When does a shareholder contributing property in exchange for corporate common stock have no gain or loss recognized?
The following two conditions must be met:
- Tranferors/shareholders own at least 80% of the voting and nonvoting stock immediately after the transaction; and
- Boot (cash or receipt of debt securities) or cancellation of debt is not involved.
Generally, what is the basis of common stock received by the shareholders?
Basis of common stock received:
- Cash--amount contributed
- Property contributed--adjusted basis (NBV)
- Services--fair value
Plus any gain recognized by the shareholder
For corporations, are bad debts deductible?
For taxpayers in general (including corporations), bad debts are deductible to the extent the bad debts were previously included in income. The charge-off method (not allowance method) must be used for tax purposes.
For cash-basis taxpayers, a bad debt is not deductible because the amount leading to the debt would not have been included in income unless it was related to an uncollectible check connected with an amount included in income.
How are charitable contributions treated by corporations?
The maximum deduction is up to 10% of taxable income before the deduction of the following deductions: the charitable contribution, the dividends received deduction, any NOL carryback, any capital loss carryback, and the U.S. domestic production activities deduction.
When are life insurance premiums deductible?
Policies on key employees are not deductible when the corporation is directly or indirectly the beneficiary.
If insured employees name the beneficiaries, premiums are deductible as an employee benefit.
Note: If life insurance coverage exceeds $50,000, payment of premiums by employers may represent income to the employees.
Identify the corporate tax treatment of capital gains/losses.
- Capital gains are taxed the same as ordinary corporate income.
- Corporations may deduct any capital losses from ordinary income.
- Capital losses are deductible to the extent of capital gains.
- Net capital losses may be carried back three years and forward five years as a short-term capital loss.
State the general NOL carryforward/carryback rules.
Net operating losses can be carries back 2 years and/or forward 20 years.
Name some nondeductible trade or business expenses.
- Bad debts, allowance method (only specific write-off method is deductible)
- Illegal activities (bribes, penalties)
- Business gifts exceeding $25 per person per year
- Business meals and entertainment are limited to 50% of total expenses
- Political contributions
- Club dues
- Executive compensation in excess of $1 million per year for the CEO or others among the four highest compensated officers (other than the chief executive officer), unless compensation is performance based
- Federal income taxes
Identify the three levels of the dividends received deduction.
- 70% -- Less than 20% ownership; 70% of dividends received are deducted from taxable income up to a limit of 70% of taxable income.
- 80% -- 20%-<80% ownership; can claim 80% devidends recieved are deducted from taxable income up to 80% of taxable income.
- 100% -- Affiliated companies (80% or more common ownership).
What are the requirements to file a consolidated return?
All corporations in group:
- Must have been members of an affiliated group at some time during the tax year.
- Each member must file a consent (act of filing a consolidated return is considered consent).
Common parent owns 80% or more of the voting power of all outstanding stock and 80% or more of the value of all outstanding stock of each corporation.
Identify the advantages of filing a consolidated return.
- Capital losses of one corporation offset capital gains of another corporation.
- Operating losses of one corporation offset profits of another corporation.
- Elimination of tax on intercompany transactions.
- Income from certain intercompany sales may be deferred.
- Certain tax deductions and tax credits may be better utilized when subject to the limitations of the overall consolidated group rather than individual members.
- Dividends received are 100% eliminated in consolidation because they are intercompany dividends.
Describe the corporate AMT.
- AMT rate of 20% on AMTI
- Exemption is $40,000 less 25% x (AMTI - $150,000)
- Exemption is completely eliminated at AMTI of $310,000
- Calculated similarly to individual AMT
Name some corporate AMT preferences.
- Percentage depletion
- Private activity bonds
- Pre-1987 ACRS excess depreciation
The adjusted current earnings (ACE) adjustment requires two steps: (i) determine adjusted current earnings, and (ii) calculate the actual ACE adjustment.
Adjusted current earnings is equal to unadjusted alternative minimum taxable income adjusted by what items?
- Municipal bond interest is added back.
- Deductions for organizational expense amortization are added back to AMTI.
- Life insurance proceeds on key employees are added back.
- The difference between AMT depreciation and ACE depreciation may need to be added back or subtracted from AMTI depending on which is the larger amount (if AMT depreciation is higher than ACE, the difference is added back).
- The 70% dividends received deduction is added back.
What is the adjusted current earnings (ACE) adjustment?
75% of the difference (positive or negative) between ACE and AMTI before this adjustment and the alternative tax NOL deduction. Note that negative adjustment in a particular year cannot be greater than cumulative positive adjustments.
What is the accumulated earnings tax?
The accumulated earnings tax is a tax on accumulated earnings beyond the reasonable needs of the business.
Corporations can accumulate up to $250,000 or an amount reasonable to the needs of the business without penalty. For personal service corporations, the amount is up to $150,000.
The tax is a flat 20% of the unreasonable accumulated earnings.
Define a personal holding company.
A personal holding company must meet BOTH of the following:
- At any time during the last half of the taxable year, more than 50% of the value of the corporation's outstanding stock is owned by five or fewer individuals, and
- At least 60% of the corporation's adjusted ordinary gross income consists of personal holding company income (dividends, rents, royalties, annuities, interest, adjusted rental income, and certain other investment income sources). [NIRD]
The penalty tax is 20% of the undistributed personal holding company income.
What is a personal service corporation?
What is the tax rate?
A personal service corporation is a corporation primarily involved in the performance of one of the following fields:
Accounting, law, consulting, engineering, architecture, health, and actuarial science.
The tax rate if a flat 35%.
What are the tax implications of a tax-free reorganization?
A tax-free reorganization is a nontaxable transaction except to the extent of boot received.
What are the eligibility requirements for an S corporation election?
- Domestic corporation
- One class of stock (difference in common stock voting rights are allowed)
- Eligible shareholders must be individuals (no nonresident alien shareholders), estates, or certain types of trusts (not corporations or partnerships)
- One hundred shareholder limit
Describe the two requirements for election of S corporation status.
- All shareholders must consent.
- Election must be made either at any time during the year immediately preceding the year for which the election will be effective or on or before the 15th day of the third month of the election year (and the election will be retroactive to the first day of the election year).
How can S corporation status be terminated?
S corporation status will terminate as a result of the following:
- Holders of a majority of the stock consent to a voluntary termination.
- The corporation fails to meet any or all of the eligibility requirements.
- More than 25% of the corporation's gross receipts come from passive activities for three consecutive years and the corporation had C corporation earnings and profits at the end of each year.
What tax year must an S corporation adopt?
An S corporation must adopt a calendar year unless a valid business purpose for a different tax year (fiscal year) is established.
When does an unrealized built-in gain result?
An unrealized built-in gain results when a C corporation elects S corporation status and the FMV of corporate assets exceeds the adjusted basis of the corporate assets at the election date.
When is an S corporation exempt from a tax on built-in gains?
- The sale or transfer does not occur within 10 years of the first day of the first year that the S corporation election is made (5 years through the period ending 12/31/13).
- S corporation was never a C corporation.
- S corporation can demonstrate that the distributed asset was acquired after the S election.
- S corporation can demonstrate that the appreciation occurred after the S election.
- The net unrealized built-in gain has been completely recognized in prior tax years.
How is the tax on built-in gains calculated?
Built-in gains tax is 35% (the highest corporate tax rate) times the lesser of the following:
- Net recognized built-in gains for current year; or
- Taxable income of S corporation as if the corporation were a C corporation.
What items must be separately listed on an S corporation tax return (Schedule K)?
Some items that must be separately listed on an S corporation tax return include the following:
- Ordinary income
- Rental income/loss
- Portfolio income (including interest, dividends, royalties, and all capital gains [losses])
- Section 1231 gains and losses
- Charitable contributions
- Section 179 deduction
- Foreign taxes
- Tax-exempt interest
Other than for a 501(c)(1) corporation, which is created through an act of Congress, what are the general requirements for a corporation to obtain tax-exempt status?
Other than for a 501(c)(1) corporation, which is created through an act of Congress, the general requirements for a corporation to obtain tax-exempt status are listed below:
- Make a written application for exempt status - Be approved by the IRS
- Become incorporated under the standard procedures
- Issue capital stock
- Include in the articles of organization the fact that the articles limit the purpose of the entity to the charitable/exempt purpose
What are the general requirements for a 501(c)(3) corporation to maintain its tax-exempt status?
The general requirements for a corporation to maintain its tax-exempt status are as follows:
- No part of the net earnings may inure to the benefit of any private foundation or individual.
- No substantial part of the activities may be nonexempt activities (e.g., propaganda or influencing legislation).
- The organization may not directly participate or intervene in any political campaign.
Note: the organization must also file the required annual information tax form (if applicable). If the organization fails to file for three consecutive years, the tax-exempt status will be revoked.
When does a private foundation terminate involuntarily?
A private foundation terminates involuntarily when either of the following occurs:
- It becomes a public entity (i.e., it cannot be both).
- It commits repeated violations or a willful and flagrant violation of any if the private foundation provisions.
What are the categories of private foundations that are excluded from the provisions of Section 509 (i.e., they are deemed "public organizations")?
The categories of organizations that are excluded from the provisions of Section 509 are the following:
- Maximum (50%-type) charitable donees
- Broadly publicly supported organizations receiving more than one-third of their annual support from members of the public and less than one-third from investment income and unrelated business income
- Supporting organizations
- Public safety testing organizations
What is the definition of "unrelated business income" (UBI)?
Unrelated business income (UBI) is gross income from any unrelated trade or business "regularly" carried on, minus business deductions connected therewith. UBI is:
- Derived from an activity that constitutes a trade or business;
- Regularly carried on; and
- Not substantially related to the organization's tax-exempt purposes.
How is UBI taxed for an exempt organization?
Although an organization may have tax-exempt status, the organization may become subject to regular corporate income tax on its unrelated business income (UBI).
- The organization is allowed a $1,000 specific deduction from UBI; thus, only UBI in excess of $1,000 is subject to tax.
- Further, there are other types of income that are specifically excluded from tax.
What are some items of income (other than the $1,000 that is specifically excluded from tax) that are excluded from tax for the exempt organization?
Items of income that are specifically excluded from tax for the exempt organization include:
- Royalties, dividends, interest and most annuities
- Rents from real property and rents from personal property leased with real property (subject to limitations), other than income from debt-financed property
- Gains and losses from the sale/exchange of property not held primarily for sale to customers
- Income from research of a college or hospital
- Income from labor unions used to establish exclusive-use facilities
- Activities limited to exempt organizations by state law
- Income from the exchange or rental or membership lists
What are the three types of exempt organizations that do not have an annual filing requirement of an information return with the IRS?
The three types of organization that do not have an annual filing requirement of an information return with the IRS are listed below:
- Churches and exclusively religious activities of a religious order or internally supported auxiliaries.
- Certain organizations (educational organizations, religious organizations, and those organized to prevent cruelty to children and animals) that normally have less than $5,000 in annual gross receipts.
- Organizations that normally have less than $50,000 in annual gross receipts.
What is a controlled taxpayer?
Any one of two or more taxpayers owned or controlled directly or indirectly by the same interests, and includes the taxpayer that owns or controls the other taxpayers.
What is an uncontrolled taxpayer?
Any one of two or more taxpayers not owned or controlled directly or indirectly by the same interests.
What is the definition of "controlled"?
"Controlled" included any kind of control, direct or indirect, including control resulting from the actions of two or more taxpayers acting together.
A presumption or control arises if income or deductions have been arbitrarily shifted.
What is a "controlled transaction" or a "controlled transfer"?
Any transaction or transfer between two or more members of the same group of controlled taxpayers.
What is an "uncontrolled transaction"?
Any transaction between two or more taxpayers that are not members of the same group of controlled taxpayers.
What is an "uncontrolled comparable"?
"Uncontrolled comparable" means the uncontrolled transaction or uncontrolled taxpayer that is compared, under any applicable pricing methodology, with a controlled transaction or with a controlled taxpayer.
What is the purpose for the IRS' making transfer pricing adjustments?
To assure that reported prices (as adjusted by the IRS) that one affiliate charged to another affiliate yield results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (the "arm's length" standard).
Under what circumstances will the courts not support the IRS' making transfer pricing adjustments?
The courts will reverse the IRS' adjustments if the controlled taxpayer shows that the results of its transactions are within an arm's length range established by two or more uncontrolled comparable transactions based on a single pricing method.
What is the "arm's length" standard?
A controlled transaction or controlled transfer meets the arm's length standard if the results of the transaction or the transfer are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction or transfer under the same circumstances.
Describe the circumstances that will allow the taxpayer to avoid penalties with respect to IRS-imposed transfer pricing adjustments.
By the date the taxpayer files the return, the taxpayer has completed a "482 study," which establishes that the prices charged to affiliates (controlled taxpayers) were reasonable and complied with U.S. Treasury regulations, if applicable.
What is the Advance Pricing Agreement program?
A program to resolve actual or potential transfer pricing disputes prior to examination (audit).
The agreement is a binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return consistent with the agreed transfer pricing method set forth in the contract.
What elements usually make up an appointment factor used to apportion income to a state?
The percentage of the corporation's property, payroll, and sales in the state.
How are after-tax cash flows computed?
The tax savings or expense related to a particular cash flow equals the amount of the expense or income times the marginal income tax rate of the firm. This amount is deducted from cash flows to determine the after-tax amount of the cash flow.
Note: Multiply pretax cash flow by (1 - tax rate) as a shortcut to compute after-tax cash flows.
Which type of asset transactions potentially affect income taxes and cash flows?
- Asset abandonment
- Asset sale
- Asset trade-in
What is the tax treatment for an abandoned asset?
The remaining book value (for tax purposes) is deductible as a tax loss. The tax loss will reduce tax liability in the year of abandonment.
How are income taxes and cash flows affected by an asset trade-in?
Generally, no gain or loss is recodnized or the trade-in of an old asset for tax purposes; so, there is no immediate tax effect. The traded-in asset's book value becomes a portion of the depreciable basis of the new asset, resulting in additional depreciation for tax purposes in later years and the reduction of taxes payable in those later years.