Chapter 3 Section 1: C Corporations Flashcards
What is the only entity whose earnings are subject to double taxation?
Explain
C Corps
There’s income tax at the corporate level, and then distributions are taxed at the individual level
Does the corporation recognize gain or loss in general upon formation?
No.
At what basis does the corporation record property received at formation?
Greater of NBV or debt assumed by corporation
What is the one time a corporation may recognize a gain or loss upon formation?
To prevent a negative basis when property is received and debt is assumed.
What if the aggregate NBV of property contributed at formation exceeds aggregate FMV of the property? (corporation side)
Record at FMV to avoid built-in-losses
What conditions must be present for a shareholder to avoid tax consequences when contributing to the formation of a C Corp?
- Those transferring the property must have at least 80% control
- Boot is not received (in the form of either cash withdrawn or receipt of debt securities)
How does a shareholder handle cancellation of debt in regards to boot received when donating property at C Corp formation?
Any liabilities assumed that exceed the NBV of assets contributed is treated like boot, thereby creating a gain.
At what basis does the shareholder record shares of common stock received in the following circumstances?
Cash given
Property given
Services given
Cash - amount contributed
Property - NBV, reduced by debt assumed by corp and increased by gain recognized by shareholder
Services - FMV (taxable as ordinary income)
When the shareholder contributes property, what is the basis of the stock, and when is there a gain?
Basis of the stock is the NBV less liabilities, but never negative (can only be zero)
Gain is the excess liability assumed over the NBV
What is Schedule M-1 used for?
What does it include?
To reconcile book income to taxable income
Permanent and temporary differences, with no distinction
For tax purposes, when is interest income received in advance, rental income received in advance, and royalty income received in advance taxed?
When received, resulting in a temporary difference
List three permanent differences between taxable income and book income
Interest in come from municipal or state obligations/bonds
Proceeds from life insurance on key person policies where corporation is the beneficiary
Federal income taxes - not deductible
What is the difference between an M-1 and M-3?
M-3 is for corporations with total assets of $10 million or more
What types of expenses qualify for trade or business deductions?
Ordinary and necessary expenses
Explain the Domestic Production Deduction
What percent?
What is the percentage applied to?
It allows a business to deduct a percentage of their qualified production activities income
9%
Lesser of Qualified Production Activities Income (QPAI) or Taxable Income (disregarding the deduction)
What is the formula for QPAI?
Domestic production gross receipts - COGS - Other directly allocable expenses or losses - Proper share of other deductions = QPAI
What executive compensations cannot be deducted?
Expenses in excess of $1m paid to the CEO or the four other most highly compensated officers
How are bonus accruals handled?
If they are paid by March 15, they’re deductible
How are bad debts handled?
For accrual basis, use the specific charge-off method (similar to direct write-off). Deductible when the specific A/R is written off.
For cash basis, it was never income, so it can’t be deducted
When is business interest expense deductible?
What amount of investment interest expenses is deductible?
When is prepaid interest expense deductible?
Business: when paid and incurred
Investment: only up to taxable investment interest income
Prepaid: deduct later, when incurred
What is the limit for charitable contribution deductions?
How do you handle accruals?
10% of adjusted taxable income
If it is paid by March 15, it counts for the prior year’s return
What portion of business losses or casualty losses related to a business is deductible?
100% (no $100 or 10% of AGI reductions)
What amount of loss do you deduct when property is only partially destroyed?
Lesser of the change in FMV or the NBV immediately before casualty
What amount of loss do you deduct when property is fully destroyed?
NBV before the casualty
What amount of organizational expenditures and start-up costs is deductible?
What do you do with the remainder?
$5,000 for each category
The remainder is amortized over 15 years (180 months), including this year. So this year you have $5,000 + amortization
What costs are included in organizational expenditures and start-up costs?
What is excluded?
Legal services, accounting services, and fees paid to the state
Issuing and selling stock, commissions, underwriter fees, and transferring assets to a corporation
How do you handle amortization, depreciation, and depletion of goodwill, covenants not-to-compete, franchises, trademarks, and trade names?
Amortize straight-line over 15 years (no impairment)
What do you do with life insurance premiums when the corporation is named as the beneficiary? When it is not?
Named: not tax deductible
Not: is tax deductible (fringe benefit)
What is the deduction for business gifts?
$25/person/day
What amount of business meals and entertainment is deductible?
50%
What portion of penalties and illegal activities is deductible?
0%
What taxes are deductible? What is not?
State income, city income, and federal payroll are deductible
Federal income tax is not deductible
What portion of lobbying and political expenditures is deductible?
0%
What amount of capital gains and losses are allowed?
Capital losses can only offset capital gains. Any excess can be carried back 3 years and forward 5 to offset those capital gains.
Capital gains are taxed as ordinary income.
How are NOLs handled?
Same as individuals - back 2, forward 20, using form 1120x
What basis must be used for taxpayers with inventory?
Accrual
What types of expenses are impacted by Uniform Capitalization Rules?
Raw materials
Direct labor
Factory overhead
What is the formula for the general business credit? What is the limitation?
It cannot exceed net income tax less the greater of:
25% of regular tax liability over $25,000 OR
Tentative minimum tax for the year
Explain the dividends received deduction
What are the deduction percentages for the different ownership percentages?
What is the purpose?
0-20% owner = 70% deduction
20-80% owner = 80% deduction
80-100% owner = 100% deduction
The purpose is to prevent triple taxation when one corporation invests in another.
What is the formula for taxable income or loss?
Gross income (including div inc) - deductions (excluding charity and div rec'd ded) = A - Charity = B - Div Rec'd Ded (limited to % of B) = Taxable income or loss
What is the exception to the limitation of dividends received deduction?
When taking the full percent of dividend income creates or adds to corporate loss. Then you take the percent of dividend income, even if it’s greater than taxable income
What is the dividends received deduction limitation?
Lesser of % of div received or income before DRD or NOL deduction
What types of entities cannot take the DRD?
Personal service corporations
Personal holding companies
Personally taxed S Corporations
What is the outline for schedule M-1?
Net income per books \+ federal income tax (per books) \+ Excess cap loss over cap gains \+ Income subject to tax not recorded on books \+ Expenses recorded on book not on tax return - Income on books not on return - Deductions on return not on books = Taxable income
When does a C Corp need to file by?
March 15
When is the accrual basis method of accounting for tax purposes required?
Inventory
Tax shelters
Certain farming corporations
>$5m avg annual gross receipts for last 3 years
What do small corporations need to pay for estimated taxes?
Lesser of:
100% of current year tax
100% of prior year tax (as long as it was greater than zero)
When do large corporations need to pay for estimated taxes?
100% of current year tax
When can consolidated returns be used?
For an affiliated group of corporations who can then eliminate intercompany gains and losses
Define affiliated group
A common parent directly owns 80% of the voting power and 80% of the value of all outstanding stock
Define brother/sister corporations
Can the file consolidated returns?
A parent owns 80% of two organizations
No
What is the formula for corporate AMT?
Regular taxable income \+/- adjustments \+ preferences \+/- Adjusted current earnings - AMT NOL deduction = AMTI - AMT Exemption = AMT base x 20% = Gross AMT - Foreign tax credit = Tentative minimum tax - Regular tax liability = AMT
What is the AMT exemption amount?
$40,000 less 25% of MTI over $150,000
What are the adjustment items?
LID
Long-term contracts
Installment sales
Depreciation adjustments
What are the preference items?
PPP
Percentage depletion
Private activity bonds
Pre ‘87 excess depreciation
What are the ACE (adjusted current earnings) items?
MOLDD
+ Muni interest income
+ Organizational expense amort
+ Life insurance proceeds on key employees
+/- Difference between AMT and ACE depreciation
+ Div Rec’d Deduction (under 20% owner)
How do you calculate the ACE adjustment amount?
ACE income
- AMT income
x 75%
If ACE is more, it’s added back
What is the tax rate on AMTI?
20%
What is the only credit that goes into AMTI?
Foreign tax credit
Explain the minimum tax credit
Can it be carried forward or back?
Carry AMT forward forever, never back
What is the accumulated earnings tax?
What is the tax rate
Imposed on regular C Corps whose accumulated earnings are in excess of $250,000 if improperly retained instead of being distributed
20%
How do you calculate the accumulated earnings tax?
- Beginning E&P
- Corp needs
= Beginning excess - 250,000 (regular corp) or 150,000 (service)
- beginning excess
= remaining credit - Taxable income
- all charity
- all cap losses
- taxes
- div paid
= accumulated taxable income
- remaining credit (from 2)
= Current accum. taxable income
x 20%
= accumulated earnings tax
Define personal holding company.
What does its income consist of?
NIRD
More than 50% owned by 5 or fewer individuals and having 60% of adjusted gross income consisting of Net rent (if less than 50% of income), Interest that is taxable, Royalties, or Dividends
What happens if you are a personal holding company?
You have an additional 20% tax
What is the formula for E and P carried forward to the tax year after the current year?
Beginning Accumulated E and P
+/- Current E and P less dist from current
- Distributions from accumulated
= Ending accumulated
Are distributions applied to current or accumulated E and P?
What do you do with excess?
First current, then accumulated - DO NOT NET
Excess is called excess distributions, and is reported as capital gain distributions (taxable) by the shareholder
How do you classify distributions in the following cases:
Has E and P
No E and P
No basis
- dividend income
- return of capital (not taxed)
- capital gain distribution
How are current E and P applied to distributions?
Accumulated?
Current - pro rata
Accumulated - chronological order
Are stock dividends taxable?
Usually no, unless the shareholder has a choice of getting cash or other property, in which case you do FMV and it is taxable
What is taxable to an individual shareholder when they receive corporate dividends?
- Cash
- Property
Cash: amount received
Property: FMV
What is taxable to a corporate shareholder when they receive corporate dividends?
- Cash
- Property
Cash: amount received
Property: FMV
** subject to DRD
What is taxable to the corporation paying dividends?
Usually, nothing.
If they distribute appreciated property, recognize a gain as if the property had been sold. The gain increases E and P, and is taxed
Define stock redemption.
Proportional
Disproportional
Buying back stock from stockholders
Proportional: taxable dividend income
Disproportional: subject to capital gain/loss to shareholder
What are the two taxes when the corporation sells assets in liquidation?
- Corp: gain or loss on sale of assets
2. Shareholder: gain or loss to the extent that cash exceeds adjusted basis of stock
What are the two taxes when the corporation gives away assets in liquidation?
- Corp: gain or loss as if they sold assets
2. Shareholder: gain or loss to the extent FMV of assets received exceeds adjusted basis of stock
Are reorganizations taxed?
No
Are parent/subsidiary liquidations taxed?
No
What do you do with worthless stock for section 1244?
When the corp’s stock becomes worthless, an original stockholder can be treated as having an ordinary loss (fully deductible) instead of capital for up to $50,000. Any excess is a capital loss, which offsets capital gains. Then a max of $3,000 is deductible
What do you do with small business stock?
A noncorporate shareholder who has small business stock for over 5 years can exclude 50% of the gain on sale of exchange of the stock.
