Flashcards in Corporations Deck (78):
General Rule of Corporate Tax Consquences
No gain or loss to the corporation issuing stick in exchange for property in the following transactions
1) Formation-Issuance of common stock
2) Reacquistion- Purchase of treasure stock
3) Resale- Sale of treasury stock
Basis of property in Corporations
General rule is that the basis of property received from the transferor/shareholder is the greater of:
Adjusted basis (NBV) of the transferor/shareholder (plus any gain recognizied by the transferor/shareholder),
Debt assumed by corporation (transferor may recognize gain to prevent the negative basis).
Shareholder Tax Consequences
Shareholder contributing property (not services) in exchange for corporation common stock has no gain or loss if the following two conditions have been met:
1) 80% control
2) Boot not involved
Basis of Common Stock (to shareholder)
Basis of common stock will be
Property-Adjusted basis (NBV)
a) The adjusted basis of property is reduced by any debt on the property assumed by the corporation
b) Gain recognized by the shareholder is added to bring the stock basis to zero.
Determination of Corporate Taxable Income/Loss
Corporation are taxed in a manner similiar to that of individual taxpayers.
Cash received in advance of accrual GAAP income is taxed, such as interest income, prepaid rent, royalty income.
Some GAAP income items are not includible as taxable income, such as:
1) Interest income from muncipal or state obligations/bonds
2) Certain proceeds from life insurance on the life of an officer.
Trade or Business Deductions
Expenses that are attributable to the trade or business of the corporation are deductible. All of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a business are deductible.
Domestic Production Deduction
Business may deduct a specific percentage of their qualified production activities income.
Deduction is 9% of the lesser of qualified production activities income or taxable income
Calculating Domestic Production Income
Domestic production gross receipts
Qualified production activities income
May not deduct compensation expenses in excess of $1,000,000 paid to the CEO or the 4 highly compensated officers.
Bonuses paid by an accrual basis taxpayer are deductible in the tax year when all events have occured that establish a liability with reasonable accuracy.
Business Interest Expense
Interest paid or accrued during the taxable year on indebtedness incurred for business purposes is deductible.
10% of adjusted taxable income limitation
Business Losses or Casualty Losses Related to Business
Not compensated by insurance deductible in tax year destruction occurred.
For an item partially destroyed
1) Loss is limited to the lesser or the decline in value of the property or the adjusted basis of the property immediately before the casualty
1) Amount of the loss is the adjusted basis of the property.
Organizational expenditures and startup costs
May deduct up to $5,000 of organizational expendtures and $5,000 of start up costs.
Included costs- allowable organizational expenditures and start-up costs include fees paid for legal services in drafting the corporate charter, bylaws, minutes of the organization meetings, fees paid for accounting services and fees paid to state of incorporation
Excluded costs- selling stock, commissions, underwriters fees and costs incurred for transfer of assets to corporation
Amortization, Depeciation, and Depletion
Goodwill, covenants not to compete, franchises, trademarks and trade names must be amortized on a straight line basis over 15 year basis for tax basis.
Test for impairment is done under GAAP.
Life Insurance Premiums
Premiums paid by the corporation for life insurance policies on key employees are not deductible when the corporation is directly or indirectly the befenficiary.
If the insurance premiums paid on insurance policies where the beneficiary is named by the insured employee, such premiums are deductible as an employee benefit.
Max deduction of $25 per recipient
Business meals and Entertainment
50% deductible to the corporation
Capital Gains and Losses
Capital Losses Deduction Not Allowed. Net capital losses are carried back 3 years and carry forward 5 years.
Capital gains tax calculated at the same rate as ordinary income.
Net Operating Losses
Net Operating Losses are carried back 2 years and carryforward 20 years.
1) No charitable contribution deduction is allowed in calculating the NOL.
2) The dividends received deduction is allowed before calculating the NOL.
Inventory valuation methods
Cost Method-Inventories are valued at cost (including direct labor, direct materials and attributable indirect costs), less discounts, plus freight-in.
Lower of Cost or Market Method-Inventories are valued to at the lower of cost or market, which for normal goods is generally the current bid price at the date of inventory per each item in inventory.
Rolling Average Method- Method will generally not be allowed when inventories are held for long periods of time in some circumstances or when costs tend to fluctuate significantly.
Retail Method- Retail method will approximate the cost or the market of items in inventory by substracting the mark-up percentage to retail from the retail price, typically from inventory that has a large volume of items.
Inventory ID Methods
FIFO- Most commonly used
LIFO- Must be elected taxpayer in the first year if is used and the taxpayer must use the same method for its financial statement purposes. Significant valuation adjustments may be required under LIFO.
General Business Credit
Consists of a combination of the following
1) Investment Credit
2) Work Opportunity Credit
3) Alcohol fuels credit
4) Research credit
5) Low-income housing credit
6) Small employer pension plan start up costs credit
7) alternative motor vehicle credit
8) Other infrequent credits
Generally net income tax less the greater of 25% of regular tax liability above $25,000 or tentative minimum tax. Carried back one year and forward 20 years.
Dividends Received Deduction
Domestic corporations only are allowed this deduction. Purpose is to prevent triple taxation of earnings.
Percentage allowed may be either 70%, 80% or 100%
Must Own investee stock for at least 46 days during the 91 day period beginning on the date 45 days before the ex-dividend date of the stock.
Does not employee to the following-->Personal service corporations, Personal holding companies, Personally taxed S Corps.
Equals lesser of 70% or 80% of dividends received or 70% or 80% of taxable income computed without regard to the DRD, any NOL deduction or capital loss carryback.
Divdends Received Deduction Percentages
0 to 20%-->70% deduction
20% to 80%-->80% deduction
80% or more-->100% deduction
100% Dividends Received Deduction
Dividends from affiliated corporations (80% or more of common ownership) that file consolidated returns qualify for a 100% deduction.
Small Business Investment Corporations- a 100% deduction is allowed for dividends received by a small business investment company.
MACRS for depreciation
Property Other than real estate
3 year property- midpoints of 4 years and less. Excludes automobiles and light trucks, includes racehorses more than 2 years old and other horses more than 12 years old.
5 year property- includes automobiles, light trucks, computers, typewriters, copiers, and duplicating equipment.
7 year property- ADR midpoints of 10 years and more and less than 16 years. Includes office furniture and fixtures, equipment, property with no ADR midpoint not classified elsewhere and includes railroad truck.
15 year property- sewage treatment plants, telephone distribution plans, and comparable equipment,
20 year property- Other than real property including sewer pipes.
Ignored under this method
Half year convention
Applies to personal property, under which such property placed in service or disposed of during a taxable year is treated as having been placed in service or disposed of at the midpoint of the year.
Mid quarter convention
If more than 40% of depreciable property is placed in service in the last quarter of the year, mid-quarter convention used.
27.5 years-residential real estate
39 years- non residential real property
Cost Depletion and Percentage Depletion (limited to 50% of taxable income).
Depletion is allowed on exhaustible natural resources, such as timber, minerals, oil and gas.
Goodwill, licenses, franchises and trademarks may be amortized using straight line basis over 15 years.
Business Org and start up costs- deduct for first $5,000 and remainder is amortized over 180 months. Research expenses amortized over 60 months.
Sections 1231 Assets
Comprised of depreciable personal and real property used in the taxpayers trade or business for over 12 months. Trade or business property and capital assets held over 12 months. Trade or business property and capital assets held over 12 months that have been involuntarily converted.
Long Term Capital Gain of Section 1231
Provides for allowing long term capital gain treatment (0% or 15%) on net 1231 gains from sales, exchanges or involuntary conversions.
Ordinary Loss Treatment
Net Section 1231 losses are treated as ordinary losses. Capital losses in excess of capital gains cannot be deducted and Section 1231 net loss is deducted in full without consideration of capital gains.
Section 1245 Assets
Personal Properties used in a trade or business for over 12 months.
Upon sale of 1245 asset, lesser of gain recognized or all accumulated depreciation is recaptured as ordinary income under Section 1245 and any remaining gain is 1231 gain
Real properties used in a trade or business over 12 months. Depreciation recapture is only portion of depreciation taken on real property that is in excess of straight line.
Amount of straight line depreciation taken results in the overall gain being taxed at 25%. Any excess gain is Section 1231 gain.
S Corporation Eligibility
1) Shareholder must be an individual, estate or certain types of trusts. May not be a nonresident alien. Corporations nor partnerships are eligible shareholders. Grantor and voting trusts are permissible shareholders.
S Corporation Shareholder Limit
Limited to 100 shareholders. Only 1 class of stock.
S corporation status
Dissolves when shareholder(s) who own 50% more of stock absolve to terminate S Corporation.
S corporation tax year
Must adopt calendar tax year. Return is due by March 15t
S Corporation Taxes
No tax at corporate level. All earnings passed through to shareholders.
Principal Taxes imposed S Corps.
1) LIFO Recapture Tax- Must include for last C corporation year the excess of inveotry computed under FIFO over LIFO. The resulting tax on the C corporation may be paid in four equal installments, the first of which is due with the final C corporation return. Remaining installments are paid by the S Corporation
2) Built in Gains Tax-Distribution of Sale of an S corporation's assets may result in a tax on any built-in gain at the coporate level. Unrealized built in gain results when a C corporation elects S corporation status and the FMV of corporate assets exceeds the adjusted basis of corporate assets on election date. Tax is calculated by multiplying 35% by the lesser of the following: Recognized built-in gain for the current year or taxable income for S corporation if it were a C corporation.
3) Tax on passive Income- taxed at 35% rate on the lesser of net income or excess passive investment income if the following two tests are met S corporation has accumulated C corporation earnings an profits. Passive Investment Income exceeds 25% of gross receipts.
Pass through of Income and Loss
Following S Corporation items flow through to the shareholder in a manner smiliar to a partnership.
Accumulated Adjustments Account
Distributions paid to shareholders of an S corporation that has accumulated earnings and profits since inception are computed by using the accumulated adjustments account.
Increases to the AAA
AAA is essentially increased by separately and non separately stated income and gains.
Decreases to the AAA
AAA is essentially decreased by corporate distributions, separately and non separately stated expense items and losses, and non deductible expenses that relate to income other than tax-exempt income.
Computing Shareholder basis S Corporation Stock
Distribution to shareholders
Loss or expense items
S corporation status terminates
Holders of a majority of the corporation's stock consent to a voluntary revoation;
Corporation fails to meet any or all of the eligibility requirements for S Corporation status; or
More than 25% of the corporation's gross receipts come from passive investment come for three consecutvie years.
Once an S corporation election is terminated or revoked, a new election cannot be made for 5 years unless the IRS consents to earlier election.
Section 501(c)(1) Organization
Type of organization organized under an act of Congress as a US instrumentality and does not require an application; however, it must be declared exempt under the Internal Revenue Code or the organizing legislation.
Section 501(c)(2) Organization
Corporation organized for the exclusive purpose of holding title to property, collecting income from that property and turning over the income to an exempt orgnaization.
Section 501(c)(3) Organization
Organization includes a community chest; a community fund; a foundation organized and operated exclusively fo religious, charitable, scientific, public safety, etc.
1) No part of the net earnings may inure to the benefit of any private shareholder or individual.
2) No substantial part of the activities may be non-exempt activities.
3) Organizations may not directly participate or intervene in any politicial campaign
Section 509 Private Foundations
Private foundations include all Section 501(c)(3) corporations other than those specifically excluded. A foreign corporation may qualify as a private foundation. An annual information return (Form 990-PF) that discloses substantial contributors and amounts of contributions received is required.
Unrelated Business Income
Gross income from any unrelated trade or business. Excluded are rents from real estate, royalities, dividends, interest and annuities. A corporation is allowed a $1,000 deduction from unrelated business income; thus, only UBI in excess of $1,000 is subject to tax.
C Corporation Filing Requirements
- Filing date is March 15
- 6 month extension available by filing form 7004
- Accrual basis is required for the following, accounting for purchases and sales of inventory, tax shelters, certain farming corporations and C Corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner provided the business greater than $5 milion of average gross receipts ending with the tax year.
Corporations Other than Large Corporations
Corporations not classified as large corporations are required to pay the lesser of 100% or 100% of the tax shown on the preceding year.
Taxabale income greater than $1M or more in any of its three preceding years. Must pay 100% of the tax as shown on the current year return.
Tax Rates for corporations.
Vary from 15%-38%
Consolidated Tax Returns
To consolidate a return all the corporations in the group must have been members of an affiliated group at some time during the tax year and each member of the group must file a consent. Note that the act of filing a consolidated return by all the affiliated corporations will satisify the consent requreiements. Affiliated group means 80% or more of the voting power of all outstanding stock and 80% or more of the value of all outstanding sock of each coporation.
Corporate Alternative Minimum Tax
Corporations are subject to a minimum tax of 20% on alternative minimum tax income less an exemption amount.
Calculation of Corporate AMT
Regular Taxable Income
Add or Minus Adjustment
Adjusted Current Earnings
Dividends received deduction(under 20% ownership)
AMT NOL Deduction
=Minimum taxable income
Gross Alternative Minimum Tax
(Foreign Tax Credit)
=Tenantive Minimum Tax
Long Term Contracts, Installment sale dealer, Excess depreciation
Percentage Depletion, private activity, Pre ACRS excess depreciation
Adjusted Current Earnings
Muni Interest Income, Increase SV life insurance, NON S/L deprecation
Accumulated Earnings Tax
Regular C corps. whose accumulated earnings are in excess of $250,000 if improperly retained instead of being distributed as dividends to shareholders.
1) Regular Corporations are entitled to $250K of (lifetime) accumulated earnings.
2) PSCs are entitled to only $150K of (lifetime) accumulated earnings.
3) Accumulated earnings tax is not imposed on PSCs, tax exempt corps, or passive foreign investment corps.
The additional tax rate for accumulated earnings is a flat 15%.
Avoiding unreasonable accumulation of earnings
Demonstrated, specific, definite and feasible plan for use of accumulation. Need to redeem the corporate stock included in a deceased stockholder's gross estate
Personal Holding Company Tax
Corporations more than 50% owned by 5 or fewer individuals and having 60% of adjusted ordinary gross income consisting of:
1) Net rent (if less than 50% of ordinary gross income)
2) Interest that is taxable
4) Dividends from an unrelated domestic corporation.
Additional 15% on net income not distributed.
Calculation of Corporate E&P
Corporate Taxable Income
Adjustments (Positive and Negative Adj, Temporary or Permanant).
=Current Earnings and Profits
Distributions from corporations to shareholders are taxable to such shareholders if the distributions are classified as dividends.
- Current E&P--> Taxable dividend
- Accumulated E&P--> Taxable dividend
- Return of capital--> Tax free and reduces basis of common stock.
- Capital Gain distribution- Taxable income as a capital gain
General Netting RUles
Current and accumulated E&P are not netted. Divdends come from current E&P and then from accumulated E&P. If both are positive, there are no issues; distributions are dividends to the extent. of the total of current and accumulated E&P. If current E&P is positive and accumulated E&P is negative, distributions are dividends to the extent of current E&P only.
Any distribution in excess of both current and accumulated E&P is treated as a nontaxable return of capital that reduces the shareholder's basis in the stock.
Transactions, while not in the form of dividends, are treated as such when the payments are not in proportion to stock ownership.
Stock dividends is a distribution by a corporation of its own stock to shareholders.
Shareholder Taxable Amount
a) Cash dividends- amount received
b) Property dividends- FMV of property received
a) Cash dividends- amount received
b) Property dividends- FMV of property received
Corporate sells Assets and Distributes Cash to Shareholders
Corporation recognizes gain or loss on the sale of assets
Taxable Gain or Loss
Shareholders recognize gain or loss to exten cash exceeds adjusted basis of stock.
Corporation Distributes Assets to Shareholders
Corporation Distributes Assets to Shareholders