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- no cash withdrawn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