedule M3

Net income / loss reconciliation for corporations with total assets of $10M or more

66

Dividend Received Deduction

Does NOT apply to...

Personal service corporations

Personal holding companies

Personally taxes S Corps

67

Corp Tax

Business Meals and Entertainment Deduction

50% deductible to corporation

68

Corp Tax

Penalties and Illegal Activities

Not deductible

69

Corp Tax

Taxes Deduction

State / City / Federal Payroll
= deductible

Federal income taxes = add back to book / GAAP income

70

Corp Tax

Lobbying and Political Expenditures

Not tax deductible

71

Corp Tax

Capital Losses Deduction

Not allowed

Only to offset capital gains

72

Corp Tax

Inventory Valuation Methods Deduction

Must be same method
- GAAP / tax basis
- Tax return

Uniform Capitalization Rules Impact
- raw materials
- DL
- factory overhead

73

Corp Tax

Dividends Received Deduction

Reduces tax on corp receiving dividends

0 - 20% ownership = 70% deduction
20-80% ownership = 80% deduction
80%+ ownership = 100% deduction
Consolidated return = 100% deduction

74

Corp Tax

Business Gifts Deduction

$25 per year, per person

75

Corp Tax

Life Insurance Premiums (expense) Deduction

Corp names as beneficiary - corp owns policy
- NOT tax deductible

Insured employee named as beneficiary - employee owns policy
- tax deductible

76

Corp Tax

Amortization, Depreciation, Depletion Deduction

Goodwill
Covenants not to compete
Franchises
Trademarks
Trade names

*amortize SL over 15 years*

77

Corp Tax

Business Losses or Casualty Losses Relates to Business

100% deductible
*less any insurance proceeds

Partially destroyed
- decline in value
- adjusted basis before casualty
- lesser of NBV or change in FMV

Fully destroyed
- NBV

78

Corp Tax

Organizational Expenditures and Start Up Costs Deduction

Organizational expenditures = $5k / ...
Start up costs = $5k / ...
... excess 15 years (180 months)

Included:
- legal services drafting charter
- bylaws
- minutes of org meetings
- accounting services
- fees paid to incorporation state

Excluded:
- issuing and selling stock
- commissions
- underwriters fees
- costs incurred in the transfer of assets to corp

79

Corp Tax

Charitable Contributions Deduction

Limit = 10% of adjusted taxable income

Accrue and pay by April 15th

80

Corp Tax

Business Interest Expense Deduction

On business = incurred and paid = deduction

On investment = up to taxable investment income

Prepaid = deduct "later" when incurred

81

Corp Tax

Bad Debts: Specific Charge-Off Method

Accrual Basis = tax deductible when specific AR written off

Cash Basis = No deduction (it was never income)

82

Corp Tax

Bonus Accruals (non-shareholder / employee) Deduction

Pay by April 15th

83

Calculating QPAI

Domestic production gross receipts
- COGS
- other directly allocable expenses or losses
- proper share of other deductions

= qualified production activities income (QPAI)

84

Corp Tax

Domestic Production Deduction

Deduction for US production
- may not exceed 50% of W2 wages

9% deduction for lower of:
- qualified production activities income (QPAI)
- taxable income (disregarding QPAI deduction)

85

1120

Schedule M2

Analytics of unappropriated retained earnings per books

86

1120

Schedule M1

Reconciliation of income (loss) per books with income per return

*show all differences (temp. / perm.)*

87

1120

Schedule L

Balance sheet per books

88

1120

Schedule K

Other information

89

1120

Schedule C

Dividends and special deductions

90

1120

Schedule J

Tax computation and payment

91

Form 1120

C Corp tax return

92

C Corp

General Business Credit

Greater of:
- 25% regular tax liability above $25,000
- "Tentative Minimum Tax" for the year

Can be carried back 1 year / forward 20

93

Corp AMT Formula

Regular taxable income
+/- Adjustment items to income (ALIE)
+ Preference items to increase income (PPP)
= Unadjusted AMTI

+/- Adjusted current earnings (MOLDD)
- AMT NOL deduction
= AMTI

- AMT exemption ($40k - 25% of MTI over $150k)
= AMT Base

x 20% AMT rate
= Gross AMT

- AMT foreign tax credit
= Tentative MT

- Regular tax liability
= AMT

94

Basis of common stock to shareholder

Cash = FMV
Property = NBV - debt assumed by corp
Services = FMV = taxable

95

Dividends Received Deduction

Does NOT apply to...

S Corps
Personal Service Companies
Personal Holding Companies

96

Personal Service Company

Taxed at a flat 35%

Law, accounting, engineering, consulting, etc..

97

Accumulated earnings tax

Corps with $250k+ acc. E/P

Flat 20% penalty tax

98

Personal Holding Company

5 or less people own 50%+

60% ordinary income comes from NIRD

Add 20% tax on NI not distributed

99

Personal Holding Company

NIRD

60% ordinary income comes from NIRD

N - net rent >50%
I - interest that's taxable (don't include nontaxable)
R - royalties
D - dividends from unrelated domestic corps

100

Distribution of appreciated property

FMV property
- NBV
= Corp. gain

101

Small Business Stock Exclusion

Non-corporate shareholder
Holds small business stock 5 years +
100% gain on sale or exchange is excluded
C Corp only

Maximum exclusion limited to greater of:
1 - 10x basis in stock
2 - $10M / $5M MFS

102

S Corp status takes effect...

If before the 15th day of the 3rd month in the election year = 1st day of the tax year

103

Accumulated Adjustments Account (AAA)

Tracks the taxable / distributable income and expenses for the S Corp

104

Other Adjustments Account (OAA)

Contains records of all other / non-taxable income and expense items the S Corp tracks

105

Distributions from S Corp with NO C Corp E/P

1 - to extent of basis in stock
no tax / reduces basis
return of capital

2 - beyond basis in stock
taxed as long term capital gain (if over 1 yr)
capital gain distribution

106

Distributions from S Corp with C Corp E/P

1 - to extent of AAA
no tax / reduces basis
S corp profits

2 - to extend of corp E/P
taxed as dividend, no reduction of basis
old c corp taxable dividend

3 - to extent of basis in stock
no tax / reduces basis
return of capital

4 - beyond basis in stock
taxed as long term capital gain (if over 1 yr)
capital gain distribution

107

Partner Basis Formula (BASE)

Beginning capital account
+ % All income - % All losses (up to basis)
- withdrawalS
= Ending capital account

+ % liabilities (both recourse and non-recourse)
= Year end basis

108

Partnership FY and return

FY = calendar (3 month deferral acceptable)

Return = Form 1065 = due March 15

109

Partnership

Capital Gain / Loss Calculation

Beginning capital account
+/- % of income / loss up to sale
= Capital account at sale date

+ % of liabilities
= Adjusted basis

- Amount received (cash, assumption of debt, FMV prop.)
= Gain / Loss

110

Hot assets

Treated as ordinary gain to a partner, as if cash were taken

unrealized receivables
appreciated inventory
"recapture income" regarding depreciable assets