Ch 3 Part 2 Flashcards
Computation of corporate regular (income) tax liability
Taxable income X income tax rates = regular tax liability - foreign tax credit = regular tax - general business credit - minimum tax credit - other allowed credits \+ recapture of previously claimed tax credits = income (regular) tax liability
Restriction on closely held corporations 4
1 Shareholder and family who own over 50% of company
Can’t deduct losses between company and shareholder
2 If share holder sells property of disallowed loss at gain, gain
Is offset by previously disallowed loss
3 if shareholder sells property of disallowed loss at loss, the
Disallowed loss is never recognized
4 Gain on sale is treated as ordinary income
5% surcharge, corporate tax rates
5% surcharge applies to amounts above $100,000 and less
Than $335,000
Max surcharge = $11,750 (335k - 100k)
Personal service corporations
Pay a flat tax rate of 35% on all income
Don’t have graduated tax rate like C corporations
Control group: special tax rules
Prevent shareholders from distributing income to multiple
corporations to lower their tax rates
Shareholders of 2 or more corporations must pay 5% surcharge
On income exceed $100k (maximum of $11,750)
Pay 3% surcharge on taxable income exceeding $15 million
(Maximum $100,000)
Controlled group
Comprised of 2 or more corporations owned directly or indirectly
By same shareholder or group of shareholders
3 categories of controlled groups
1 parent subsidiary controlled group
2 brother sister controlled group
3 combined controlled group
Parent-subsidiary controlled group
One corporation (parent corp.) must directly own at least 80% Of voting and value of stock of a second corporation (subsidiary)
Parent subsidiary control group example
Parent owns 80% of Axel corp and 40% of wheel corp
Axel owns 40% of wheel corp
Therefore parent also owns 80% of wheel corp, so the is
A parent subsidiary control group
Brother sister controlled group, 2 definitions
1) 50%-80% definition
2) 50% only definition
Brother sister controlled groups 50-80% definition: a group of 2 or more corporations is a brother sister group if 5 or fewer individuals, trusts or estates meet two conditions?
1 more than 50% voting power and 50% value owned
2 at least 80% voting power of all classes of voting stock
Of each corporation (5 shareholders must collectively own 80%)
Brother sister controlled groups 50% only definition
5 or fewer owners must own 50% of company
Combined controlled group
Comprised of 3 or more corporations meeting the following
Criteria:
1 each corporation is member of parent subsidiary controlled
Group or brother sister controlled group
2 at least one of the corporations is both the parent corp.
Of parent subsidiary controlled group and member of
Brother sister controlled group
How long do you have to be a group member in the tax year to be considered part of the controlled group?
1/2 the days in the year
Consolidated tax return
Groups of related corporations (affiliated groups) may elect to
File a single income tax return
Affiliated group
One or more chains of includible corporations connected
Through stock ownership with common parent
What are not considered includible corporations?
Foreign corporations, certain insurance companies, tax exempt org.,
S corporations
2 required ownership criteria for affiliated groups to file consolidated return
1 common parent must directly own at least 80% of voting power
And value of at least one includible corporation
2 one or more group members must directly own stock with at
Least 80% voting power and value of each other other corp.
In affiliated group
Can parent subsidiary portions of combined groups file consolidated returns?
Can brother-sister control groups file consolidated returns? Why .
Parent subsidiary portions of combined groups can file
consolidated returns
Brother sister controlled groups can’t, because parent subsidiary
Relationship doesn’t exist
3 advantages of filing a consolidated return
1 losses of one member of group can offset profits of another
Group
2 capital losses of one member of group can offset capital gains
Of another member of the group
3 profits or gains realized from sale between members in group
Are deferred until sold outside of the group
5 disadvantages of filing consolidated return
1 election is binding on all subsequent tax years unless IRS grants
Permission to discontinue consolidate returns/or affiliated group
Terminates
2 losses on inter company transactions deferred til sale to
Outside group takes place
3 sec. 1231 loss offsets sec. 1231 gain instead of being reported
as ordinary loss
4 losses of unprofitable group member may reduce deduction
Or credit limitations of group members compared to separate
Filing
5 additional administrative costs in maintaining records
When are corporate installment payments required
Every corporation that expects to pay over $500 in tax for
Current year
Each payment should be equal to 25% of liability
