T2-M5 Tax Planning for Corporations

Question 1

what are the common tax planning strategies for corps?

Answer 1

• Timing: when is income or loss recognized?
• income-shifting: to whom/where is income or loss allocated
• estimated payments and the avoidance of underpayment penalties: eliminating unnecessary penalty payments
• in addition to these strategies, corps must be aware of LIMITATIONS generated by nontax business conditions and certain judicial doctrines (state with lower tax rate)

Question 2

what are the goals of timing strategies?

Answer 2

• minimize the PV of tax costs (which maximize after-tax income) = pay later
• maximize the PV of tax savings (which minimizes after-tax expense) = deduct sooner
• utilize NOL carry back first to get refund and then utilize for carry forward as soon as possible
• if having capital losses that are about to be expired, should sale investment with capital gain enough to utilize capita losses. Then buy back investment with higher basis. Do not sale capital losses and buy back right away that would generate wash sale
• tax rate changes:
  + when tax rates are constant or decreasing, corporations should accelerate deductions into earlier years (increase tax saving sooner) and defer income into later years (increase tax costs later)
  + when tax rates are increasing, corporations should choose to postpone deductions to future years and accelerate the reporting of income in earlier years

Question 3

what are the goals of income-shifting strategies?

Answer 3

• transactions between jurisdictions (states and foreign): states with different tax rates
• transactions between entities (corps vs shareholders):
  + corps rent or loan from shareholders
  + corps pay salary to shareholder employee instead of paying dividends to avoid double taxation
  + corps should not distribute or shareholders should not contribute appreciated noncash property when ownership is less than 80% (80% or more ownership will get tax free)

Question 4

what are the goals of estimated tax payments, and underpayment penalties strategies?

Answer 4

• reduce the corp’s tax liability
• minimize or eliminate any underpayment penalties for the corp’s tax
• estimated tax payments:
  + each payment = 25% of the corp’s annual required payment
  + minimum annual required payment is the LOWEST of:
  
  • 100% of tax liability in CY
  • 100% of tax liability on PY’s TR (may only be used to the 1st quarter payment for large corp (over $1M in TI in 3 prior years) and may not be used if PYTR tax liability is zero
  • 100% of estimated tax in CY using annualizing method
• if paying the estimated tax payments, regardless how much tax a corp owns by the filing time, it wont have to pay any penalties and interest

Question 5

what are limitations of tax planning strategies?

Answer 5

• general limitations: lack of opportunity to engage in tax planning
• judicial doctrines:
  + constructive receipt that limits the effectiveness of timing strategies. ex: a taxpayer cannot ignore a check waiting in the mailbox to defer income to subsequent year
  + the assignment of income limits income-shifting strategies to make it more difficult to shift income between taxpayers
  + substance-over-form doctrine allows the IRS to re-determine the substance of a transaction regardless of whether the form to arrive at specific tax treatment was followed