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
Section 1231 assets are
- Held for longer than 12 months
- Used for generating revenue
“Business assets” such as a building
NOTE: it is not what the asset is, it is WHAT IT IS BEING USED FOR that makes it 1231
Does depreciation have anything to do with whether or not an asset is 1231 property?
NO
It is what the asset is being used for.
MUST be a tangible asset. (Copyright NOT 1231)
What is considered depreciable basis for tax purposes?
Very similar to book basis.
-Shipping, installation, training, sales tax, testing. Everything to get the equipment ready for its intended use.
Further improvements are also capitalized.
What does real property include?
Land
All items permanently affixed to the land (buildings, paving, etc).
What is meant by double taxation of corporate earnings?
Corporate earnings taxed at 21%
Distributed earnings to shareholders, taxed again.
Dividends from one C-corp to another C-corp have the potential for triple taxation. What tax rule helps avoid this for corporations?
Dividends Received Deduction
Dividends Received Deduction amounts
Less than 20% ownership = 50% DRD
20% - 80% = 65% DRD
More than 80% ownership = 100% DRD
How do you calculate the Dividends Received Deduction?
Percentage amount X Business Net Income
Percentage amount X dividend income
***Take the lower of the two numbers as the DRD
How do you calculate the DRD if there is a NOL?
Calculate the dividend income by the appropriate % and add the full deduction to the NOL to make it larger.
How much of charitable contributions can be deducted each year?
Up to 10% of income
Can be carried over for up to 5 years
C-corp: Charitable Contribution
If pledge is made and then paid within ___ of the next year, the deduction can be taken in the current year
3 1/2 months
Can a parent and sub file a consolidated tax return?
Do they have to?
Yes, as long as the parent holds 80% or more of the voting stock.
“affliliated group”
Do not have to.
Ownership of 80% or more of voting stock, what is the DRD?
100% deduction
Can operating losses of a sub offset operating income a parent?
Yes, if more that 80% owned
What is the Accumulated Earnings Tax?
- Penalty tax if audited by the IRS
- C-corps only
- Flat 20% of accumulated earnings
- Regular corps” $250,000 exemption
- Calculation based on “reasonable needs” of business
How does a C-corp avoid the accumulated earnings tax?
- Pay dividends
- Pay dividends late (by April 15th)
- Reasonable needs argument (to grow)
- Consent dividends (hypothetical, shareholders increase basis, pay tax now, reduce capital gains later)
Can a company be subjected to both the Personal Holding Company tax and the Accumulated Earnings tax?
No, only one.
What is a Personal Holding Company?
- Small C-corp, 5 or less owners in the last half of the year who own more than half the stock
- Income is mostly from passive sources (60% +)
Which of the following should be self-assessed?
I. Personal Holding Company tax
II. Accumulated Earnings tax
Personal Holding Company tax should be self-assessed.
Accumulated Earnings tax is paid by IRS audit only.
Tax-exempt status requirements
- Must file as corporation or trust
- Needs an exempt purpose
- Can’t be for the benefit of its owners
- Allowed to issue stock but usually do not
Form to seek tax-exempt status?
Form 1023 Form 1023EZ (assets < $250K, receipts of < $50k)
Form 1023 EZ can’t be filed by a:
- Church
- School
- Hospital
- private foundation
- foreign organization
What is a private foundation?
-Most support comes from specific sources
(at least 2/3)
-does not solicit public support
If a tax-exempt organization has gross receipts of ___ or more, they must file an informational return
$50,000
What is the tax form for Private Foundations?
Form 990 PF
Annual filing form for tax-exempt organizations?
Form 990
How to lose tax-exempt status?
- trying to impact legislation
- Cap is $1M for lobbying efforts
- Churches can’t engage in any political activities
In what situation can a tax-exempt org pay taxes?
-on any unrelated business income in excess of $1,000
Are church bingo games related to the mission or unrelated?
Related, no tax paid
If a donor donates a car or artwork and the organization only engages in this type of activity occasionally, is this taxed?
NO, considered related income
An unrelated business does / does not include activity where all the work is performed by unpaid volunteers?
Does not.
Not taxable.
Tax exempt org: is corporate sponsorship of athletic events subject to tax?
No, considered tax exempt (not unrelated business income)
Corporate stock redemption
Shareholder sells stock back to issuing corporation
Corporate Stock Redemption rules to get capital gain treatment
- After redemption, stockholder must own less than 50% of the stock
- Percentage drop in total ownership must be more than 20%
How is a partial liquidation taxed?
As a capital gain/loss
What is the difference between a “complete liquidation” and a 100% stock redemption?
In a complete liquidation, the corporation is initiating.
How are assets taxed upon complete liquidation?
Double taxation. Revalue assets to fair value, pay tax. Then taxed upon distribution.
Losses are usually deductible in complete liquidation.
In a corporate liquidation, gain on the sale of inventory results in?
Ordinary income
In a corporate liquidation, gain on the sale of land result in what?
Capital gain
If a corporation distributes property subject to mortgage of 130,000 with a basis of 40,000, how much is the capital gain?
90,000.
The FMV can’t be less than the value of the mortgage. Therefore, value the property at 130,000 and subtract the basis of 40,000.
Class B re-organization CHARACTERISTICS
- VOTING stock of the acquiring corporation is exchanged solely for the stock of the target corporation
- No BOOT allowed (NO CASH)
- After transaction acquirer must own at least 80%
- No tax
- Shareholder basis stays the same
“Pursuant to a plan of corporate reorganization” =
tax free, as long as voting stock, 80%+
Type A consolidation characteristics
“statutory merger”
“consolidation”
Getting all assets of target corp.
No gains or losses recognized.
Can be stock and cash.
Voting and non-voting stock.
Type A consolidation
A + B = ____
Both companies dissolve
A + B = C
C is a new company
In a Type A consolidation, at least ___% of consideration provided must be in the form of acquiring corporate stock
50%
Is a Type A consolidation taxable?
No, tax free to all parties
Type C reorg
- Stock for assets deal
- Voting stock only
- Boot allowed, but voting stock must be at least 80%
Explain the difference between boot allowed in a Type A vs Type C re-organization
Type A: Boot allowed, but can’t be more than 50% consideration received from acquiring corp
Type C: Boot allowed, but can’t be more than 20% of total consideration received
Are all assets of the target corp transferred to the acquiring corp in a Type C reorg?
No.
- Any assets transferred to shareholders, gains taxed to corporation
- Any assets transferred to acquiring corp, no gains taxed
Type D reorganization characteristics
- Divisive
- Transfer assets to the subsidiary
Type E and Type F reorganization
Recapitalizations (swap preferred stock for bonds)
Change in name, change in state of incorporations, “mere change in place”
No gain or loss for shareholders.
Type G reorganization is related to ____
Bankruptcy
Is stock redemption a type of reorganization?
NO
In a re-organization, what happens to the tax attributes of the sub?
Type A: They are transferred to the parent (net loss carryovers, tax credit carryovers)
Type B: Remain with the sub since the sub still exists.
What is taxable if the realized gain is higher than the boot received?
The lower of the two, therefore the boot received would be the taxable gain in this instance.
3 characteristics of a Type B re-org
- Stock for stock
- Assets don’t transfer
- Tax attributes don’t transfer
4 characteristics of a Type A re-org
- stock for assets
- merger or consolidation
- assets transfer
- tax attributes transfer
CONTROLLED GROUP what happens to IRS limits?
The group can only receive the amount in total.
Say 179 deduction limit is $1,200,000. The group can only use this amount in total. In can be split up in any way between the groups.
Controlled groups are for companies that own what % of stock?
80%+
What are brother sister controlled groups?
If 2 or more corporations are owned by 5 or fewer persons.
What are the 2 tests to determine a brother sister controlled group?
1) More than 50% combined interest
2) The remaining individuals have at least 80% ownership
Controlled Group vs.
Affiliated Group
Controlled Group - Negative thing, limitations
-one corporation owns at least 80% of the voting power of another corporation
OR
-holds shares representing at least 80% of its value
Affiliated Group - positive thing, share attributes
-one corporation owns at least 80% of the voting power of another corporation
AND
-holds shares representing at least 80% of its value
What is the biggest advantage of being an AFFILIATED GROUP?
The group can file a consolidated tax return.
The operating losses of one group member can offset operating profits of another.
Who is NOTE ELIGIBLE to file consolidated tax returns?
Insurance companies
S-corps
Foreign corporations
How are DIVIDENDS handled between AFFILIATED CORPORATIONS?
Dividends between the affiliated corporations are eliminated on the consolidated return
How are sales of PROPERTY handled between two companies in an AFFILIATED GROUP filing a consolidated return?
Gains and losses are IGNORED.
Gain / loss would be recognized if/when the item is sold to an outside party.
If prices are rising, what results in a higher taxable income?
FIFO, because ending inventory will have the more expensive items
COGS will have cheaper items, lower, equals more taxable income
In the case of falling prices, if they are using LIFO, does this result in higher or lower taxable NI than FIFO?
LIFO falling prices =
- cheaper items in ending inventory
- more expensive items in COGS
- COGS higher
- Taxable net income lower than if FIFO used
When is accrual accounting mandatory for tax purposes?
If the company has average gross receipts of $26M over the past 3 years from their sales of INVENTORY
When do Uniform Capitalization Rules apply?
When the company has over $26M in gross receipts over the past 3 years from their sales of inventory
Under Uniform Capitalization rules, are service costs such as marketing, selling, advertising capitalized to inventory?
NO, expensed/deducted immediately.
In a barter situation, how much should be included in taxable income?
The fair value of what was received is ordinary income.
Example: $300 cash + $350 (bird cage) = $650 ordinary income
80% rule: what if someone contributes20% or more of services?
Automatically does not meat 80% rule, assets go in at FMV. Possible taxation on any gains.
Are UNDERWRITER’S FEES considered amortizable for organization costs?
NO
Tax exempt: sale of merchandise received by donors - related or unrelated?
Related. Some donor contribute merchandise instead of cash. This can in turn be sold for cash and is considered related.
