Corp / Entity Taxation Flashcards
Expense Deduction in lieu of Depreciation
Section 179 expense
Limit = $510k for new/used personal property
Phase out dollar for dollar after $2,030,000
Deduction not permitted when net loss exists or if deduction would create a net loss
Corp Tax
Executive Compensation Deduction
Max = $1M (fixed / base salary)
Form 709
Gift tax form
tax paid by person giving the gift
Tax Due on Current Gifts
Formula…
Gross gifts in a calendar year (@FMV) - exclusion of $14k per donee per year - unlimited marital deduction - unlimited charitable gifts = taxable gifts this year
+ taxable gifts of prior years
= cumulative lifetime gifts
x tax rate
- tax paid
- credits
= tax due on current gifts
Estate Expenses and Deductions
Medical expenses
Administrative expenses
above = expense or liability, but not both
Unlimited charitable deduction
Unlimited marital deduction
above = discretionary deductions
Estate Transfer Tax
Formula…
gross estate - non discretionary deductions = adjusted gross estate - discretionary deductions = taxable estate \+ adjusted taxable gifts = tentative tax base at death x uniform tax rates = tentative estate tax - gift taxes payable = gross estate tax - applicable credit = estate tax due
Form 706
Filed if gifts exceed 2017 limit ($5,490,000)
Due in 9 months after death
Property transfers to corporations
Non-taxable upon formation, if resulting in 80% ownership
Taxable if not 80%, or subsequent to formation
Treated like a sale of property to corp at FMV
Corp Tax
Shareholder Tax Consequences
No gain/loss if:
1 - 80% control
2 - no receipt/loot
- ..
- no cash withdrawn
- excess debt put into corp
NBV assets - liabilities = gain/loss
Amortization
GAAP not equal to Tax
Tax = 15 yr SL
GAAP =
- public = impairment test / not amortized
- private = option to amortize over 10 years
Form 1041
US income tax return for estates and trusts
Complex Trusts
May accumulate current income
May distribute principle
May deduct charitable contributions
Permitted a $100 exemption in arriving at taxable income
Grantor Trust
Individual who established the trust retains control
Income tax of the grantor
Can be qualified shareholder of an S Corp
Typically included in the taxable estate of the grantor upon his/her death
Simple Trusts
Only make disbursements out of current income
Required to distribute all of its income currently
Cannot take a deduction for charitable contributions
Entitled to a $300 exemption
Trusts and Estates
Annual Estate Income Tax
Form 1041
Required when income exceeds $600
- exemptions for estates = $600
- no standard deduction allowed
Tax year return due 15th day of 4th month
Estate exempted from making estimated tax payments for first two tax years
Trusts and Estates
Income Distribution Deduction
Lessor of:
1 - actual distribution to beneficiary
2 - DNI (less adjusted tax-exempt interest)
Distributable Net Income
(DNI) formula…
estate / trust gross income (includes cap gains)
- estate / trust deductions
= Adjusted Total Income
+ adjusted tax exempt interest
- capital gains (attributable to corpus)
= DNI
Nontaxable Liquidation of a Partnership
“complete withdrawal”
beg. capital account
+ % of income/loss up to withdrawal
= Partners capital account
+ % of liabilities
= Adjusted basis at date of withdrawal
- cash withdrawn
= Remaining basis to be allocated to assets withdrawn
Gain recognized exception = $ > basis
Loss recognized exception = $ < basis (no other items)
LLC Key Points
Protects from liabilities like a corporation
Unlimited members
Sole prop can be single member LLC
Can’t IPO
LLC members can make changes / manage but shareholders generally cannot
Taxable Income to Partners
Income = taxable = increases basis
Withdrawal = nontaxable = decreases basis
Partnership Terminates when…
Ops cease
50% of cap and profits is sold or exchanged
Less than 2 partners
Partnerships
Property Subject to an (excess) liability
If debt relieved (negative basis) exceeds basis once everything is factored in, it results in a 0 basis and taxable gain as boot/loot to the partner
Partnership Initial Basis Calculation
Cash contributed \+ NBV property contributed - Liabilities assumed by partnership \+ Services rendered FMV (taxable as income to partner) \+ Share of partnership liabilities
How to lose S Corp Status
Voluntary revocation
Failure to meet eligibility requirements
- corp or foreign owner
+ 25% gross receipts from passive investment income for 3 consecutive years and had C corp E/P at end of each year
can re-apply in 5 years
S Corp Shareholder
Loss Limitation Formula
Basis
- Direct shareholder loans
- Distributions
= Loss Limitation
Computing Shareholder Basis in S Corp
initial basis
+ income items (separate, non-separate, tax free income)
+ additional shareholder investments in corp stock
- distributions to shareholders
- loss or expense items
= ending basis
1120
Schedule E
Ordinary business income (including S Corp)
Net rental real estate income/loss
S Corp
Pass-through of income/losses to SH
K1 - on per share, per day basis
Losses limited to basis
Deduct up to = basis + direct loans
Disallowed losses can be carried forward indefinitely
Cost of fringe benefits over 2% not deductible
- include in K1
S Corp
Passive Investment Income taxed if…
S Corp has accumulated C Corp E/P
Passive income exceeds 25% of gross receipts investment
S Corp
Exemptions from Recognizing Gain
No tax on “built-in-gain” if:
S Corp was never a C Corp
Sale / xfer doesn’t occur within 10 years of S Corp election
Appreciation occurred after S election
Distributed asset was acquired after S election
Net unrealized gain (built-in) has been completely recognized in prior tax years
S Corp
Eligible Shareholders
1 class of stock / 100 shareholders max
Must be an individual, estate, or certain type of trust
Can’t be nonresident alien
Qualified retirement plans, trusts, 501c3’s okay
No corporations or partnerships
Grantor and voting trusts okay
S Corporations
Shareholders pay tax
Avoids 2x taxation
Form C corp and then apply for S corp election
Liquidation and Reorganization Rules
Liquidation
Business activity completely ceases
Corp consequence = taxable
Shareholder consequence = taxable
Liquidation and Reorganization Rules
Reorganization
Business activity continues
Nontaxable to both corp and shareholders
Tax Free Reorganizations
Type F
Change in form, identity, or place or organization
Tax Free Reorganizations
Type E
Recapitalizations
Tax Free Reorganizations
Type D
Dividing of the corp into separate operating corporations
Tax Free Reorganizations
Type C
Acquisition by one corp of another corps assets, stock for assets
Tax Free Reorganizations
Type B
Acquisition by one corp of another corps stock, stock for stock
Tax Free Reorganizations
Type A
Mergers or consolidations
Corporation Paying Dividend Exceptions
Does not create a taxable event
exception: property dividends = taxable event
FMV property
- NBV
= corp gain
Stock Dividends
Generally not taxable
Value is FMV at distribution date
Basis = basis of old stock / (old + new shares)
Constructive Dividends
Excessive salaries paid to shareholder employees
Excessive rents and royalties
“Loans” to shareholders where there is no intent to repay
Sale of assets below FMV
Dividends Defined
Current E/P (by year end) = taxable div
Accumulated E/P (distribution date) = taxable div
Return of capital (no E/P) = tax free, reduces basis
Capital gains distribution (no E/P/no basis) =
taxable income as capital gain
Capital Loss Carryover
Capital loss = only offset capital gains of corp
“Short term”
- carried back = 3 years
- carried forward = 5 years
Capital gains = no lower tax rate / taxed at ordinary rates
Net Operating Losses
1 - no charitable contribution deduction allowed
2 - no dividends received deduction
3 - no domestic production activities
4 - nothing counts from previous NOLs to current
5 - Can’t deduct capital loss carry back against net cap gain
Carry back = 2 years
Carry forward = 20 years
Consolidated Taxable Income Calculation
1 - calculate stand-alone taxable income
2 - remove inter-company transactions (sales, adjustments, dividends)
3 - determine gains, losses, deductions at consolidated level
4 - taxable income combined
5 - taxable income adjusted for items from 3 above
Disadvantages of Filing Consolidated Return
Mandatory compliance with complicated regs
Possible 2x counting of inventory
Inter-company tx losses can be deferred
Have to have same tax year
Tax credits may be limited
Binding for future years
Some states don’t allow
Advantages of Filing Consolidated Return
Offset capital losses
Offset operating losses
Dividends received 100% removed
Tax deductions
NOL carry-overs
Some deferred inter-company sales
Affiliated Group Defined
Conslidated tax return when:
- 80%+ voting power and 80% value of stock
Consolidate:
- GAAP = over 50%
- Tax = 80-100%
Bonus Depreciation
New property only
50% = 2015-2017 (placed in service)
40% = 2018 ("")
30% = 2019 ("")
Claimed after section 179 and before regular
Example assets:
- 1st < Section 179 >
- 2nd < Bonus Depreciation >
- 3rd < Regular >
Corporate Capital Gain / Loss
No lower / special tax rate
Net Cap Loss = only to be used to offset cap gains
- back 3 years
- forward 5 years
Corp AMT
Minimum Tax Credit (MTC)
Credit against future regular tax
Carry forward of MTC (not back)
carry forward forever
Corp AMT
Foreign Tax Credit
Only credit allowed against Tentative Minimum Tax
Can be carried back 1 year / forward 10
Corp AMT
Tax Rate
Flat 20%
Corp AMT
AMT Exemption Amount
$40,000
25% of AMTI over $150,000
Corp AMT
Alternative Tax Net Operating Loss Deduction
ATNOLD
Generally limited to 90% of AMTI
Corp AMT
Adjusted Current Earnings (“ACE”)
(MOLDD)
Municipal bond interest added back
Organizational expense amortization added back
Life insurance proceeds on key employees added back
Difference between AMT and ACE depreciation
Dividends received deduction
ACE = 75% of difference between ACE and AMTI*
ACE can be negative, but can’t exceed bet positive ACE from prior periods
Corp AMT
Preferences
PPP
added back to income
Percentage depletion
Private activity bonds
Pre-1987 ACRS depreciation
Corp AMT
+/- Adjustments
(ALIE)
Adjustments for gain/loss
Long-term contracts
Installment sales-dealer
Excess depreciation
Corporations Exempt from AMT
If gross receipts from previous 3 periods is:
- 7.5 million or less
C Corp
Foreign Tax Credit
Choose annually to take either a credit or a deduction
Calculated:
1 - determine qualified foreign income tax paid
2 - compute foreign tax credit limitation
3 - determine lesser of the two above
Unused foreign tax credits:
- carry back = 1 year
- carry forward = 10 years
C Corp
Research and Development Tax Credit
20% of the increase in qualified research expenses over defined base amount
Small businesses able to use R/O credit to offset AMT
Up to 3 taxes on C Corp
1 - Regular tax
2a - Accumulated earnings OR
2b - Personal holding company tax
3 - AMT
1120
Schedule M3
Net income / loss reconciliation for corporations with total assets of $10M or more
Dividend Received Deduction
Does NOT apply to…
Personal service corporations
Personal holding companies
Personally taxes S Corps
Corp Tax
Business Meals and Entertainment Deduction
50% deductible to corporation
Corp Tax
Penalties and Illegal Activities
Not deductible
Corp Tax
Taxes Deduction
State / City / Federal Payroll
= deductible
Federal income taxes = add back to book / GAAP income
Corp Tax
Lobbying and Political Expenditures
Not tax deductible
Corp Tax
Capital Losses Deduction
Not allowed
Only to offset capital gains
Corp Tax
Inventory Valuation Methods Deduction
Must be same method
- GAAP / tax basis
- Tax return
Uniform Capitalization Rules Impact
- raw materials
- DL
- factory overhead
Corp Tax
Dividends Received Deduction
Reduces tax on corp receiving dividends
0 - 20% ownership = 70% deduction
20-80% ownership = 80% deduction
80%+ ownership = 100% deduction
Consolidated return = 100% deduction
Corp Tax
Business Gifts Deduction
$25 per year, per person
Corp Tax
Life Insurance Premiums (expense) Deduction
Corp names as beneficiary - corp owns policy
- NOT tax deductible
Insured employee named as beneficiary - employee owns policy
- tax deductible
Corp Tax
Amortization, Depreciation, Depletion Deduction
Goodwill Covenants not to compete Franchises Trademarks Trade names
amortize SL over 15 years
Corp Tax
Business Losses or Casualty Losses Relates to Business
100% deductible
*less any insurance proceeds
Partially destroyed
- decline in value
- adjusted basis before casualty
- lesser of NBV or change in FMV
Fully destroyed
- NBV
Corp Tax
Organizational Expenditures and Start Up Costs Deduction
Organizational expenditures = $5k / …
Start up costs = $5k / …
… excess 15 years (180 months)
Included:
- legal services drafting charter
- bylaws
- minutes of org meetings
- accounting services
- fees paid to incorporation state
Excluded:
- issuing and selling stock
- commissions
- underwriters fees
- costs incurred in the transfer of assets to corp
Corp Tax
Charitable Contributions Deduction
Limit = 10% of adjusted taxable income
Accrue and pay by April 15th
Corp Tax
Business Interest Expense Deduction
On business = incurred and paid = deduction
On investment = up to taxable investment income
Prepaid = deduct “later” when incurred
Corp Tax
Bad Debts: Specific Charge-Off Method
Accrual Basis = tax deductible when specific AR written off
Cash Basis = No deduction (it was never income)
Corp Tax
Bonus Accruals (non-shareholder / employee) Deduction
Pay by April 15th
Calculating QPAI
Domestic production gross receipts
- COGS
- other directly allocable expenses or losses
- proper share of other deductions
= qualified production activities income (QPAI)
Corp Tax
Domestic Production Deduction
Deduction for US production
- may not exceed 50% of W2 wages
9% deduction for lower of:
- qualified production activities income (QPAI)
- taxable income (disregarding QPAI deduction)
1120
Schedule M2
Analytics of unappropriated retained earnings per books
1120
Schedule M1
Reconciliation of income (loss) per books with income per return
show all differences (temp. / perm.)
1120
Schedule L
Balance sheet per books
1120
Schedule K
Other information
1120
Schedule C
Dividends and special deductions
1120
Schedule J
Tax computation and payment
Form 1120
C Corp tax return
C Corp
General Business Credit
Greater of:
- 25% regular tax liability above $25,000
- “Tentative Minimum Tax” for the year
Can be carried back 1 year / forward 20
Corp AMT Formula
Regular taxable income
+/- Adjustment items to income (ALIE)
+ Preference items to increase income (PPP)
= Unadjusted AMTI
+/- Adjusted current earnings (MOLDD)
- AMT NOL deduction
= AMTI
- AMT exemption ($40k - 25% of MTI over $150k)
= AMT Base
x 20% AMT rate
= Gross AMT
- AMT foreign tax credit
= Tentative MT - Regular tax liability
= AMT
Basis of common stock to shareholder
Cash = FMV Property = NBV - debt assumed by corp Services = FMV = taxable
Dividends Received Deduction
Does NOT apply to…
S Corps
Personal Service Companies
Personal Holding Companies
Personal Service Company
Taxed at a flat 35%
Law, accounting, engineering, consulting, etc..
Accumulated earnings tax
Corps with $250k+ acc. E/P
Flat 20% penalty tax
Personal Holding Company
5 or less people own 50%+
60% ordinary income comes from NIRD
Add 20% tax on NI not distributed
Personal Holding Company
NIRD
60% ordinary income comes from NIRD
N - net rent >50%
I - interest that’s taxable (don’t include nontaxable)
R - royalties
D - dividends from unrelated domestic corps
Distribution of appreciated property
FMV property
- NBV
= Corp. gain
Small Business Stock Exclusion
Non-corporate shareholder
Holds small business stock 5 years +
100% gain on sale or exchange is excluded
C Corp only
Maximum exclusion limited to greater of:
1 - 10x basis in stock
2 - $10M / $5M MFS
S Corp status takes effect…
If before the 15th day of the 3rd month in the election year = 1st day of the tax year
Accumulated Adjustments Account (AAA)
Tracks the taxable / distributable income and expenses for the S Corp
Other Adjustments Account (OAA)
Contains records of all other / non-taxable income and expense items the S Corp tracks
Distributions from S Corp with NO C Corp E/P
1 - to extent of basis in stock
no tax / reduces basis
return of capital
2 - beyond basis in stock
taxed as long term capital gain (if over 1 yr)
capital gain distribution
Distributions from S Corp with C Corp E/P
1 - to extent of AAA
no tax / reduces basis
S corp profits
2 - to extend of corp E/P
taxed as dividend, no reduction of basis
old c corp taxable dividend
3 - to extent of basis in stock
no tax / reduces basis
return of capital
4 - beyond basis in stock
taxed as long term capital gain (if over 1 yr)
capital gain distribution
Partner Basis Formula (BASE)
Beginning capital account
+ % All income - % All losses (up to basis)
- withdrawalS
= Ending capital account
+ % liabilities (both recourse and non-recourse)
= Year end basis
Partnership FY and return
FY = calendar (3 month deferral acceptable)
Return = Form 1065 = due March 15
Partnership
Capital Gain / Loss Calculation
Beginning capital account
+/- % of income / loss up to sale
= Capital account at sale date
+ % of liabilities
= Adjusted basis
- Amount received (cash, assumption of debt, FMV prop.)
= Gain / Loss
Hot assets
Treated as ordinary gain to a partner, as if cash were taken
unrealized receivables
appreciated inventory
“recapture income” regarding depreciable assets
