Federal Taxation VII: Corporate Taxation Flashcards Preview

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Flashcards in Federal Taxation VII: Corporate Taxation Deck (30):
1

Corporate Formation: Control Club (3)

1. group of individuals
2. participate in xfer of property to a corp (in exchange for stock)
3. in control of the corp immediately after the xfer (services do not count) IF control more than 80% of stock

2

Corporate Formation: Boot

Property Received other than Stock.

Gain Recognized for Boot is lower of:
1. Realized gain
2. FMV of boot received

3

Corporate Formation: Stock in exchange for services

1. Transferor has wage income equal to FMV of stock received (basis in stock = same amount)
2. Corporation has salary expense deduction

4

Corporate Formation: Basis (3)

1. s/h basis in the property + Gain recognized by the s/h
2. s/h stock takes adjusted basis of transferred property + gain recognized - boot received
3. s/h BASIS in stock:
Basis of all property transferred to the corporation
+ Gain recognized by s/h
- Boot received by s/h
- Liabilities/debt assumed by corporations

5

Corporate Formation: Basis adjustment for loss property

If total property basis is greater than property FMV, basis adj required to prevent s/h and corp from both benefiting from this unrealized loss.

*If both s/h & corp elect, s/h stock basis can be reduced instead of corporation's assets

6

Corporate Formation: Debt Assumption

Gain recognized in 2 situations when corp assumes s/h debt:

1. total liabilities assumed by the corp exceed total adjusted basis of property transferred. Gain = Liabilities assumed - basis of transferred property

2. if debt was not incurred by s/h for valid bus reasons then corp taking over debt will cause it all to be boot

7

Corporate Formation: S/H Holding Period

1. Capital Asset Section 1231 - asset xferred to corp - property holding period is tacked on to stock holding period

2. All other property - property holding period does not tack on - begins day after the xfer

8

Corporate Formation: Corp's Holding Period

Holding period in property received always includes period the transferor held the property before the exchange

9

Corporate Tax Formula

Realized Income
-
Nonrecognition of Income:
Deferrals and Exclusions
Cost of goods sold
=
"Gross Income"
-
Deductions
=
Taxable Income before Special Deductions
-
Special Deductions
=
Taxable Income
x
Tax Rates
=
Gross Tax
-
Credits and Payments
+
Other Taxes
=
Net Tax

10

Net Capital Loss

No deduction.

Carried back 3 yrs/ forward 5 to offset capital gains

11

Closely Held Corporation

if at any time during the last half of the taxable yr > 50% in value of stock is owned by not more than 5 individuals

12

Corporate passive loss rules (3)

1. Passive loss limits do not apply to corporations (unless personal service corp and some close corps)

2. Closely held corps can use passive losses to offset active corporate income but not portfolio income

3. Personal service corps cannot offset passive losses against either active income or portfolio income

13

Book Income vs Taxable Income (M-1 < $10M, M-3 > $10M)

To/From Book Income:
ADD nondeductible expenses (fed tax, net cap loss, expenses in excess of limits)
ADD income that is taxable but not already included (i.e. prepaid income)
SUBTRACT nontaxable income already included (municipal interest, life ins proceeds)
SUBTRACT deductions not expensed (dividends received deduction, election to expense)

14

3 Sections of M-3

Part I: provides certain financial info and reconciles worldwide consolidated net income on book financials to book income for entities included on the corporate return

Part II: reconciles book income from Part I to taxable income on the 1120.

Part III: provides breakdown of expense/deduction items that affect the reconciliation in part II.

15

Net Operating Loss (5)

Negative taxable income from other tax years.

1. Carryover = Back 2 yrs, forward 20 yrs
2. Carryover from prior period not included in calculating current year NOL
3. Current year carryover ignores carryovers created in other years (FIFO if multiple)
4. Charitable not allowed in computing NOL
5. NOL carrybacks can be reported on 1120x or 1139 (corp application for tentative refund)

16

Corporate Deduction: Organizational Expenses

$5K deduction, but reduced by amount of expenditures that exceed $50K.

Expenses not deducted must be capitalized/amortized over 180 months (unless elect not to)

17

Corporate Deduction: Syndication expenses

Cost of issuing/selling stock. Must be capitalized, but cannot be amortized.

18

Corporate Deduction: Charitable Contribution

Can be deducted after amortization of organizational expenditures.

Same as individuals, but contribution of inventory/depreciables/real property used in business subject to special rules

Lower Of:

AB of property + 50% x (FMV - AB) OR 2 x AB

Limit: 10% taxable income

Excess: Carries forward 5 yrs (not back)

19

Corporate Deduction: Dividends-Received (DRD)

A % of domestic dividends

If corp owns < 20%, then DRD = 70% of dividends

If corp owns > 80%, then DRD = 100% of dividends

all other ownership %, DRD is 80%

20

Corporate Deduction: Domestic Production Deduction (DPD)

= 9% x lower of
1. Qualified production activity income
2. taxable income

DPD reduced for production of oil, gas, related products

May not exceed 50% of wages allocable to

21

Corporate Deduction Ordering Rules

Gross Income
Less: Deductions (except charitable, dividends received, domestic production deduction, NOL carryback, capital loss carryback )
= Taxable income for charitable limitation

Less: Charitable contributions (d deduction (however, note that NOL carryforwards are not allowed for computing the DRD limit)

Less: Dividends received deduction
= Taxable income before carrybacks

Less: Domestic Production Deduction, NOL carryback and STCL carryback
= TAXABLE INCOME

22

Corporate AMT Formula

Does not apply to small corps whose annual gross receipts for 3 tax year periods ending before the tax year do not exceed 7.5M

*In 1st 3 years, Sub $5M for the 7.5M... exempt in yr 1

23

Corporate AMT Preferences

Increase taxable income when computing AMTI

1. Tax-Exempt Interest
2. Realty and leased personalty
3. Excess of percentage depletion (deduction over property's adj. basis)
4. Excess intangible drilling/development costs

24

Corporate AMT Adjustments

Either increase or decrease taxable income when computing AMTI

1. MACRS 3-, 5-, 7-, 10-yr property depreciated using 200% declining balance... for AMT s/b 150% DBM.
2. Diff in gain/loss b/w reg tax and AMT caused by difference in basis in assets
3. Diff in percentage of completion method income over completed contract method income
4. Add regular tax net operating losses in excess of AMT net operating losses

25

Adjusted Current Earnings (ACE)

If positive, represents high pretax economic earnings.

Calculated by modifying AMTI by adding economic income and adjusting for timing differences analogous to E&P adjustments.

If ACE exceeds AMTI (before ACE adj), then 75% of the difference is used as an adjustment for calculating AMTI

If ACE is negative, it is limited to cumulative amount of prior positive adjustments

26

AMT NOL Deduction

Allowed for carryover of NOL under AMT in prior years. Limited to 90% of AMTI before NOL.

27

AMT Exemptions

$40K. Phased out for AMTI > $150K. (25% of the amount of AMTI over this trigger)

ABC corporation has AMTI of $250,000. ABC will be entitled to claim an exemption of $15,000 ($40,000 less 25% of $100,000)

28

AMT and Foreign Tax Credit

Corporations pay the greater of AMT tentative tax or regular tax, but regular tax is not reduced by the foreign tax credit.

Foreign Tax Credit can reduce AMT liability

29

AMT Credit Limitation

The AMT credit is only available when a corporation has paid the AMT in prior years because of timing differences (such as the use of accelerated depreciation or installment sales). Hence, no AMT credit is available unless both conditions are present (prior AMT payments and timing differences).

30

Formula for Corporate AMT

Taxable Income
+ Tax Preferences
+/- AMT Adjustments &
ACE Adjustment
= Alternative Minimum Taxable Income (AMTI)

- Minimum Tax Exemption
= Tax Base

x Tax Rate (20%)
= Tentative Tax before Credits

- Foreign Tax Credit
= Tentative Tax

- Regular Tax
= Alternative Minimum Tax (AMT)