C-Corp Taxation Flashcards
Shareholder contributes asset/property to form a corporation and receives 82% of stock - is asset valued at basis or FMV?
Asset is contributed at BASIS when shareholder receives 80% or more of the stock.
In this case, NO gain or loss is recognized by the shareholder.
When asset is transferred to the corporation and does not meet the 80% rule, what happens?
Corporation picks up basis at FMV (as if it was purchased).
Shareholder is taxed on the built-in gain.
If a shareholder contributes services worth $50,000 to form a corporation and receives $70,000 worth of stock, what are the tax implications to the shareholder?
The shareholder is taxed on services at the value that was exchanged. Therefore, $70,000 would be ordinary income.
What happens if a stockholder contributes property with a value of $50,000 and a mortgage of $20,000? Assume the corporation assumes the mortgage.
Since the shareholder received debt relief, the shareholder’s basis in the corporation is $30,000.
What is the corporation’s basis in the property contributed by a shareholder if debt is assumed?
The corporation’s basis is the greater of:
- The debt assumed OR
- The transferor’s basis in the asset
Corporation capital assets are
stocks and bonds.
C-Corp: 1231 assets
Used to generate revenue.
Things such as machinery and equipment.
Subject to depreciation.
Can treasury stock transactions create a gain or loss?
NO. Treasury stock is not a capital asset.
If a corporation has both capital gains and capital losses in the same year, how is it handled?
Netted out to one final figure.
What happens if there is a capital loss but no capital gain?
The net capital loss can be carried back 3 years and forward 5 years.
TCJA: Meals deductions
50%
Onsite cafeteria counts
Can a C-corp deduct a federal income tax provision?
NO
Is State Income Tax provision an allowable deduction from a federal return?
YES
Expensed on books, allowed on return, not an M-1 adjustment.
Are key officer life insurance premiums deductible if the company is the beneficiary?
NO because the proceeds won’t be taxable.
Are life insurance premiums deductible if the employee is the beneficiary? Is this an M-1 adjustment?
YES. But this isn’t an M-1 adjustment because it is also deducted on a book basis.
M-1 adjustment: Muni bond interest
Included in book income, not included in taxable income.
What happens to interest expense paid to invest in municipal bonds?
It is not deductible on a tax basis because it was borrowed for tax-free income.
For tax years beginning before January 1, 2018, NOLs were able to offset ____% of income. Could be carried back __ years and forward for __ years.
100%
Could be carried back 2 years and forward for 20 years.
TCJA - NOLs are generally no longer allowed to be carried back but can be carried forward for ____
indefinitely
Under the new NOL rules, a NOL can only offset ___% of income in any given year.
80%
There are special NOL carryback rules (2 years) for what businesses?
Farming and insurance businesses
C-Corp: If capital losses are taken on the books, how does this effect taxable income?
Add back, capital losses are not allowed to be taken as a deduction in the current year.
Which entities are not entitled to a NOL deduction?
Partnership and S-corp
How is bad debt expense handled book vs. tax?
Bad debt expense is added back to net income per books. Only amount actually written off can be deducted.
C-corp: bad debt expense
Can you deduct a bad debt expense for a customer who never paid?
No, unless income was already recognized.
Does a corporation get the $3000 capital loss deduction against ordinary income?
No. Only individuals.
Capital losses can be carried back 3 years and carried forward 5 years.
What if company buys back their own stock at a gain? Do they recognize a gain on treasury stock?
NO. No gain or loss on the sale of treasury stocl.
How is municipal bond interest handled book vs. tax?
Muni-bond interest will be included in books. It should not be included in taxable income because it is tax exempt.
Subtract from book net income to arrive at taxable income.
Are dividend payments deductible to the corporation?
Taxable to the recipient?
Corporation = not deductible
Recipient = taxable
What is a distribution of corporate earnings called?
A dividend.
What is meant by double taxation of corporate earnings?
Earnings taxed on corporate return.
Then, if dividends distributed, taxed again by recipient.
What is a distribution IN EXCESS of corporate earnings considered?
A return of capital to the shareholder, reducing the shareholder’s basis.
Positive Current Year AEP = 12,000
Negative Prior Year AEP = (50,000)
Distribution = 15,000
Net or some other method to determine dividend/ROC amounts?
DO NOT NET if there are current earnings.
Current earnings and profits are measured first.
$12,000 dividend
$3,000 ROC
Negative Current Year AEP = (60,000)
Positive Prior Year AEP = 80,000
Distribution = 25,000
Net or some other method to determine dividend/ROC amounts?
If current is negative, NET.
Netted = 20,000 available for dividend
5,000 is then ROC
What happens when a corporate distribution is in excess of basis?
Distribution is return of capital to the extent of basis. Excess of basis is a capital gain.
Asset distributed from a corporation come out at FMV or Basis? How does this effect AEP?
FMV
Typically the corp records a gain which increases AEP.
Do dividends reduce the basis of a shareholder?
No, because they are taxable.
What happens when a corporation distributes an asset with a FMV of 50 and a basis of 20, current and accumulated AEP of 10.
Corp recognized a gain of 30 (50-20) which increases Accumulated AEP to 40. Distribution is at FMV (50), therefore 40 of the distribution would be a dividend and 10 would be a ROC.
Can a C-corp take a loss on an asset that is distributed?
No, the only way the C-Corp can take a loss is if the asset is SOLD.
How much stock must a shareholder own to be considered a RELATED PARTY transaction?
OVER 50%
Related party gain vs. Related party loss tax effect
RP gain = taxable
RP loss = not deductible
If a corporation distributes property with debt that is assumed by the shareholder, how is it handled for tax purposes by the:
corporation?
shareholder?
Corporation recognizes a gain of Debt assumed - Basis.
Shareholder’s basis in the asset is the value of the mortgage. If the FMV is less than the mortgage, no tax.
What are considered organizational costs?
- Legal services to draft charters
- Accounting and consulting services to choose entity type
- Expenses of initial meetings of directors and shareholders
How much of organizational costs are tax deductible?
$5000 in the year they begin business
Phased out dollar for dollar over $50,000
Rest is amortized over 15 years/180 months.
**note when they BEGIN BUSINESS not when organized
Are stock issuance costs and underwriter fees deductible as organizational costs?
NO
What are considered deductible start-up costs?
- Incurred after the business is born
- But BEFORE they begin their trade/business
- Analysis/Survey of markets
- Initial advertising/marketing costs
- Employee training
- Benefits prior to generating revenue
- Rent and utilities pre-opening
How much start-up costs may be deducted?
$5,000 in the first year of business
Dollar for dollar phase out over $50K
Remainder amortized over 15 years/180 months
**Deductible once business begins
What is Section 197 property?
Intangibles when purchasing another company =
GOODWILL
Is goodwill deductible?
Yes, over 15 years.
not amortized for book purposes
