Flashcards in Corporation Tax Deck (59):
P corporation acquired the assets of its wholly‐owned subsidiary, S corporation, under a plan that qualified as a tax‐free complete liquidation of S. Can it transfer carryover charitable contributions or net operating loss?
Yes it can transfer. that is 1 of Tax attributes of the subsidiary transfer to the parent after a tax‐free liquidation of the subsidiary into the parent.
Type A reorganization
Asset for Stock:
-Target's asset exchanged for acquirer's stock. Target not exist anymore.
- Requirement: at least 50% of consideration exchange into stock.
- Gain from stock will be defered
Type B reorganization
stock for stock
-Target's stock exchange for voting stock from acquirer.
- Target still exist, got owned by at least 80% by acquirer
- Gain will be deferred like Type A reorganization.
Type C reorganization
Asset for stock:
-Target's substantially all of asset's exchanged for acquired's Stock
-Substantial meaning 90% of net asset or 70% of gross asset.
Or Split up
A contributed property to exchange for C's stock.
A's Property basis: $40K
Property FMV: $82
Property have a mortgage: $10K which corp assume
What A basis in C's stock
What Corp's basis in the building
A basis in C's stock = property basis less any debt assumed by the corp= 40 - 10 = $30
Corp basis in building = the greater of (1) adjusted NBV + gain recognized by transferor or (2) debt assumed by the corp. Therefore, property basis = $40. In the 2nd scenario when debt assumed by the corp is more than the adjusted basis and the gain recognized or cash contributed, the Corp's basis will be debt assumed by the Corp.
80% voting stock immediate after a transfer, what is tax implication on shareholders ?
Tax free transfer happen when immediately after transfer control shareholders own more than 80% voting stock, otherwise, taxable gain will be recognize
i.e. A , sole shareholder transfer land with basis of $40, FMV of $100 to corp >>Non-taxable transaction, corp basis in land = $40. One year later, B contribute equipment exchange for 10% stock, equipment basis $10, FMV $100>> as 10% < 80%, it's taxable transfer, B recognized gain of $90, Corp basis in equipment is $100.
What type of business required to file tax using accrual basis method.
1. Business that have inventory
2. Tax shelter
3. Certain farming corp
4. C corporations, trusts with unrelated trade or business income and partnership having a c corp as a partner provided the business >$5 Mil annual gross receipts for 3 year period.
Shareholder contribute only service can be counted toward control group?
Goodwill depreciation period
15 year straight line.
What is the limite of deductible charitable contribution for corporation? the excess of deductible amount can be carry forward for how many year.
10% of taxable income after adding back dividend-received deduction.
Excess charitable contribution carried forward to 5 years
Accrued donations deductible
As long as the Board's authorized contribution:
1. before the end of taxable year
2. it was paid by the 15th of the 4th month after the end of taxable year (filing deadline not include extension).
Dividend received deduction depend of the ownership %
1. Ownership 0% to < 20% : DRD 70%
2. Ownership 20% to < 80%: DRD 80%
3. Ownership 80% or more : DRD 100%
4. DRD is 100% if received from the same affiliated group or receive from small business investment.
Stock required to be owned more than 45 days
Deduction not apply to preferred stock
Attention: when calculating DRD, the deduction is limited to the modified taxable income which is taxable income before
1. the DRD
2. Carryback (NOL, Capital loss
3. Domestic production activities deduction. . I.e. CY loss from operation (not include dividend income) of ($10) , div rec'd $100 from unrelated corp. DRD = .7*(100-10)= $6.3.
Organization cost amortization
Amort period = 180 months (amortize by month, i.e start the corp in July 1, Y1 meaning the org cost amortization expense cover 6 month.
Report rent income for accrual corp.
Rent income for accrual corp = rent actual receive + increase of AR
i.e. AR beg =10
AR end = 20
Rent received 50
rental income to record on tax return = 50 + (20-10)= 60
Capital loss deduction.
Capital loss only is used to offset capital gain. not used to reduce ord. income.
Capital loss can carryback 3 year and carryforward 5 year to offset capital gain.
Gift expenses allowed
Gift per individual limit to $25.
Bad debt tax reporting method.
corp required to use direct charge off method
Personal Holding Company definition.
How phc calculate the undistributed income
personal holding company is corp:
1. required to distribute net earning. Otherwise penalty will be imposed.
2.No accumulated earnings tax as net earnings are required to distribute.
3. Personal Holding companies are corp when more than 60% of the adjusted gross income consist of net rent, royalty ,interest and dividend ( from unrelated domestic corp).
4. A shareholder is considered to own stock held by family member including brothers, sisters, ancestors and lineal descendants(children).
Note: To calculate the undistributed income: deducted federal income tax
Illegal business (i.e. weed selling business). How to report income and expenses
Income can be netted with cost of sale. But no related business expenses will be deducted due to illegality of the business.
How corp can reduce accumulated earning tax?
How to calculate the acc. earning tax?
1. Paid out dividend by the filing deadline in the following year(4/15)
2. Prove business need which required the co to accumulate earnings .
Calculate the accumulated earning tax:
Less: Fed Income tax
Less: $250,000 (minimum accumulated earnings credit)
Consent dividend is agreement between shareholder and the corp, whereby the s/h pick up the amount on their personal income without actual distribution being made.
That is consider dividend paid on the corp's books.
No underpayment penalty will be imposed when?
when the tax for the year is less than $1,000.
To be entitled to file a consolidated return, all the corporation in the group
1. Must have been a members of an affiliated group at some time during the tax year
2. Must have file a consent (the act of filing a consolidated return qualified as consent)
An affiliated group means that a common parents owns :
80% or more of the voting power and value of all outstanding stock
Corp that are denied the filing of consolidated return privilege include.
2. Foreign Corp
3. Most real estate investment trusts (REITs)
4. Some insurance company
5. Most exempt organizations.
Dividend received deduction limitation for consolidated corps
X reported $120,000 loss which include $10,000 dividend from Y (X & Y file consolidated TR). Y report $140,000 income which included $30,000 of dividend received from less than 20% owned stock investment. What is the group consolidated loss for the year.
$10,000 dividend from Y is excluded as X& Y consolidate, that makes loss of 130,000(= -120,000-10,000). Add Y income, to get to income of $10,000.
The dividend received deduction on the $30,000 div received by Y is limited by 30% of the consolidated taxable income bef dividend received deduction which is .3x10,000 = 3,000. Therefore the net income after dividend deduction is 7,000 = 10,000 - 3,000 .
AMT income exemption
The normal exemption amount for corp is $40,000. It must be reduced by 25% of the amount by whixh AMTI exceed $150,000, causing the exemption amount to be completely phased out when AMTI is $310,000 or more
Taxability of distribution
1. Net operating Income
Less: Non-deductible expense
AMT Income adjustments
1. Adjustment for gain loss from sale
2. Long term contract : Difference between revenue calculated under completed contract method and revenue calculated under the % of completion method
3. Installment sale: acrual method used to record profit instead of installment sale method
4. Depr adjustment for property placed into service after 1986 and before 1999 (1986-1999)
Preferences mean in AMT calculation (PPP)
Preference is excludible for regular tax purpose but added back for AMT purpose.
1. Percentage depletion
2. Private activity bond
3. Pre 1987 acrs depreciation
ACE = Adjustment to current earning (MOLDD) multiplied by 75%
Negative adjustment rule?
2. Organizational expense amortization is added back
3. Life insurance proceeds on key employee added back.
4. Depreciation (added or substracted)
5. Dividend- received deduction (added back)
Negative adjustment rule: The ACE adjustment can be negative. but the amount of the negative adjustment in a particular tax year cannot be greater than the cumulative net positive ACE adjustment (prior positive adjustment less prior negative adjustment)
Minimum tax Credit: against future regular tax
2. A corp that pays AMT in one year may use this AMT as a credit in future years against the corp's regular income tax liability
1. Taxable income
2. Add: preference items
3. = Unadjusted AMT taxable income
4. ACE adjustments time 75%
5. = AMT income
6. Less NOL (not exceed 90% of AMT income)
7. Less exemption: $40,000 (reduced 25% for any excess of $150,000)
Corp's capital loss carryback or carryover
Corp capital loss carryback or carryover treated as short term capital loss to offset capital gain and 1231 gain
How much of distribution in excess of the accumulated earning and profit and current earning considered dividend?
Only the amount of distribution in the extent of AEP and current earning considered dividend
Corp liquidate, gain or loss from distributed property based on FMV or cost basis of the property?
When a corp liquidate and distribute asset to shareholders, gain is recognized to the extent that FMV distributed to shareholder exceeds shareholder's basis
1. Current E&P (by year end) -> Taxable dividend
2. Accu. E&P -> Taxable dividend
3. Return of capital (no E&P) -> tax free and reduce basis of common stock
4. Capital gain distribution (no E&P no basis) -> capital gain .
Multiple distributions in a year
1. Current E&P (as earnings made through out the year), distribution to the extent of CY E&P is prorated through out the year.
2. Acc. E&P, first come first served, based on chronological order of distribution
i.e. distributions of $100 total equally distributed each quarter from a Corp with CY E&P of $80, Acc. E&P of $10. Each quarter distribution is $25. Answer: the first $20 distribution of each quarter will come from CY E&P, Acc E&P, first come first served, $5 from 1st and 2nd distribution will come from Acc E&P, the rest $5 from 3rd and 4th will be tax free return of capital.
Distribution in complete liquidation of a corporation taxable to shareholder as capital gain (loss) or ordinary
Shareholder own stock, so property paid to shareholder as liquidation distribution considered payment of their stock, therefore the shareholder must recognize capital gain or loss equal to the difference between the FMV and the basis of the stock.
Stock dividend taxable or not
Stock dividend generally not taxable unless shareholder has a choice of receiveing cash or other property.
Distribution to preferred shareholder vs. common stockholder
Preferred shareholder are paid in full before common shareholders receive dividends
Liquidating distribution of property from subsidiary to parent corp taxability
No gain or loss recognized by either the parent corp or the sub corp when the parent own at least 80% of the stock.
Basis of stock when shareholder contribute property with mortgage.
1. Jones contributed property NBV $100, have mortgage of $60, the property FMV $120, received $10 from the corp.
2. Carey contributed property NBV $20, FMV $50, mortgage $20, Carey contributed $30 cash to the corp.
3. Token contributed $10 cash , property worth $40, basis $5, mortgage 20.
Basis of share
Jones Carey Token
Net book value 100 20 5
Less: debt relief (60) (20) (20)
Cash contributed 0 30 10
Cash received (10) 0
Gain recognized 10 0 5
Basis of share 40 30 0
Penalty for C-corp payment estimated tax late
If the Corp is not a large corp, use 100% prior year method for estimated taxes.
Late payment penalty is half of a percent for each month (fraction of a month considered 1 month) up to a max 25%.
Late payment penalty exception: if 90% of the tax was paid on time and the remaining amount is paid by the extended due date. No penalty.
S corp status effective date
To be effective for the current taxable year, the S corp election must be made by the 15th day of the third month of the taxable year. If the election is made after that date, it becomes effective on the first day of the next taxable year, Jan 1, next year.
Revoke S status
S corp status can be revoked if shareholder owning more than 50% of the total number of issued and outstanding shares consent. The specific percentage of voting and nonvoting shareholder is not considered, just the total.
Build in gain for property contributed when forming a C corp. Later C become S corp.
Build-in Gain determine at the time the S election become effective. The appraised valued of the property at that time if exceeding basis, the difference will result in build in gain which is taxable at 35% highest corp tax rate.
Distribution and loss in current year exceed s corp shareholder basis. What order for the distribution and loss to exhaust shareholder's basis .
Distribution first, then loss.
I.e. Basis beginning $500, distribution CY is 300, loss is 250.
Basis of 500 less distribution of 300= 200.
loss of 250, only 200 deductible, 50 will be carried over to next year.
S-corp election termination related to passive investment income and previously C corp status
S corp that are former C Corp with undistributed C corp earnings and profits are restricted to less than or equal to 25% of the total E&P is passive investment income realized without terminating their S election.
A company terminated s corp status. When can the company reelect S status?
Until the 5th year from the year of termination.
Termination of partnership status
A partnership terminate for income tax purpose when 50% or more of its interest change hands within 12 months .
What happening to the remaining partner when the partnership got terminated?
Tax law treats this as a distribution of the prior partnership's assets followed by a recontribution of the (deemed) distributed assets to the new partnership.
Basis of partner's interest when partner contributed services.
If a person received an interest in the capital of a partnership in exchange for services provided to the partnership. The basis of the interest is the FMV of the the interest acquired.
I.e. Don received a 10% interest in the capital of Rev partnership for services rendered. Partnership net asset have basis of $350, FMV of $500. Don basis in partnership is $50 (10% of FMV).
when the holding period of a partnership interest acquired in exchange for a contributed capital asset begins.
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner's holding period of the capital asset began.
In the absence of an election to adopt an annual accounting period, what is the required tax year for a partnership?
Per IRC Section 706(b), a partnership tax year must have the same taxable year of the partners that, in the aggregate have interest greater than 50%, which is determined based on the testing date, which is the first day of the partnership's tax year.
Exceptions: (1) If there is no "majority-interest" tax year, then the tax year is the tax year of all of the principal partners of the partnership (who owning 5% or more of the income or capital of the partnership). (2)If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that cause the least aggregate deferral of income to the partners must be adopted.
Non-liquidating distribution of partnership capital assets. What gain or loss will be recognized?
No gain or loss will be recognized. The basis of the property distributed is the value of the distribution.
I.e. Partnership A distribute machine FMV of $100 with basis of $70 to its partners. $70 will be reduced from basis of partners.
Who elect the method of depreciation in partnership and what method is allowed?
The partnership elect the depreciation method and any method approved by the IRS.
Section 444, choosing a tax year different from their required tax year.
The referenced tax year is where the deferral period is not longer than three months (i.e. the number of months between the beginning of the tax year and the end of the required tax year).