CORPORATE TAX Flashcards
When forming a corp, under what circumstances is no gain or loss recognized?
- only property received from the corporation is stock
- the stock is received in exchange for property or cash
- the group transferring property and receiving stock owns at least 80% of voting power
What is the control club
the people who contribute property or cash to form the corporation. cannot contribute services
What if stock is received for services?
- FMV of stock is reported as wages
- The corp has a salary expense deduction
Boot and recognizing a gain
Anything received other than stock
Gain is recognized as the lower of
- FMV of boot received OR
- realized gain (amount realized - ab)
What happens when the liabilities assumed by the corporation is more than the total AB of property received?
Recognize a gain
= liabilities assumed - AB of received property
Shareholder basis in stock received by corporation formula
= AB of property transferred to corp \+ gain recognized - boot received - liabilities assumed by the corp
Corporate capital losses
Can only be used to offset gains
CB 3; CF 5
Corporations are required to use accrual method unless:
- average gross receipts are less than 5m
- personal service corp
- it is an S Corp
M-1 adjustments for corporations
Non-deductibles (+) to BI (fed tax exp)
Taxable Income NOT in book (+) to BI
Deductions NOT expensed in book (-) from BI (DRD, sec 179)
Non-taxable income in book (-) from BI (muni interest, life insurance)
Personal service corporation
corp whose principal activity is to perform personal services by employees who own substantially all of the stock
Passive loss rules
- no limits for a corp
- closely held can offset corp income but not portfolio income
- PSC cannot offset against active or portfolio income
DRD
Dividends Received Deduction
When corp owns stock in another company, and the other company pays dividends
DRD ownership % for dividends
If company owns less than 20% = DRD * 70%
If company owns 20-79% = DRD * 80%
If company owns 80-more = DRD * 100%
If the company’s taxable income is less than total DRD, can only deduct up to taxable income amount
Charitable Contribution Rules if Inventory is contributed
Lower of
AB of property + 50% (FMV-AB)
OR
AB * 2
Deduction for charitable contributions
limited to 10% of taxable income before special deductions
CF 10 years only; No CB
Organizational costs that can be deducted
accounting services, organizational meetings of directors and shareholders, fees paid to incorporate, legal fees, temporary director fees
Organizational and startup cost rules
$5,000 can be deducted from taxable income; but reduced by any amount above $50,000
The rest must be capitalized over 180 months (15yrs)
Stock issuance costs are “syndication” NOT deductible
Domestic Production Deduction
9% of the lower of :
- qualified production activity income OR
- taxable income
Qualified production activity income formula
Gross Receipts
- COGS
- Direct fees, allocable to the income, including wages
- prorated share of indirect expenses
AMT Exemption rule
Average annual gross receipts do not exceed $7.5 million
First year is automatically exempt and first 3 years annual average GR test is $5m
Once it failed once it applies in all future years
AMT Formula with Exemption
40,000 - [25%*(AMTI - 150,000)]
When tentative minimum tax is more than regular tax, you do what?
Add it to the regular tax = total tax liability
If also PHC tax, also add to it
Gives you total regular tax and tentative
Take difference and add difference to the regular
Accumulated earnings tax
penalty when corp accumulates earnings and profits for the purpose of avoiding tax for its shareholders = 20% of accumulated taxable income
Any DRD is added back to income
Accumulated earnings credit
amount that can be accumulated for reasonable business needs
the greater of:
- amount of earnings needed OR
- 250,000 (150,000 for nonmanuf business) less than accumulated earnings and profits at the end of the preceding year
PHC standards
- own more than 50% of stock by 5 or fewer individuals
- substantial portion 60% or more must be passive income (dividends, interest, rents, royalties)
Affiliate Group
C Corp owns at least 80% of voting power of another C - or multiple C Corps and can file consolidated return
S Corp, foreign and insurance co. is NOT allowed to be a member
How are dividends and gains/losses treated for affiliated groups
Dividends are eliminated
G/L are not recognized until sold to an outside party
General rule for corporate distributions
depends on accumulated earnings and profits
if distributions are larger than AE&P the remaining is return of capital and NOT taxable except when corp gain on appreciated property is deferred and then distributed = taxable
Difference between affiliated and controlled groups
Affiliated = every day of the year; 80% for voting AND value Control = by last day of the tax year; 80% for voting OR value
Ordinary Distributions
- taxable as dividend income to the extent of E&P
- Excess is tax-free to extent of stock basis and decreases the basis
- Any remaining is treated as capital gain
Increases and Decreases to E&P
Increased by all income and decreased by all deductions/non-deductibles
reduced by cash distribution and property using greater of FMV less liabilities or AB less liabilities
When property distribution from corp to shareholder has appreciated value
Recognize a gain on the corp for the amount that the basis increased to FMV
i.e. Basis = 5
FMV = 40
Gain on corp = 35 + beginning basis less cash distributions
Redemption
When corp buys back stock from shareholder; qualifies as a sale/exchange treatment if ends up owning less than 80% or 50% of total combined voting power
When corp is completely liquidated, distribution is capital gain NOT ordinary
Partial liquidiation - non-corp shareholders = capital gain, corp shareholders = dividend
Expenses related to corp distributions and to a liquidation
are deductible
What is the usual result to the shareholders of a distribution in complete liquidation of a corp?
capital gain or loss
If a subsidiary is liquidated under a parent, how is the G/L calculated?
In general nothing is recognized
How is reorganization treated for tax purposes?
It is generally tax-free to the corporation and its shareholders
How are losses recognized in liquidation
They may not be if:
- property was contributed in the last 5 years OR
- property is distributed to a related party
General definition of corporate reorganization
where two corps (acquiring and target) choose to merge or consolidate, or one spins off part of its operations as a separate corp
Summarize the types of reorganizations
- Assets of target are exchanged for stock in acquiring (statutory merger - target is dissolved)
- Stock for stock (acquiring must own 80% after this - otherwise recognize gain)
- Acquiring gets 90% of net assets of target in exchange for voting stock. target distributes to shareholders
- Divisive - one corp divides by transferring assets to a sub in exchange for stock in a sub
Consequences to a Corp in reorganizaiton
- gain or loss is generally not recognized
- if acquiring transfers appreciated property to target a gain - but NO loss is recognized
- if target distributes appreciated property to shareholders, gain but NO loss is recognized
Nexus
taxing corporate income does not exist if limited to:
- sale of tangible personal property that are shipped and accepted outside of the state
- advertising
- determining reorder needs of customers
- furnishing auto to sales staff
How are foreign currency exchange gains and losses treated?
If through investment/person = capital
If through course of business = ordinary
Describe exempt organization
charities, labor orgs, social clubs, pension and profit-sharing trusts, political orgs and private foundations
may be a corporation or a trust, and must apply for an receive exemption from taxation
must not engage in political campaigns/activities
Filing requirements for exempt organization
Must file if gross receipts are more than $50,000
How is an exempt organization taxed?
based on its unrelated business income (UBI):
- substantially all work is performed for no compensation
- business carried on for the convenience of students or members
- sale of merchandise received as contributions
- in general, investment income
- rents from real property
Types of personal service corps
health, law, engineering, architectures, accounting and consulting
When a corporate material event occurs, what is the filing that must be completed
8-K within 4 days of the event
