Section 2: Corporate Tax Flashcards
(41 cards)
When is no gain or loss recognized when property is transferred to a corp?
If the property is solely exchanged for stock if, immediately after the transfer, the transferors are in control of the corporation
Tax-free exchange of property situations
- Cash or property 80% or more (control)
- Tax free
- Carryover basis
- If product is subject to debt (CV-debt=basis)
- Carryover holding period
- Services or <80% of stock
- Taxable income at FMV of stock
- Wage expense for corp
- If no control
- Taxable to all parties, similar to services
- Reorganizations of corps also tax-free
- Carryover basis
Basis for shares issued for cash
Basis is equal to the amount of cash paid
Shares in exchange for the rendering of services to corp
Result in ordinary income to the service provider.
The service provider reports income equal to the estimated FMV of the shares
Shareholder’s basis in stock received equals:
Adj basis of property transferred
+ Recognized gain
+ Cash paid
+ Liabilties assumed
+ transaction costs and fees
- Cash rec’d
- FMV of property rec’d
- Liabiltities transferred
Corporation’s basis in property rec’d equals:
+ Adjusted basis of the property in the hands of the transferor
+ Gain recognized by the transferor
Corporate Income Tax Return (1120)
Gross Income (worldwide)
- Ordinary deductions
Income before “special deductions”
- Charitable Contributions
- Div Rec’d Deduction (DRD)
Taxable Income
x Tax Rate
Gross Tax Liability
- Foreign Tax Credit
Net Regular Tax Liability
+ Personal Holding Company Tax (PHC)
+ Accumulated Earnings Tax
+ Alternative Minimum Tax (AMT)
Total Tax Liablity
Corporate Revenues
Same as individual tax with some exceptions
Revenue recognized at the earlier of when earned or collected
- Rent income rec’d in advance
- Interest income rec’d in advance (not muni interest)
- Royalty income rec’d in advance
Life Insurance Proceeds on key employee
- If the corp is the beneficiary, the premiums pd on such policies are not deductible, since the proceeds are not taxable
- Premiums on life insurance to benefit employee’s family are deductible
- Company-Owned Life Insurance (COLI) - the beneficiary may exclude from gross income beenfits rec’d only up to the total amount of premiums and other amounts pd by the policy holder for the contract, any excess would be taxable
Taxpayer can accrue an expense when:
- The transaction meets both an all-events test and an economic performance test
All-Events Test
Met when the existence of a liability is established and the amount of liabilty can be determined with reasonable accuracy
Economic Performance Test
When the property or services are actually provided
Deduction of Organizational Expenses
- Corp may elect to deduct to $5k of organizational expenditures and start-up costs
- The $5k is reduced by the amount by which the organizational expenditures or start up costs exceeds $50k
- The balance not deducted is amortized over 180 months
- The entity must elect to amortize the orgizational costs in the period of organiztion
- If no election is made, the costs are capitalized and remain until the entity is liquidated
- Costs of issuing, printing, and selling stock are NOT organizational expenses
Deduction of Salaries and Wages
- Can only deduct up to $1M of compensation expense for each of the highest paid executive officers of a public corporation
- Entertainment expenses for officers, directors, and 10% or greater owners may be deducted only to the extent that they are included in the individual’s gross income
Deduction of Bonuses and Vacation Pay
if paid within 2 and a half months of year end (3/15)
Deduction of Estimated Losses
- Estimated losses are not deductible
- Bad debts not claimed until actual direct write-offs
- Warranty costs not claimed until actual repairs
- For book, both accrued
- For tax, direct write-off method
Deduction of Interest Expense
Not deductible if loan proceeds used for tax-exempt investments
Deudction of Reimbursed Employee Expenses
- 50% of M&E
- All travel costs
- The cost of a luxary skybox is disallowed to the extent that the cost exceeds the cost of the most expensive non-luxury seat in the venue
- Tee limit does not apply if the skybox is rented for one event only
- Rental of a skybox for more than one event in the same sports arena, such as a series of playoff tickets, is subject to the limitation
Deduction of Casualty Losses
- Business property-adjusted basis immediately before the casualty
- Bot that “$100 floor” and “10% of AGI” limitations do not apply
Deduction of Goodwill, Franchises, and Trademarks
- Amortized over 15 years
- For book, tested annually for impairment
Expenses that are never deductible
- Government fines, fees, and penalties, including interest penalties
- Federal income taxes
- Can deduct state and local taxes on the federal return
Deduction of Research and Development Costs
Immediately or over a minimum of 60 months
Deduction of Dividends
- Reported fully in gross income
- Dividend Reduction Deduction (DRD)
- <20% owned - 70% DRD Allowed
- >=20%-80% - 80% DRD Allowed
- >= 70% - 100% DRD Allowed
- Investor does not qualify for DRD if
- From foreign corp
- Borrowed money to buy the investment
- Rec’d from tax exmpt organization
- Owned for ess than 46 days
- If Dividend is more than Income before DRD, apply % to Income before DRD
Deduction of Charitable Contributions
- Claimed after all others except “special deductions
- Limited to 10% of income before claiming deduction (10% ATI)
- Unused amount carried forward 5 years
- Pledge may be accrued if paid within 2 and half months of year end
