Chapter 2- C- Corp Corporate Tax Flashcards
1
Q
What are C Corporations?
A
- created formally w/an article of incorporation; once that is approved it becomes the corporate charter
- they have limited liability; all of the shareholders have limited liability
- they are a tax paying entity (form 1120) and they do pay taxes b/c they will write a check for the tax liability due
2
Q
how are C corporations formed?
A
-no gain or loss is recognized if property is transferred to a corporation solely in exchange for stock if, immediately after the transfer, the transferors are in CONTROL of the corporation
3
Q
What type of accounting does C Corporations use?
A
-90% GAAP accrual; 10% is an exception.
4
Q
when are C Corporations tax returns due?
A
- March 15 or 2 and a 1/2 months after year-end
- a 52-53 week tax year is fiscal year that varies from 52 time 53 weeks and ends on the same day (but does no have to end on the last day of a month)
This is testable for JULY 2016 TESTING WINDOW:for years beginning in 2016, the return is due on 4/13 which is 3 and a half months after calendar year end and only a 5 month extension is available. Therefore for corporations that don’t have a calendar year you must count 3.5 months after their year end to get when the tax return is due and there is a 6 month extension available from that due date (the 3.5 months after fiscal year end)
5
Q
how is cash or property that the C-Corp receives from contributors & the contributors gain 80% or more of the stock control?
A
- its tax free exchange & considered a non event and not taxable
- it has a carryover basis; if the property is subject to debt it is the net of the cash value less the debt & that is the stock basis
- has carryover holding period which means as long as the person had the cash or property the corporation gets the same amount of time ex. person owns property for 5 years then transferred it to the corp; the corp then has owned it for 5 years.
6
Q
how are services given for LESS THAN 80% of stock (control of the company) that is received by the C-Corp?
A
- taxable income at FMV of STOCK; this results in ordinary income
- for the shareholder donating the services, they must report ordinary income on their individual tax return.
- wage expense for corporation
7
Q
how are goods/services treated that the contributor gives that does not gain them any control of the company?
A
-taxable to all parties, similar to services
8
Q
Are reorganizations of a corporation taxable?
A
- No, they are tax-free
- have a carryover basis
9
Q
how are shares issued for cash in a C Corporation?
A
-the shareholders basis in the corporation is equal to the amount of cash paid
10
Q
how is property in particular treated in as an exchange for stock?
A
two possible ways to value it:
- tax/adjusted basis which is the one generally used, it is the tax/adjusted basis of the property to the shareholder
- fair market value; this is generally ignored when the property tax/adjusted basis is used.
the transfer of property is a non-taxable to the shareholder.
The federal tax code permits this treatment as long as 80% or more of the corporate stock is in the hands of shareholders that provided either cash or property to obtain their shares.
11
Q
what is the special rule related to property donated to the corporation that is less than 80% but more than 20% (no control) of the voting stock?
A
-property contributed is reported at the fair market value of the property on the date of the contribution, and is reported as a sale by the contributor. A gain is reported for the difference in the fair value and the tax basis property value.
12
Q
what happens to the business interest transferred by the proprietor or partners?
A
it is considered property, so incorporation is non-taxable and the assets and liabilities of the business are carried over to the corporation as long as the owners of the previous business are given at least 80% of the voting stock of the corporation.
13
Q
what does the “nonrecognition of gain” apply to when incorporating?
A
applies only to amounts transferred solely in exchange for stock.
14
Q
what happens if the shareholder receives cash or other property in addition to stock?
A
gains are recognized up to the amount of cash or fair market value of other property received. Securities are considered property for this purpose
15
Q
how do you treat property transferred and the contributor receives cash and stock % =>80%?
A
The stock is valued at the adjusted basis of the property + the cash received. and that will be the corporations basis in the property. The contributor/shareholder will have a stock basis in the amount of the property only and the cash that was received by them will be considered as a gain.
if a shareholder contributes property subject to liabilities, the shareholders basis in the stock received is reduced by the amount of liability relief. If the liabilities exceeds the shareholders adjusted basis in the property, gain is recognized on the excess and the shareholders basis in the stock is zero.
16
Q
what is the basis of property exchanged for corporate stock; tax-free exchanges under section 351 transferors have at least 80% control after the exchange for the SHAREHOLDER’S BASIS in stock received?
A
\+adjusted basis (meaning not the fair market value) of property transferred \+recognized gain \+cash paid \+liabilities assumed \+transaction costs and fees -cash received -FMV of property received -liabilities transferred.
17
Q
what is the basis of property exchanged for corporate stock; tax-free exchanges under section 351 transferors have at least 80% control after the exchange for the CORPORATION’S in stock received?
A
+adjusted basis of the property in the hands of the transferor
+gain recognized by the transferor
18
Q
how does properties transferred with a carryover basis that exceeds its aggregate FMV, how is it treated?
A
the corporate transferee’s aggregate basis for the property is generally limited to its aggregate FMV immediately after the transaction (generally the lesser value). any required basis reduction is allocated the transferred properties in proportion to their built-in loss immediately before the transaction. The transferor’s basis in the stock would still be the carryover basis of property (generally the higher value)
19
Q
what is the irrevocable election to limit the basis in stock received by the transferor?
A
that the stock received by the transferor is at the aggregate FMV of the transferred property (which is generally the lesser value). The transferor would then have a basis that is less than what the corporation’s basis in the property is. basically the corporations basis would be higher.
20
Q
how do reorganizations work in regards to taxes?
A
- basically the transfer of virtually all the assets and liabilities of one corporation to another in exchange for stock in the new corporation, and are generally non-taxable with the shareholders having the same basis in the stock of the new corporation as they did in the old. Tax-free status examples include:
- **changes in the place of organizations (for ex. the assets of a new your corp are all transferred into a corporation with a Florida charter)
- **mergers and consolidations of businesses
- **absorption of subsidiaries (the assets and liabilities of a controlled subsidiary are transferred to the parent)
-all require that a standard of 80% ownership be met for parties providing consideration other than services for their stock. it is the standard of CONTROL for tax purposes and is the minimum ownership level required to identify an investee company as a controlled subsidiary and allow the preparation of consolidated tax returns. it is optional to complete a consolidated tax return.
21
Q
when does GAAP consider control of a corporation to take place?
A
when a majority of the voting stock is owned, or when other acceptable standards are met, and require the preparation of consolidated financial statements when such circumstances arise.
***REMEMBER FOR ACCOUNTING PURPOSE MAJORITY RULE IS 50%
22
Q
AFTER a corporation is formed, how is a donation of additional property to the corporation handled?
A
- the shareholder will recognize NO GAIN OR LOSS on the transfer and will increase the tax basis in the stock by the TAX BASIS OF THE PROPERTY TRANSFERRED
- the shareholder’s tax basis in the transferred property will carry over to the corporation and become its tax basis in the property.
23
Q
What is included in a corporate income tax return form (1120)
A
Gross income (world-wide) -ordinary deductions =INCOME B4 SPECIAL DEDUCTIONS -charitable contribution -dividend received deduction =TAXABLE INCOME x tax rate =GROSS TAX LIABILITY -foreign tax credit =NET REGULAR TAX LIABILITY \+Personal Holding Company Tax \+Accumulated Earnings Tax \+Alternative Minimum Tax =TOTAL TAX LIABILITY
24
Q
what are considered revenues under c-corparations?
A
- its recognized at the earlier of when earned or collected
- rental income received in advanced is considered revenue for tax purposes when it was received
- interest income received in advance (not municipal bond interest)
- royalty income in advance
Monies received related to life insurance proceeds on key employee
- if the corp is the beneficiary, the premiums paid on such policies are not deductible, since the proceeds are not taxable
- premiums on life insurance to benefit employee’s family (the employees family is the beneficiary) are deductible because it is part of the fringe benefits
- company owned life insurance (COLI) the beneficiary may exclude from gross income benefits received only up to the total amount of premiums and other amounts paid by the policyholder for the contract, any excess would be taxable. there are exceptions which are director or highly compensated employee
25
what are deductions for the c-corporation?
- generally claimed in the same manner as GAAP regarding the matching principle.
- an accrual basis taxpayer can accrue an expense if the transaction meets both an all-events test and an economic performance test.
These may only be deducted when accrued if they are paid within 2&1/2 months of the close of the corporations tax year. this applies to wages, bonuses, vacation pay, charitable contributions.
26
when is the all events test met for claiming expense for a c-corporation on the accrual basis of accounting & tax purposes?
when the existence of a liability is established and the amount of liability can be determined with reasonable accuracy.
27
when is the "economic performance test" for claiming expense for a c-corporation on the accrual basis of accounting & tax purposes?
in the event that another person is to provide the taxpayer with property or services, the economic performance test is satisfied when the property or service are ACTUALLY PROVIDED.
28
under a c-corporation, what are considered organizational expenses?
- c corp may elect to deduct up to 5K of organization expenses for each expenditure and start up costs. the 5K amount is reduced by the amount by which the organizational expenditures or start up costs exceeds 50K respectively dollar for dollar.
- any cost not currently deductible are amortized over 180 months (15years) beginning in the month in which the active trade or business begins (basically if you don't start amortizing in the first month then you don't get to take the deduction)
- the entity must elect to amortize the organization costs in the period of the organization
- if no election is made, costs are capitalized and remain until the entity is liquidated
DO NOT INCLUDE THESE AS ORGANIZATION EXPENSE BECAUSE THEY AINT!
-costs of issuing, printing, and selling stock (including legal accounting fees related to the offering of securities) are NOT organizational expenses. The are a reduction to additional paid in capital (APIC). ex cash debit, credit commons stock, credit APIC (net of stock issuing cost)
29
what are the deduction rules related to salaries and wages for a c-corp?
- payroll taxes and fringe benefits
- can only deduct up to 1 Million of compensation expense for each of the 5 highest paid EXECUTIVE OFFICERS of a public corporation (1125-E) (500K if under TARP)
- entertainment expenses for officers, directors, and 10% or greater owners may be deducted only to the extent that they are included in the individuals gross income.
- bonsues and vacation pay CAN BE DEDUCTED, if paid within 2&1/2 months of year end (3/15; March 15)
30
what are the deduction rules related to estimated losses for a c-corp?
```
they are NOT deductible!
-bad debts not claimed until actual DIRECT WRITE-OFF
ex. a/r sales journal:
*debit- A/R
*credit-Sales
*debit-bad debt expense
*credit-allowance for doubtful acct:
for TAX Purposes you can only deduct the revenue when you write the account off the account: Direct Write-OFF
debit- bad debt expense
credit - A/R
```
these are temporary differences and they show up on the the M-1 statement
-Warranty costs NOT claimed until ACTUAL REPAIRS; (for book, both accrued & for tax purposes it is the direct write off method
31
Is interest expense deductible under a c-corporation?
No; if the loan proceeds used for tax-exempt investments like municipal bonds. So they must be added back to taxable income on the Schedule M-1.
32
how are reimbursed employee expenses treated for c-corporations?
50% of meals and entertainment
* **when reimbursed meals and entertainment is treated by the employer as compensation and wages, it is fully deductible to the entity.
* **the payee will be taxed on the amount of the reimbursement and be allowed to deduct 50% of the meals and entertainment as an unreimbursed business expense.
- all travel costs
- the cost of a luxury skybox is DISALLOWED TO THE EXTENT COSTS EXCEEDS THE COST OF THE MOST EXPENSIVE NON LUXURY SEAT IN THE VENUE
* **the limit does not apply if the skybox is rented for one event only
* **rental of a skybox for more than one event in the same sports arena, such as a series of playoff tickets, is subject to the limitation
33
how are casualty losses handled for tax purposes under a c-corp?
- business property-adjusted basis immediately before the casualty
- note that $100 floor and 10% of adjusted gross income limitations DO NOT APPLY
34
what are things are NEVER deductible for a c-corporation?
- government fines, fees, and penalties, including interest penalties
- federal income taxes (you can deduct state and local taxes on the FEDERAL RETURN
35
how are goodwill, franchises and trademarks treated for tax purposes for C-Corporations?
deductions are amortized over 15 years & for book it is still tested annually for impairment
36
how are research and development cost deductions handled for c-corporations?
-they can be deducted IMMEDIATELY or over a minimum of 60 months OR 5 YEARS
37
how are dividends treated under c-corporations? (remember dividends are not an expense because it comes out of retained earnings so its taxed)
from other taxable DOMESTIC corporations:
- reported fully in gross income
- dividends received deductions this is to avoid triple taxation on dividends.
38
how are dividend received deductions calculated? this is special deduction
**less than 20% of ownership in the corporation = 70% deduction and you get taxed on 30% of the amount
This is called and UN-AFFILIATED COMPANY
**greater than or equal to 20% but less than 80% = 80% deduction and 20% will be taxed. so multiply the amount by 20%.
**greater than 80% or equal to =100%; it is considered control of the company and all 100% of dividends received are deductible. They may also file a consolidated tax return and eliminate inter-company dividends which will give the same effect as 100% deductions.
**exception to the dividend deduction rules is if the dividend reduction is $70 or greater before taxable income before the dividend reduction is $80 but less than dividend of $100 then the dividend is limited to $80x70% = $56)
39
what is the rare limitation related to dividend deductions rules?
rare limitation is that the amount of DRD applicable to investments that qualify for the 70% or 80% DRD. This limitation applies when the income before DRD is less than the amount of the dividend itself, but not lower than the dividend multiplied by the applicable percentage. in these cases, the DRD % is applied to income before the DRD instead of the dividend itself.
basically if your DRD is less than your taxable income and your taxable income is LESS THAN THE DIVIDEND you are only going to get 70% OF THE TAXABLE INCOME MEANS THAT YOU CAN DEDUCT 70% OF THE TAXABLE INCOME AND 30% OF THE INCOME IS TAXED.
40
how are charitable contributions treated under a c-corp? THIS IS CONSIDERED A SPECIAL DEDUCTIONS
- they are claimed after all others deductions EXCEPT for "special deductions"
- they are limited to 10% of income before claiming deduction (meaning the adjusted taxable income ATI- ADJUSTED TAXABLE INCOME IS NET INCOME ADJUSTED BACK FOR CHARITY, DIVIDEND RECEIVED DEDUCTION, ANY KIND OF NET OPERATION LOSS CARRYBACK OR ANY KIND OF CAPITAL LOSS THIS WILL GIVE THE INCOME BEFORE SPECIAL DEDUCTION)
- unused amount can be carried forward 5 years
- a pledge may be accrued if paid within 2&1/2 months of year end (MARCH 15)
41
what is the adjusted taxable income (ATI) for a c-corp?
Net Income adjusted for the following:
- Charity
- Dividend Reduction
- Capital loss carryback
42
what are the charitable contribution rules for INDIVIDUALS?
- Maximum deductions are are 50% of AGI
| - Unused portion forward 5 years
43
what is the summary for charitable contributions?
Gross Income
-Ordinary deductions
=Income B4 Special deductions (ATI; adjusted taxable income)
-Charity (limited to 10% of ATI WHICH IS BEFORE THE SPECIAL DEDUCTIONS MULTIPLIED BY 10%)
-Dividend Reduction
=TAXABLE INCOME
44
how are capital gains & losses handled for a c-corp?
when a corporation sells assets that are held for investment, the difference between the tax bases and proceeds from sale are recognized as capital gains and losses.
- if the assets are held for one year or less, gains and losses are treated as ordinary income or losses
- if the assets are held for more than one year, losses are treated as ordinary losses which are offset by gains, losses are not deductible to a corporation and gains are treated as long-term capital gains
45
what are the rules for losses for c-corps
- may only offset capital gains per IRC 1211 (No net Cap. Loss)
- unused carried back 3 years and forward 5 years
- all loss carrybacks and carryforwards are considered short term
-Net Operating Losses are carried back 2 years (amend the return in the prior two years to offset some gains in the 2 prior years) and forward 20 years.
46
how are capital losses for individuals treated?
-can claim up to 3,000 per year & the rest can be carried forward indefinitely.
47
what are non-deductible items for a c-corp?
- federal income taxes (these are treated as offsets against the federal tax owed, and not as deductions. state and local taxes are fully deductible on a normal accrual accounting basis)
- government fines and penalties (since the intention of these are punishment, no deduction is allowed even though such penalties may appear to be in the form of interest)
- cost of issuing stock (these are treated as adjusted to the proceeds from sale)
- lobbying cost (corporations are discouraged from political involvement and may claim no costs associated with influencing candidates and legislation)
- compensation (over 1 million to the top executive officers of a public corporation; however pay to other employees is unlimited
- club dues (these are considered too personal in nature to qualify as business expenses)
- meals and entertainment are considered to have personal as well as business elements so only 50% of these cost are deductible.
- no estimates of bad debts (are only deductible at the time individual debts are written off. allowance approach is NOT permitted
- no estimated warranty expenses (the actual cost of repairs and replacements of products under warranty are deductible when costs are incurred)
- no estimated lawsuit costs (losses may not be deducted until paid. the tax code does not permit the deduction of losses just because they are probable and estimate.)
- no marketable securities changes; changes in the market value are not reported on the tax return. gains and losses are only recognized at the time of sale
- no inventory valuation declines are deductible until disposal of the inventory takes place.
48
what is the formula for the foreign tax credit for c-corporations?
u.s. tax liability x (foreign country income/worldwide income or total income) = foreign tax credit
** foreign tax credit is to never exceed actual foreign taxes actually paid. it is the lesser of the tax liability due or taxes paid in the foreign country
49
what is the foreign tax credit?
a credit available to US Corporations for income taxes paid to foreign countries on income that is also reported on the U.S. return. The credit is limited to the portion of the U.S. gross tax that applies that the income on which the foreign tax was assessed. the excess can be carried back one year or carried forward 10 years
**A corporation may elect to claim the entire amount of foreign taxes as a deduction from taxable income instead of claiming the credit.
50
when a corporation has an unused net capital loss that is carried back or carried forward to another tax year?
it is treated as a short-term capital loss whether or not it was short-term when sustained.
51
what is the accumulated earnings tax (AET) penalty tax?
a penalization of corporations that accumulate earnings beyond the reasonable needs for expansion, retirement of debt and working capital needs. they are taxed at the capital gains rate 20% on this money. So the corp pays corporate tax + 20%.
- allows certain amounts to be retained for the following:
* ***$250,000 for manufacturing co + the federal taxes due (only $150,000 for personal service corporations like health services, law services, accounting services, consulting services etc + the federal tax liability)
* **additional sums retained for the purpose of paying federal income taxes.
* ***retained earnings appropriated is money "reserved for" schedule must be attached to say what the funds are reserved for
NOTE: The sum of these two amounts is known as the minimum accumulated earnings credit.
52
what criteria does the IRS use to decided whether they will assess the accumulated earnings tax?
- excessive retained earnings in the judgement of the IRS
- not self assessed (by an audit) so the IRS looks at the audited financial statements and determines what the retained earnings should be by what is appropriated and whats not appropriated for the business. they look at the unappropriated amount and makes sure it is not over a set amount. anything over the set amount is taxed at 20%
- tax on unidistributed income only (20% rate)
Note: the tax can be reduced or eliminated if any of the following are paid:
* *actual dividend
* *consent dividend which is a hypothetical dividends you pay taxes on, even though no money was actually received. So this means that the shareholder agrees to pay the tax for the dividend hypothetically received.
* *if already paid PHC tax
53
what does the safe harbor allow?
- allows certain amounts to be retained for the following:
* ***$250,000 for manufacturing co + the federal taxes due (only $150,000 for personal service corporations like health services, law services, accounting services, consulting services etc + the current federal tax liability)
* **additional sums retained for the purpose of paying federal income taxes.
* ***
NOTE: The sum of these two amounts is known as the minimum accumulated earnings credit.
54
what is the personal holding company tax (PHC)?
it is to discourage the sheltering of certain types of passive income in corporations if both of the following apply:
1) 5 or fewer individuals own more than 50% of stock
2) 60% or more of revenue from passive income sources (taxable interest, dividends, rental & royalty income; it is where you sit back and watch your money grow i.e. not working for it)
* *****tax on undistributed personal holding company income (UPHCI) only (20% rate)
* ******self assessed by filing form with return (1120 PHC)
Note: It can be avoided if you actually pay dividends or have a consent dividend (a hypothetical dividend) So you can avoid getting hit with the PHC tax by doing this.
55
why was the personal holding company tax created?
to prevent individuals in high individual tax brackets from establishing corporations to hold their personal investments and benefit from lower c orporate tax rates on income. the tax only applies to UNDISTRIBUTED INCOME of the corporation after deducting corporate taxes and net long-term capital gains to arrive at UPHCI, and the tax can be reduced or eliminated by sufficient dividend distributions. This results in individual shareholders paying taxes on the dividends received.
56
what is an m-1 supplementary schedule/ reconciliation
-it is used to reconcile book income to taxable income; the government wants this because they want to make sure you are paying your fair share of taxes on your 1120
- the purpose of this schedule is to identify to the IRS amounts that are reported differently for GAAP and tax purposes.
- The calculation begins with book income and it is then increased/decreased by items that cause taxable income to be higher/lower than book income like the temporary differences between book and tax income and the permanent differences between book income (which came from the financial statements) and tax income.
temp differences (timing differences will eventually reverse) - bad debt expense (journal entry is debit bad debt expense credit allowance for doubtful accounts); depreciation expense
The corporation must prepare a reconciliation of book income to taxable income BEFORE special deductions, drd, charity donations and net operating loss deductions.
57
what are some temporary differences between book and tax income that are reported on schedule M-1?
- bad debt expense (would be added back to arrive at taxable income)
- warranty expense (would be added back to arrive at taxable income)
- depreciation expense differences (would be added back to arrive at taxable income)
58
what are some permanent difference between book and tax income that are reported on schedule M-1 ? These will ALWAYS be different between book and tax!
- municipal bond interest (this is book income only; so this income should be subtracted from income to arrive at taxable income)
- 50% of meals and entertainment (for book purposes meals and entertainment reduce income by its full amount (100% cost of the meals and entertainment) so for tax purposes you would add back 50% of the amount that was deducted for book income)
- fines are deductible for book but must be added back to income for arriving at the taxable income
- penalties are deductible for book but must be added back to income for arriving at the taxable income
- premiums paid on key person life insurance
59
what is an m-2 supplementary schedule?
it is a reconciliation of unappropriated beginning retained earnings and ending retained earnings. the government is trying to see what corrections you made to your retained earnings to see if they squeeze more money out of you!
Start with beginning Retained Earnings +/- adjustments = adjusted beginning + net income - dividends = ending retained earnings
The IRS examines this schedule to determine if any prior period adjustments (which is a correction of an error) might require amending returns of earlier years.
60
what is an m-3 supplementary schedule?
it is a reconciliation of financial accounting income with taxable income. for corporations with total ASSETS of $10 million or more, this schedule is prepared in lieu of schedule M-1 and is, in essence, simply a more detailed form of that schedule.
the schedule M-3 income and expense difference are separately reported as temporary or permanent differences.
Schedule M-3 also reconciles worldwide consolidated net income (loss) per the income statement to the net income (loss) per income statement of includible corporations. Income/Loss reconciliation items are shown as single line items.
61
what are underpayment penalties?
a corporation is required to make payments QUARTERLY ESTIMATED TAX PAYMENTS (1120-ES) during the tax year, and is subject to a penalty for underpayment of taxes if the tax liability has not been paid in four equal installments over the course of the tax year. Interest must be paid from the due date until the date the tax deficiency is paid.
62
what are the quarterly tax payment due dates for estimated taxes on form 1120-ES.
the 15th day of the following months of its TAXABLE YEAR:
- 4th month
- 6th month
- 9th month
- 12th month
63
when does the underpayment penalty not apply?
- small balance; the total underpayment is less than $500 the corporation is not penalized
- annualized income; the installments each quarter cover the tax on the income to date
- current year; the estimated tax payments equal at least 100% of the current year tax liability
- previous year; the payments equal at least 100% of the prior year tax liability. this may not be used to escape a penalty, however if the following:
* ***there was no tax liability in the previous year
* ****the corporation had taxable income exceeding $1 million in any of the preceding 3 tax years
64
when is a corporate tax due?
the 15th day of the 3rd month following the close of the corporations TAX YEAR/FISCAL YEAR (generally March 15). A corporation must file a return each year it is in operation, even if it has no taxable income.
65
what is the extension timeframe for a late filing by a c-corporation?
-due date for six months is available but this doesn't extend the time to pay ! It only EXTENDS THE TIME TO FILE
66
what are the penalties for not filing a tax return by the deadline of 2 1/2 months after the year end (generally March 15)?
interest will be owed to the IRS on the unpaid balance. In addition if the amount paid by the original due date is less than 90% of the total tax liability, monthly delinquency penalty will be owed in addition to the interest charges.
67
what is the time limit for a C-corp to claim a tax refund from the IRS?
- the limit is the LATER OF
* *3 years AFTER THE ORIGINAL RETURN WAS DUE INCLUDING EXTENSIONS
* *2 years AFTER THE PAYMENT OF THE TAX
68
What are the statue of limitations for a C-Corp for the IRS?
- ordinarily 3 years for a normal mistake
- 6 years applies to gross income omitted that exceeds 25% of the gross income reported on the corporate return; or gross negligence
- there is NO STATUTE OF LIMITATIONS IN CASES OF FRAUD; meaning you lied or cheated on taxes
69
what are corporate distributions?
the reason for this distinction is because the government wants to say that every dollar paid out that the shareholder received was dividends and is taxable but the shareholders and corporations want to say it is a return of capital. so you have to spell out where the payments are coming from like from current earnings or retained earnings.
distributions made by the corporation to its shareholders are taxable as dividends to the extent of earnings & profit (E&P)
70
what are corporate distributions that are considered current earnings and profit (CEP)?
similar to current year net income
* **add distributions to net income, tax-exempt income, DRD
* **subtract federal taxes, and net capital losses
***payments from accumulated earnings and profits are taxable to the shareholder. Any payments above both the current earnings and profit + the accumulated earnings and profits are called A RETURN OF CAPITAL/BASIS because no money was earned and the company paid anyway. this is what leads to a reduction of the shareholders basis
***RETURN OF CAPITAL/BASIS IS NOT TAXABLE
71
what are corporate distributions that are considered accumulated earnings and profit (AEP)?
the sum of all previous years earnings and profits, similar to retained earnings at the beginning of the year.
***treated as dividend income up to the extent of current earnings and profits and the sum of current and accumulated earnings and profits before distribution. the remaining dividends reduce basis of investors shares.
***payments from accumulated earnings and profits are taxable to the shareholder. Any payments above both the current earnings and profit + the accumulated earnings and profits are called A RETURN OF CAPITAL/BASIS because no money was earned and the company paid anyway. this is what leads to a reduction of the shareholders basis
***RETURN OF CAPITAL/BASIS IS NOT TAXABLE
72
how is appreciated property dividends handled?
- results in gain on sale
* **losses not deductible except in liquidation of company
* **no gain or loss when SUBSIDIARY liquidates into parent. so when the question as what is the gain or loss when the parent liquidates the subsidiary (meaning the parent sold the subsidiary) there will be no gain or loss for neither the parent or the subsidiary.
* ** THE BASIS IS A CARRY OVER BASIS FOR THE PROPERTY
73
as it relates to corporate distributions, what factors are considered for taxable income?
taxable dividend represents the higher of current E&P or total E&P (when both are negative) none of the distribution is treated as a taxable dividend.
74
how are stock redemption treated?
they are treated as exchanges, generally resulting in CAPITAL GAIN or loss treatment to the shareholder if at least one of the following tests is met (constructive stock ownership rules generally apply in each case)
* *redemption is not essentially equivalent to a dividend
* *redemption is substantially disproportionate (substantially reduces ownership percentage)
* *all of the shareholders stock is redeemed
* *redemption is from a non-corporate shareholder in a partial liquidation; or
* *distribution is a redemption of stock to pay death taxes under sec. 303
75
when the corporation terminates what happens?
corporation discontinues operations and distributes all its assets - liquidating distribution
* **corporation recognizes BOTH gains and losses. Usually ordinary (capital if related to the distribution of investments in stock)
* **shareholders capital gain/loss for difference (proceeds - basis = gain/loss
76
how are non liquidating (means the corporation is just making a distribution) dividends handled when a corporation terminates?
Corporation - taxed on gain because it is considered a capital gain; cannot deduct a loss
shareholder - it is considered ordinary income up to earnings and profits
77
how are liquidating (means the corporation is closing down) dividends handled when a corporation terminates?
Corporation - ORDINARY gain (capital gain if its stock); ordinary loss can be deducted as if the corporation was sold
Shareholder - CAPITAL gains are recognized & capital losses are recognized
78
how are distributes of property to a shareholder handled in a liquidation
shareholder - recognized at the fair market value of the property received.
corporation - recognize a gain as if the property had been sold if the fair market value of the property exceeded its tax basis on the date of declaration of liquidation.
**if the FMV of the property is lower than the tax basis, the corporation is not allowed a loss deduction (unless the distribution is in connection with a complete liquidation of the business)
79
if an asset is subject too a liability upon liquidation, how is that handled?
if the corporation distribute the liability to the shareholder along with the asset, the liability reduces the amount of distribution. the basis of the liability exceeds the FMV of the asset, the corporation must report a gain on the excess in addition to the gain on sale.
formula: liability - tax basis = excess of the liability over tax basis
80
how are complete liquidations handled?
it when the corporation distributes all of its assets and liabilities in a complete liquidation of the corporation, it reports gains and losses in full as if all of the assets had been sold and may deduct all expenses associated with the corporation.
The only exception is if the assets and liabilities are being transferred pursuant to a corporate reorganization in which case all of the assets and liabilities retain their tax bases in the new corporation.
81
how are distributions to non-corporate shareholders in exchange for their stock in a partial or total liquidation of the corporation handled?
this is treated as a sale of the stock, and the gain or loss on redemption is reported as a capital gain or loss with the following exceptions:
- when subsidiary is liquidated into the parent; tax-free organization; no gain/loss for either parent or subsidiary
- carryover basis
82
what are the two types of corporate reorganizations?
- mergers and acquisitions
* **stock for stock must end up with control
* **new shares are carryover basis of old shares
* **no gain or loss except to extent that cash boot is received (reorganizations generally receive non-recognition treatment under IRC Sec. 368)
- types of reorganizations
* **Type A:Mergers or acquisitions
* **Type B: use of voting stock of the acquiring corporation to acquire at least 80% of the voting power and 80% of each class of nonvoting stock of the target corporation
* **Type C: Use of voting stock to acquire substantially all of the target's net assets
* **Type D: transfer of assets by an acquiring corporation to acquire controlling interest in a target corporation
* **Type E: Recapitalization to change the capital structure of a single corporation
* **Type F: Mere change identity, form, or state of corporation
* **Type G: Transfer of assets of an insolvent corporation, including as part of bankruptcy proceedings, to former creditors
83
What is an affiliated group and what can they do as it relates to filing a tax return?
an AFFILIATED group is one or more chains of includible corporations connected through stock ownership, with a common parent corporation owning at least 80% of the voting power and total value of stock in at least one other includible corporation.
an AFFILIATED group of corporations may elect to file a consolidated tax return instead of filing a separate return.
They need to eliminate intercompany profits and losses and interest and dividends.
C CORPS AND S CORPS MAY NOT CONSOLIDATE TOGETHER.
84
What is section 1244 of the tax code?
- allows losses from the sale of small domestic corporation stock AS LONG AS YOU ARE THE ORIGINAL INVESTOR, that was sold directly to individual shareholders, to be deducted as ORDINARY losses (FORM 4797 LONG TERM BUSINESS PROPERTY) up to 50,000 single person or 100,000 married filing jointly as opposed to treating the loss as a capital loss. THIS IS TO ENCOURAGE INVESTING IN SMALL BUSINESSES
- The remaining loss will be treated as a capital loss subject to the 3,000 per year limit INDEFINITELY UNTIL THE TOTAL LOSS IS RECOUPED. so in effect you could deduct up to 53,000 for singles and 103,000 for married filing joint.
- If a gain is realized, that gain would be taxed as a CAPITAL GAIN @ 35%. THIS IS CALLED APPRECIATED VALUE AND IS ON SCHEDULE D
to qualify, the AGGREGATE capital must NOT EXCEED $1 million when the stock was issued and the corporation MUST NOT derive more than 50% of its income from PASSIVE investments.
85
What are the rules for electing the 1244 stock exemption/credit?
- if the stock appreciates, the gain is considered a capital gain goes on schedule D
- if the stock value declines, the loss is considered an ORDINARY loss (form 4797-long term business property)
- up to $50,000 ordinary loss ($100,000 MFJ) rest is a capital loss LIMITED TO 3,000 PER YEAR AND THE REST CAN BE CARRIED FORWARD INDEFINITELY
- only applies to the first 1,000,000.00 of stock
- must be sold by original purchaser
86
what are the qualifications for the section 1244 election on a tax return?
the stock must be issued by a domestic (US) corporation to an individual or partnership in exchange for money or property (other than stock securities) and NOT FOR SERVICES.
-in addition, the 5 most recent tax years ending before the date of the loss, the entity earned less than 50% of its revenues royalties, rents, dividends, interest annuities, and sales or exchanges of stocks and securities. any type of stock can qualify, whether common or preferred, voting or nonvoting.
87
when a corporation makes distributions to shareholders, what part is taxable as dividends?
the amount to the extent of the corporations earnings and profits.
meaning if the cash dividend paid is more than the amount of the corporations earnings and profits for the year, the taxable dividend is the lessor of the two meaning only to the extent of the earnings and profits so basically which ever one is lower. I would conclude.
88
what is the alternative minimum tax (AMT)?
-once the regular tax is calculated the corporation must then determine if its subject to the alternative minimum tax. this tax may apply if the corporation benefits from certain items that have preferential tax treatment in determining regular taxable income. it requires the calculation of alternative minimum taxable income which differs from regular taxable income.
89
what makes the alternative minimum tax income different from the regular taxable income?
the treatment of the following makes regular and alternative taxable income different:
regular taxable income
+/- adjustments and preferences
=alternative minimum tax before ACE adjustments
+/- adjusted current earnings (ACE) adjustments
=alternative minimum taxable income before exemption
-exemption
=alternative minimum taxable income
x tax rate
=tentative minimum tax
-regular tax
=alternative minimum tax
90
when calculating the alternative minimum tax, what are the adjustments and preferences for a corporation to include?
P-I-L-E
- Private activity bonds (private activity bonds is also a type of municipal bond & are used to finance nongovernmental activities such as industrial development, student loans and low-income housing & the interest income on these have a tax preference. this must be added back to regular taxable income)
- Installment method of inventory sales (the difference between the installment method and the accrual method of accounting when the installment method was used for regular tax purposes.
- long term contract income ( must be calculated using the percentage of completion method)
- excess depreciation on personal property (over 150% declining balance when double declining balance was used for regular tax purposes.
91
how is the adjusted current earnings computed in the calculation for the alternative minimum (ACE) tax?
- the corporation begins with the alternative minimum tax income before the adjusted current earnings then ADDS the following: (S.L.I.M)
- Seventy percent of dividends received deduction on dividends from unrelated corporations (80% and 100% DRD's do not have to be added back) 75% of this amount is added back not the full amount
- Life Insurance proceeds on the death of a key employee. add back 75% of the amount
- Municipal bond interest from all such bonds (except private activity bonds, which were already included in AMTI before the ACE adjustment.
ACE is compared to the AMTI before ACE adjustment, and the difference is then multiplied by 75% to determine the ACE adjustment. In effect, the actual adjustment is equal to 75% of each of the items included in the determination of ACE.
A negative ACE adjustment may reduce AMTI To the extent that the cumulative increases to AMTI in prior years due to ACE adjustments exceeds decreases in AMTI in prior years due to ACE adjustments. However, the cumulative amount cannot be negative a negative amount.
92
what is the basic rule of thumb when trying to calculate the alternative minimum tax
-when the tentative minimum tax exceeds the regular tax, the excess is the alternative minimum tax and is owed in addition to the regular tax. if the tentative minimum tax is less than the regular tax, there is no AMT for that year.
a corporation is exempt from the corporate AMT for its first year regardless of income. it will also be exempt in the second year if its first years gross receipts do not exceed 5 million.
93
when do you not receive the drd (dividend receive deduction)?
- if you received the dividend from a foreign corporation because that means the government didn't tax the organization.
- you borrowed the money because you can claim the interest expense on the loan so you can't take the dividend received deduction.
- if you received it from a tax exempt like a municipal bond because they are non taxable.
- if you owned it for less than the minimum holding period
94
what is a capital asset?
a non business asset, all business assets are considered ordinary asset (which means they are taxed at the ordinary tax rate)
95
what are 1231 assets
a non-current asset which means it has to be owned for over a year:
if it is a gain on the asset it is considered a capital gain and taxed at the lower % and if its a loss its an ordinary loss
96
differences in tax credits or tax deductions are what?
- credits are after tax deductions meaning you take the taxable income x the tax rate to arrive at the tax liability then you subtract the credit from the tax liability.
- deductions happen before you multiply the tax liability meaning you take taxable income minus the deduction then multiply it by the tax rate then you receive the tax liability amount. (which is pretax reduction)
credits are generally better because the are a dollar for dollar tax liability reduction.
97
are capital losses that are carried back or carried forward by a corporation to offset against capital gains in those periods considered short-term or long-term capital losses?
they are considered short-term capital losses regardless of their nature at the time they were incurred.
98
for IRS purposes, what do they use to decided if an entity is truly a corporation?
two types of test
1. gross income test is the gross income ins greater than or equal to 60% of your TAXABLE passive activities (passive activity income is like interest, dividends, rental income, royalty income)
2. alter ego test is the number of people, which means if you have less than or equal to 5 ppl own greater than or equal to 50% of the stock
they are not considered a corporation they are consider a personal holding company. and they have to fill out the form 1120 PHC
99
return of capital or return of basis
corporations want to call every dollar earned a return of capital or return of basis because it is no taxable.
100
when a corporation makes a distribution to shareholders, its taxable as dividend income to the extent of what?
to the extent of the corporations earnings and profits. the taxable amount will be the current periods earnings and profits plus accumulated earnings and profits if any. when the accumulated amount is a loss, a distribution up to the CURRENT PERIODS EARNINGS AND PROFITS IS STILL TAXABLE.
101
in order to minimize the impact of AMT on corporations with relatively low amounts of income, an exemption of up to how much can be claimed?
up to 40,000 may be claimed against the AMTI. the exemption is reduced by 25% of the amount by which the AMTI before exemption exceeds $150,000. Once the AMTI exceeds 310,000, no exemption is available.
exemption = 40,000-(25%x (amti before exemption -150,000)
102
what is the method of depreciation used for commercial real property to arrive at alternative minimum taxable income before the adjusted current earnings (ACE)
it is the straight line method for both regular tax and AMT purposes
103
does the corporate exemption amount reduce the alternative minimum tax?
yes; a corporation is allowed an exemption of $40,000 which reduces the AMT. it phases out beginning when a corporation's AMTI exceeds 150,000 and is eliminated in its entirety when AMTI reaches 310,000
104
can the ACE adjustment be positive or negative (means increase the AMTI amount or decrease the AMTI amount)
yes it can increase AMTI
yes it can reduce the AMTI to the extent that cumulative positive ACE adjustments in prior years exceed cumulative negative ACE adjustments in prior years.
105
is the depreciation on personal property to arrive at alternative minimum taxable income before the ACE adjustment is straight-line over the MACRS recovery period?
no.
for regular tax purposes, depreciable personal property may be depreciated using the double declining balance method. the excess over depreciation calculated under the 150 double declining method. using 1 1/2 times the straight-line rate instead of double the rate, is an adjustment that increases regular taxable income to calculate AMTI
106
is the alternative minimum tax the excess of the tentative minimum tax over the regular tax liability?
yes it is. it is the additional amount owed.
107
is municipal bond interest, other than from private activity bonds includible income to arrive at alternative minimum taxable income before the ACE adjustment?
no, interest income on a certain form of municipal obligations referred to as private activity bonds is a tax preference that is added back to corporate income in calculating AMTI. Interest on other municipal bonds is not
108
what is the maximum corporate exemption amount for minimum tax purposes?
corporations are entitled to a maximum exemption from AMT of $40,000 which is phased out when the AMTI before the exemption exceeds $150,000
109
when computing AMT what is the amount the ACE adjustment requires of the DRD deduction?
it is 75% and it is essentially added back to regular taxable income.
110
is municipal bond interest included in taxable income to determine ACE
yes
111
depreciation on personal property is calculated at what?
150% declining balance method of the AMT purposes NOT ANY OTHER METHOD
112
a redemption of shares is considered what and how is it treated?
it is a repurchase of shares from the shareholder, and is treated as a sale or exchange by the shareholder and generally results in a capital gain as long as the redemption is not essentially equivalent to the following:
* a dividend
* is substantially disproportionate
* involves redemption of all of the shareholders stock
* provided other shareholders are NOT related; directly or indirectly owns more than 50% at the time of the redemption the loss is disallowed
* is from a non-corporate shareholder in partial liquidation
* or is a redemption of stock to pay death taxes under section 303
113
when do stock redemption's qualify for as an exchange?
a redemption must be substantially disproportionate indicating the shareholders ownership percentage is no greater than 80% of what it was before the redemption.
114
are losses allowed when a shareholder owns 50% or more directly or indirectly of stock?
no losses are disallowed. also no income is recognized nor is any gain recognized.
115
in a complete liquidation of corporation, how is the liability treated when the corporation dissolves?
when the distribution is subjected to a liability, the gain is increased to the extent that the liability exceeds the fair value of the property. if the liability is less than the fair value of the property then no gain is recognized.
116
when a corporation distributes property in a complete liquidation how are gains or losses treated?
they are recognized as if the property were sold at its fair value. it is the difference between the adjusted basis in the property and the fair market value in the property.
117
upon liquidation from a subsidiary and parent, are gains and losses recognized?
no. no gain or loss is recognized by either party
118
for NON LIQUIDATING DIVIDENDS how are gains and losses recognized?
ONLY GAINS ARE RECOGNIZED to the extent the FV exceeds the adjusted basis. NO LOSSES ARE RECOGNIZED.
119
what happens to earnings and profit when shares are redeemed in a qualifying stock redemption?
accumulated earnings and profits will be reduced by an amount equivalent to the % of shares being redeemed x accumulated earnings and profit.
120
how is income recognized when some of the owners invest cash and the other invest services?
it is recognized by their respective percentages in the company multiplied by the total income and then reduced by the amount of cash that was invested. if services were donated then the entire portion of their income is considered income, meaning there is no cash investment to subtract so their entire % is considered income.
121
section 1031 of the IRC relates to exchanges of property for similar property in "like kind" exchanges. who does this rule apply to?
it applies to corporations and individuals.
122
for a corporate merger or takeover that qualifies as a reorganization, how is a gain or loss treated?
no gain or loss is recognized on the transaction under the IRC section 368 and the basis of the targets assets carry over WITHOUT being adjusted to fair market value.
123
what are the rules for unlike property exchanged in a qualifying re-organization?
in a qualifying reorganization, gains are recognized to the extent of BOOT or UNLIKE PROPERTY RECEIVED OR RETAINED. losses may only be recognized by shareholders when shares are exchanged exclusively for unlike property that is less than their basis in the corporation.
124
when forming a corporation if you have control then it is an extension of you so it is tax free.
you would own 100% of the stock
125
corporations gross income
-worldwide income, interest income that is taxable (so not municipal bond income); dividends, rents royalties
revenue is recognized at the earlier of when earned or when collected (touched it)
126
amended c-corp returns go on what form
1120X
127
what is a 351 asset
contributing assets to a corporation
128
Boot
it is dissimilar property that could be cash or the relinquishment of debt. gains are recognized for the cash received or the amount of the FV of the property. Remember boot is giving up two or more assets in exchange for stock.
129
tax deduction vs tax credit
- deductions help you arrive at AGI and they determine your tax liability prior to tax credit adjustments. Deductions are pre-tax income
- credits are taken from AGI and are after tax income. so you calculate the tax liability then you take the credit which is dollar for dollar reduction of the tax liability.
So you would rather take a credit vs. a deduction because you get to reduce the tax liability amount dollar for dollar. With a tax deduction; it just reduces your income to find out your tax liability (income x tax rate = tax liability-tax credit is taxable amount owed or refunded)
130
+positive current earnings (made money in the current year) and +positive accumulated earning (made money in the prior years)
this tells how much is taxable;
| all of it is taxable income to the shareholder
131
+positive current earnings (made money in the current year) and -negative accumulated earnings (lost money in all prior years)
this tells how much is taxable;
you get taxed up to the amount of the current earnings x your percentage of stock ownership
132
-negative current earnings (lost money in the current year) and +positive accumulated earnings (made money in the prior year)
to find the taxable amount you net the CEP and the AEP
133
-negative current earnings (lost money in the current year) and -negative accumulated earnings (lost money in the prior years)
then it is not taxable at all because it means that the payment to the shareholder was a RETURN OF CAPITAL/BASIS BECAUSE IT IS YOUR MONEY COMING BACK TO YOU
134
Trust and estates
are taxable entities and therefore entitled to the net operating loss deduction. Which is 50,000 per year
135
suspended losses
the difference between the total loss incurred in passive activities divided by the portion of the entity that the question ask to get the % for the entity. it is then multiplied by the netted amount of gains and losses. the outcome is that entities suspended loss
136
current earnings and profit
=taxable income
+tax exempt interest (municipal bond interest income)
-federal income taxes that were deducted from financial statement income)
-any net capital losses
+excess depreciation of the difference from book depreciation and tax depreciation
+ federal tax refund income
+any loss carryforwards
137
1244 stock tax treatment recap
- applies to the first one million of stock
- up to 50,000 (for singles & 100,000 for mfj) is treated as an ORDINARY LOSS
- losses over 50,000 (single)/100,000 (mfj) will be treated as capital losses
- all gains are considered CAPITAL GAINS and are reported on Schedule D
138
When is a corporation exempt from corporate AMT?
a corporation is exempt from the corporation AMT for its FIRST TAX YEAR REGARDLESS OF INCOME. It will ALSO BE EXEMPT in the SECOND YEAR if its FIRS GROSS RECEIPTS DO NOT EXCEED 5 MILLION.
