Flashcards in Youngberg- green book Deck (52):
On what form and how is a C corp taxed?
C corporations used the 1120 form
There is a 2 tier system:
C corp is taxed annually on it's worldwide taxable income
Shareholders are taxed on distributions from the corporation that qualify as dividend distribution.
What is a Personal Service Corporation?
Shareholder-employees who own substantially all (greater than or equal to 95% by value) of the stock perform service activities. Subject to a flat 35% tax rate. Services include accounting, actuary, architecture, consulting, engineering, health, law, and performing arts.
What is a Personal Holding Company?
Any nonexempt closely-held corporation that primarily generates passive income. Stock is held greater than 50% by 5 or fewer shareholders.
What is section 351 for corporations?
No G or L is recognized on the transfer by one or more persons of cash/property to a corporation solely in exchange for stock if immediately after the exchange, that person or persons are in control of the corporation.
What are the 3 requirement to be met for 351 non recognition?
Property transferred (everything but services)
Consideration received: only receives stock
Control test: As a group >= 80% of the voting power and >=80% of shares for each class of non voting shares.
What happens if the shareholder provides services:
if the shareholder provided services, then the shareholder must recognize ordinary income equal to the FMV of the services rendered.
What is the definition and treatment of boot?
Boot is anything received by the shareholder other than stock.
Treatment: realized gain, but no loss is recognized.
Recognized gain is limited to the lesser of ;
1) FMV of Boot received, or
2) Transferor's Realized Gain
How are liabilities treated under 351?
The corporation's assumption of transferor's liabilities is generally not treated as boot received by the transferor unless one of the following exceptions applies:
The shareholder must recognize gain to the extent liabilities assumed by the corporation exceed the total adjusted basis of all property transferred by the shareholder.
Treated as boot if no valid business purpose, or a tax avoidance purpose is connected with the liability assumption.
What is the Shareholder's basis in the stock received?
AB of property transferred
Plus: Any gain recognized by shareholder
Less: FMV of boot received by shareholder, includes
Liabilities assumed by corporation
Money received from the corporation
Other property (FMV), does not include corporation stock
Equals: Shareholder's AB in corp stock received.
What is the Shareholder's holding period?
Usually the holding period is carryover basis.
What is the corporation's basis and holding period?
Shareholder's AB in the property given up
Plus: Gain (if any) recognized by the shareholder
Minus: Reduction for loss property
Equals: Corporation's basis in the property received.
Holding period usually carryover.
What kind of year can corporations generally elect?
And once elected, how can it be changed?
A corp may generally elect either a calendar year or fiscal year.
Once adopted, a tax year may only be changed with prior IRS approval.
What kind of tax year can S corps and PSC used?
S corps and PSC's must use a calendar year unless valid business purpose exists as supported by natural business year.
A corp must use what accounting method unless an exception is met:
A corp must use accrual method unless it it had average annual gross receipts of
What are the other 2 times that cash method may be used?
Small TPs: Any TP, except a tax shelter, with average annual gross receipts of less than 1 mil in the three preceding tax years. Primary business does not involve inventory.
Personal Service Corporations.
Debt Capital is an attractive option because the interest paid on debt is:
Interest paid on debt is deductible to the corporation.
Worthless Securities: what is the GR and the exception?
the GR is that a security that becomes worthless results i a CL for the investor as of the last day of the taxable year in which the security became worthless.
Exceptions: Ordinary loss treatment by a parent corporation owning >=80% of the subsidiary stock.
Securities held as inventory by securities dealer will receive ordinary loss treatment when it is sold, exchanged or becomes totally worthless.
Related party sales- losses disallowed.
Sale or worthlessness of "Small Business Stock": 1244 treatment:
Ordinary loss up to $50,000 for single TPs and $100,000 for married TPs. Any losses over that are treated as CL
Under 1244 a shareholder must be:
Shareholder must be original holder of the stock, and an individual or partnership. Not available for stock inherited, receives as a gift, or purchased from anther shareholder.
What is the treatment of CG and CL for a corp?
What is the CF and CB rule?
A corp must net all of its capital gains and losses to obtain its net capital gain or loss position.
A net CL is not deductible in the current year; CLs can be used only to offset CGs, unused CLs are carried back 3 years and carried forward 5 years, all carry forward losses are treated as short term.
No preferential treatment with regard to tax rates applied to income- Net CGs are taxed at ordinary rates.
What is the M-1 adjustment?
Muni bond interest income is excluded
Executive life insurance policy: proceeds are excluded.
Rent and Royalty income
how is property received from non-shareholders treated?
Non cash property will have 0 basis in the corp
Any cash received will reduce the basis of whatever property is acquired within 1 year
If nothing acquired, or if there is any excess cash not utilized, the basis of the corp's existing property will be reduced, beginning with depreciable property.
What is Uniform Capitalization Rules?
Requires certain expenses not typically capitalized for book purposes to be included in inventory. Includes indirect costs that benefit both resale and production activities and policy and management functions.
What are the exceptions of the Uniform Capitalization Rules?
If the TP qualifies for an exception to accrual basis accounting, the TP also escapes the Uniform Capitalization Rules.
Retailers and wholesalers with average annual gross receipts for the three preceding years
What is excluded from the Uniform Capitalization rules?
What is the limitation of compensation and in what ways can an employee earn more than that limitation?
Compensation in excess of $1,000,000 may not be deducted for CEO, CFO and the next 3 highest compensated executive officers of a publicly held corporation.
This limitation excludes Commission based income, compensation related to achievement of performance goals.
What kind of loss is business debt and can both cash and accrual TPs deduct bad debts?
Only deductible for accrual basis corporate TPs when income has been previously recognized.
For bad debts, what method must be used?
Either the direct write off method or the non accrual experience method must be used. The reserve method for financial reporting purposes is not permitted.
For corporations, extensions filed are good for?
A corporation is allowed an automatic extension of 6 months for filing its income tax return if the corporation files the appropriate form (7004) and pays its estimated unpaid tax liability on or before the due date of the return.
When may a corporation use cash method?
A C corp with average annual gross receipts of less than 5 mil in the three preceding tax years and does not maintain inventory.
The following information pertains to treasury stock sold by Lee Corporation to an unrelated broker in the current year:
Proceeds received 50,000
Par value 9,000
What amount of capital gain should Lee recognize in the current year on the sale of this treasury stock?
A corporation does not recognize gain or loss on the receipt of money or other property in exchange for its stock, including treasury stock
Gross income of a corporation includes all income, unless specifically excluded. Excluded from a corporation's gross income are:
Gross income of a corporation includes all income, unless specifically excluded. Excluded from a corporation’s gross income are capital contributions and any gain or loss realized by a corporation on the sale or exchange of its own stock (including treasury stock).
Both cash- and accrual-basis taxpayers must include in gross income amounts that are:
actually or constructively received if the taxpayer has an unrestricted claim to the amounts.
If a corporation establishes a sinking fund under the control of a trustee for the payment of its debt, any gain arising from the fund must be included or excluded in income?
If a corporation establishes a sinking fund under the control of a trustee for the payment of its debt, any gain arising from the fund must be included in income of the corporation.
How are services treated in regards to the creation of a corporation?
If the shareholder provided services, then the shareholder must recognize ordinary income equal to the fair market value of the services rendered. Because services do not qualify as property, stock received by a person who exclusively provides services does not count toward the 80% control threshold.
Personal Holding Company Tax: Who does this not apply to?
Tax exempt corporations
Personal Holding Company: What are the tests?
Shareholder: 5 or fewer individuals own more than 50% of the stock at any time during the last half of the tax year AND
Income: PHC income (income other than business income such as interest, dividends, rents, royalties) constitutes at least 60% of adjusted ordinary income.
Personal Holding Company: What is the penalty?
20% penalty tax is imposed on undistributed PHC income, self assessed and reported on Form 1120 PH
Accumulated Earnings Tax: what is it?
It's a penalty tax applied on excess earnings held beyond the reasonable needs of the business. Failure to distribute earnings is tax avoidance. When applicable, this tax is owned in addition to regular income tax and AMT. Assessed upon audit only.
Accumulated Earnings Tax: who does it not apply to?
Does not apply to:
Personal Holding Companies
Tax exempt corporations
Accumulated Earnings Tax: what is the credit?
Accumulated Earnings Credit, is the greater of minimum credit $250,000 ($150,000 for personal service corporations) OR
Earnings needed to satisfy reasonable business needs. Examples: expansion, acquiring a business, working capital, debt retirement, business contingencies, loans to suppliers or customers.
Accumulated Earnings Tax: what is the penalty %?
20% or declare divs.
What is the formula for foreign tax credit?
Actual Foreign taxes paid or accrued OR
U.S. tax on foreign source taxable income
FTC limit= (Foreign Source taxable income/Total worldwide taxable income)x US tax before FTC.
How are foreign tax credits carried?
Carryback 1 year and forward 10 years.
All corporations must make estimated tax payment, except those which have an estimated tax liability of less than..
All corporations must make estimated tax payments, except those which have an estimated tax liability of less than $500.
Finbury Corporation’s taxable income for the year ended December 31, 2014, was $2 million. For Finbury to escape the estimated tax underpayment penalty for the year ending December 31, 2015, its total 2015 estimated tax payments must equal at least
100% of its 2015 tax liability.
A large corporation will not be considered to have underpaid its income tax if it pays 100% of the tax shown on the return for the tax year. A large corporation is one having $1 million or more taxable income during any of its 3 preceding tax years. Large corporations are not able to avoid underpaying their taxes by relying on the 100% of the tax shown on the return for the preceding year exception.
Can the preceding year method be used if a corporation had no tax liability last year?
Corp must have shown a tax liability in the previous year in order to use the 100%-of-the-preceding-tax-year method. Since the previous year generated an NOL, this method cannot be used. The annualized income method is available in this situation.
When computing a corporation’s income tax expense for estimated income tax purposes, which of the following should be taken into account?
Corporate Tax Credits
Alternative Minimum Tax
BOTH. A corporation is required to make payments of estimated tax liability in quarterly installments. The estimated tax liability is the sum of the regular income tax, AMT, and certain other taxes, reduced by corporate tax credits.
A corporation will not be considered to have underpaid its income tax if:
Sec. 6655(b) provides that a corporation will not be considered to have underpaid its income tax if it pays the lesser of (1) 100% of the tax shown on the return for the tax year or (2) 100% of the tax shown on the return for the preceding year. The definition of tax for this purpose is found in Sec. 6655(f). This definition includes the alternative minimum tax.
Accumulated earnings tax does not apply to:
Personal holding companies
Tax exempt corporations
For a corporation to justify its accumulation of earnings, there must be evidence that the future needs of the business will require such an accumulation and that the corporation has specific and feasible plans for the use of the accumulation. What are some examples?
Definite long-range commitment to purchase raw materials.
A feasible long-range plan to expand factory production.
Specific plans to update factory machinery.