Corporate Tax Flashcards
C Corporation
A tax-paying entity, taxed separately from its owners, created formally in accordance with the laws of the state in which it is considered domiciled, with shareholders as owners who have limited liability.
Section 351 Tax-Free Exchange
A provision that allows unincorporated entities to incorporate without significant tax ramifications by making exchanges of property or cash for equity nontaxable, provided only stock is received in exchange for the property and the party transferring the property and cash has control, consisting of at least 80% ownership when the exchange is complete. Services are excluded from the definition of property and are considered taxable exchanges.
Accrual Basis
A method of accounting that requires a corporation to generally recognize revenues when earned, except for rents and interest received in advance, and expenses when incurred, provided they are paid within 2 ½ months of the corporation’s year-end.
Dividends-Received Deduction (DRD)
Front
A corporate deduction equal to a percentage of dividends received based on the level of ownership:
- 50% if a company owns less than 20% of the voting stock of another company (Unaffiliated co)
- 65% if a company owns 20% or more, but less than 80% of the voting stock of another company
- 100% if a company owns 80% or more of the voting stock of another company (Control)
Charitable Contributions
Donations made by a corporation to a charitable organization, deductible to the extent of 10% of adjusted taxable income (ATI), with any excess carried forward up to 5 years. Pledges may be accrued if paid within 3 ½ months of year-end.
Adjusted Taxable Income (ATI)
A corporation’s taxable income before any deduction for charitable contributions, a dividends-received deduction, or any capital loss carrybacks.
Nondeductible Expenses
xpenses incurred by a corporation that are not considered ordinary and necessary for tax purposes and are, therefore, not deductible, including fines and penalties imposed by a government, costs of issuing stock, lobbying costs, compensation of executive officers in excess of $1,000,000 per year, and club dues.
Accrual Differences
Items that are reported differently by an accrual basis corporate taxpayer than they will be handled for financial reporting purposes, including bad debts, warranties, contingencies, unrealized gains and losses on marketable securities, and inventory losses.
Accumulated Earnings Tax (AET)
A 20% penalty tax is imposed on a corporation for accumulating excessive retained earnings to encourage the distribution of dividends. Excessive is considered to be $250,000 for a manufacturing company and $150,000 for a personal services company.
Personal Holding Company (PHC)
A tax on the undistributed income of a corporation that has 5 or fewer stockholders and earns 60% or more of its income from passive sources, such as interest, dividends, rents, and royalties. The tax on the undistributed amount is 20%.
Schedule M-1 Reconciliation
A corporation’s reconciliation of book (financial statement) income (before special deductions – DRD & NOL Deduction) to taxable income. The reconciling items include both Temporary differences (bad debt expense, warranty expense, depreciation differences), and Permanent differences (municipal bond interest, 50% meals, fines, penalties, premiums paid on key person life insurance).
Section 1244 Stock
Stock acquired by a shareholder directly from a corporation with initial capital of $1,000,000 or less, losses on which are deductible as ordinary to the extent of $50,000 for a single taxpayer ($100,000 for married filing jointly) with the excess carried forward indefinitely and deductible as capital losses subject to the $3,000 per year limitation.
