Flashcards in R3- Corporate Taxation Deck (107)
How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred
+ Gain recognized (if less than 80% ownership)
- Boot received
= Shareholder basis.
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
+ Gain recognized by shareholder
FMV of Corporate Interest
- Adjusted basis of property
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS, NOT FMV of property.
What are the basic rules for filing a form 1120?
Return is due regardless of income level
Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year
An automatic six-month extension is available
When are Corporation with LESS then $10Mil Corp. federal tax estimated payments required, and how are they calculated?
- Required if more than $500 in tax liability expected
- Lessor of :
100% current year liability
100% previous year liability
Describe the AMT calculation for C-Corporations
+Tax Preference Items
+/- ACE Adjustments
- 40,000 Exemption
= Tax Base
x 20% (Tax Rate)
= Tentative Minimum Tax
- Regular Tax Liability
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years
Personal Property - use 150% MACRS, not 200%
Construction must use % completion method
What are the ACE adjustments in the C-Corporation AMT tax calculation?
- Municipal Bond Interest
- Organizational Expenditures must be capitalized, not amortized
- Life Insurance Proceeds (key employees)
- Difference betwn AMT & ACE Depreciation
- Dividends Received Deduction
(under 20% ownership/ 70% unrelated)
When are C-Corporations exempt from AMT?
In year one
In year two, if year one gross receipts were less than $5 Million
In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million
In year four and beyond, if the average from the previous 3 years is less than $7.5 Million
How are gains and losses handled with respect to a Corporation's transactions involving its own stock?
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.
If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.
How are Corporate organization costs handled?
Amortization of costs begin the month the Corporation commences business activity
If the Corporation doesn't amortize organization costs in year one, they can never be amortized
Costs associated with offerings are neither deductible nor amortized
How are excess charitable contributions treated in a C-Corporations?
Carried forward 5 consecutive years
When can a board of directors authorize charitable contributions for a tax year?
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year
How is the dividends received deduction (DRD) calculated?
80% Interest ownership = 100% DRD
20-79% = 80% DRD
less than 20% = 70% DRD
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
Only take DRD % x Taxable Income
Note: If DRD brings a loss situation, then you can take the full DRD
If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed
How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
How are capital losses deductible in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates
How are Corporate losses carried back/forward?
- Carry back losses 3 years
- Carry forward losses 5 years
(as a Short Term Capital Loss)
How are bad debt losses Classified in a Corporation?
Bad debt losses are classified as ordinary
What is the casualty loss floor for a C-Corporation?
No floor on Corporate casualty loss like there is with an individual taxpayer
If destroyed, the loss is the property's basis (minus proceeds)
Calculation: Adjusted basis - Proceeds from Insurance = Loss
How are net operating losses handled in a C-Corporation?
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward
Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year
Any leftover NOL = This year's NOL
What is the purpose of Schedule M-1 on a Corporate tax return?
Schedule M-1 Reconciles:
- Book to Tax Income before Net Operating Loss/Dividend Received Deduction
- Ex: Premiums paid on key-person life insurance
What is the purpose of Schedule M-2 on a Corporate tax return?
Reconciles beginning to ending retained earnings
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward
Dividends between them are eliminated
One AMT exemption
One accumulated earnings tax allowed
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of Current Accumulated E&P (ordinary income)
Then, remainder (if any) is a return of basis.
Then, add'l remainder (if any) is a Capital Gain
What is the order of treatment in a Corporation's distribution to a shareholder?
1. Distribution is a dividend to the extent of current and accumulated earnings and profits
2. Shareholder basis is then exhausted
3. Remainder, if any, is a Capital Gain
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits
What is the treatment of a gain in a complete Corporate liquidation?
If Capital Property, then Capital Gain
If Non-Capital Property, then Ordinary Income
Gain characterization is the same for both the Corporation and the shareholder
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: capital loss only
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid
Treat as if distributed by the end of the year
Describe the requirements for a Personal Holding Company.
Not Subject to the Acc. Earnings Tax
No banks or financial institutions can be PHCs
5 or fewer individuals own more than 50% of the stock
60% of the PHC's income must be from passive means
PHC tax is self-assessing - 20% tax rate on undistributed PHC Income
How is Corporate accumulated earnings tax (AET) different from Personal Holding Company taxation?
- Not Self-Assessing like a PHC
- Flat 20% additional tax rate
How is the Accumulated Earnings credit calculated for a Corporation?
-Take greater of $250,000
($150,000 for Service Corps)
- The legitimate balance based on future needs (i.e. purchasing a building)
What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?
$25 per person for gifts
Service awards up to $400
What income can business losses offset on a 1040?
They may only offset active business income.
Note: W2 wages are considered active business income.
How is non-business bad debt deducted on a 1040?
It is treated as a STCL
What are the Transactions that there is NO G/L for issuing stock?
- Formation- Issuance of Stock
- Reacquisition- Purchase of Treasury Stock
- Resale- Sale of Treasury Stock
If shareholders have 80% control after a property transfer then what taxable event occurs?
- No taxable event occurs.
If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
If liabilities exceed basis on contributed property to a Corporation then?
- A Gain is Recognized.
When a Corporation receives Property, the Basis used is the Greater of:
- Adjusted Basis (Net Book Value)
- Debt assumed by Corporation
What are the Advantages & Disadvantages for affiliated Corporate tax returns?
Advantage- Gains are deferred
Disadvantage- losses are deferred.
In order to Consolidate What % of Ownership does the Parent need?
- 80% voting power
- Own 80% of the stock value
The Basis of Common Stock to the Shareholder when Property is Received is?
- Net Book Value
- Basis is reduced by any debt assumed by the Corp
- Gain Recognized by shareholder is added to bring basis to Zero.
What is the Basis & Taxable Events for a Corporation receiving Services in exchange for Common Stock?
-Ordinary Income Recognized at FMV
Included in Gross Income; Cash received in advance of Accrual GAAP is Taxed such as:
- Interest Income
- Rental Income
- Royalty Income
GAAP Income items that are NOT Included in Gross Income:
- Interest Income from Municipal & State Bonds
- Proceeds from Life Insurance of a "key officer"
- Fed. Income Taxes- NOT deductible
What is the Maximum Deduction for a Corporation's qualified Domestic production activities?
- The deduction may NOT exceed 50% of the W-2 wages paid
The Domestic Production Deduction is 9% of the lessor of:
- Qualified Production Activities Income
-Taxable Income (not including above number)
When are deductible Bonus Acurrals must be paid by?
- March 15th
- 2 1/2 Months after year end.
In handling Bad Debts, ACCRUAL Basis taxpayers must use what Method? Is it Tax Deductible?
- Specific Charge-Off Method
- Tax Deduction when Specific A/R is written off
Are Bad Debts in CASH Basis Method Tax Deductible?
- Was never Income so Tax Deductible
- Has not included amount in Gross Income
Prepaid Business Interest Expense; Deductible when & must be allocated to the?
- Proper period to which it is related
- Deduct when Incurred
Business Interest Expense is Deductible when?
- Incurred & Paid
Investment Interest Expense is deductible up to what amount?
- Investment Income
- Investment interest on tax-free investments are NOT deductible.
What Maximum % of AGI can Charitable Contributions be deductible & Within how many months?
- 10% of AGI
- Any Accrual must be paid within 2 1/2 months of year end
The casualty loss for a Partially Destroyed C-Corporation is limited to the lesser:
-Adjusted Basis Reduction
Corporations may elect to deduct up to how much of Start Up Costs & Organization Expenditures?
- Up tp $5,000
- Amount exceeds $50,000 is then Amortized over 180 Months
What are the Allowable Organizational Expenditures & Start- Up Costs?
- Legal Services
- Accounting Services
- Fees paid to the State of Incorp.
What are the Excludable Organizational Expenditures & Start- Up Costs?
- Costs of Issuing & Selling the Stock
- Underwriter Fees
- Costs incurred in transfer of assets to a Corporation
What is the Tax Rule for Amortization of Depreciation, Goodwill, Intangibles, Depletion?
- Amortized on a Straight-line basis over 15 Years
When the Corp. OWNS the Life Insurance Policy, are the Premiums paid tax Deductible?
- Not Tax Deductible
When an Insured Employee is the Beneficiary of the Life Insurance Policy, is the Premiums paid tax deductible?
- Yes, Tax Deductible
What are the Taxes that are Deductible?
- State income taxes
- Local/City Taxes
- Federal Payroll Tax
What Tax isn't tax deductible?
- Federal Income Tax
- Added back to Book Income
What are the Rules for Net Operating Losses Carry-back & Forward in a C-Corporation?
- Carry Back: 2 Years
- Carry Forward: 20 Years
What method of accounting must be used for Inventory Valuation
- Accrual Basis for Purchases & Sales.
What are the Valuation Methods for Inventory?
- Cost Method
- Lower of Cost or Market Method
- Rolling-Avg Method
- Retail Method
The General Business Credit may not exceed 'Net Income Tax'" Less the Greater of:
- 25% of regular tax Liability above $25,000
- 'Tentative Minimum tax' for the year
What are the limitations of dividends received deduction (DRD) ?
- Only allowed if no consolidated return is filed.
- Qualified dividends from domestic Corporations only.
Entities for which the Dividends Received Deduction does NOT apply?
- Personal Service Corporations
- Personal Holding Companies
- (Personally taxed) S Corps.
The Accrual Basis Method for tax purposes is required for?
- Accounting for Purchases & Sales
- Tax Shelters
- Certain Farming Corps
- Business with C Corps with greater then $5Mil gross receipts
If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on
-The previous year & the remainder based on the current year.
- Must pay 100% of tax of Current Yr Return
- 4 equal payments
AMT Paid for Corporations; Carryfwd/back rules:
- Never carried back
- Carried forward indefinitely
What are Preferences for C- Corps Alt. Min. Tax purposes?
- Items that are typically not taxed for regular tax purposes
- BUT are added back for AMT purposes
What are the 3 Items in C-Corps Preferences?
- Percentage Depletion
- Private Activity Bonds (After 1986)
- Pre-1987 ACRS Depreciation
What is the Exemption amount for Alt. Min. Tax Calc. ?
- Less 25% of AMTI in Excess of $150,000
What Credit is used for Corp. Alt. Min. Tax ?
- Foreign Tax Credit
What are are the Carry Fwd/Back Rules for Minimum Tax Credit?
- No Carryback
- Carry Forward Indefinitely
Personal Holding Companies as Corps with Ordinary Gross Income consisting of:
- Net Rent ( less then 50% of O.G. Inc)
- Interest- Taxable (nontax~ excluded)
- Royalties (not minerals/oil)
- Dividends from Unrelated Domestic Corp.
Are Current E&P by year-end Dividends taxable?
- Taxable Dividend
- Do not Net with Acc. E&P
Is Accumulated E&P (Distribution date) Dividends Taxable?
- Taxable Dividend
- Do NOT Net with Current E&P
Is Return of Capital (No E&P) Dividends Taxable?
- Tax Free
- Reduces Basis of Common Stock
Capital Gain Distribution (No E&P/Basis) Dividends Taxable?
- Taxable Income as a Capital Gain
Current E&P are allocated on a?
- Pro Rata Basis to each distribution
Accumulated Earnings & Profits are applied in?
- Chronological Order
- Beginning with the earliest distribution
Stock Dividends are generally not taxable Unless?
- The shareholder has a choice of receiving cash or other property
- Taxable at FMV
Individual Shareholder Taxable amount when Cash/Property Dividends are received?
- Cash Dividend: Amount Received
- Property Dividends: FMV of property received
Corporate Shareholder Taxable amount when Cash/Property Dividends are received?
Both Subject to Dividends Received Deduction:
- Cash Dividend: Amount Received
- Property Dividends: FMV of property received
The payment of a dividend from a Corp. is not a taxable event but is ?
- A reduction of Earnings & Profits (R/E)
If a Corporation distributes Appreciated property, the Tax Results are?
- Recognizes Gain (as if was sold)
- Gain increases E&P
~ FMV - NBV = Corp. Gain/ E&P
Proportional Stock Redemption is?
- Redeems or Cancels the stock pro rata for all shareholders
- Taxable Dividend Income
Disproportional Stock Redemption is?
- Sale by Shareholder subject to:
~ Taxable Capital G/L to shareholder
How are a C-Corporation's deductible charitable contributions calculated?
Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
=Deductible Charitable Contributions
Which items are included in Schedule M-1?
Includes permanent differences:
- Tax-exempt interest & non-deductible expenses
- Accelerated tax depreciation, straight-line, etc.
How is the Schedule on a Corp. tax return calculated?
Beginning Unappropriated R/E
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated R/E
How is the Distribution Amount for Corporate distributions to shareholders Calc?
FMV of Property
- Liability Assumed
= Distribution amount
How is the Shareholder Basis for Corporate distributions to shareholders Calc?
FMV of Property
+ Cash received
(basis not reduced by the attached liability)
= Shareholder Basis
When there is both S.T. Capital G/L & L.T. Capital G/L; what is the amount added or subtract from Reg. Taxable income?
- Net together first then add or subtract from reg. taxable income
What is a deduction from illegal activity?
- Cost of Merchandise
A Personal Holding Company deducts from Taxable income to compute: Undistributed Personal Holding Company Income?
- Federal Income Taxes
- Net Long-Term Capital Gain
LESS Related Fed. Income Taxes
What 2 requirements qualify as a Type B Reorganization?
- Target Corp is acquired solely for voting stock of acquiring corp or parent
- Acq. Corp. must have control of the target corp. immediately after the acquisition
For a Liquidating Corp, Fees incurred in connection with the liquidation are?
- Deductible in full by the Dissolved Corp.
- Fees: Professional, Filings, etc
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
Taxpayer must be original stock owner, and either an individual or partnership
$50k (single) or $100k (MFJ) limit - remainder is a capital loss
Must have been issued in exchange for money or property (not exchanged for services)
Shareholder equity must not be in excess of $1 million
Both common and preferred stock is allowed