Corporate Tax- C corps- Section 2 Flashcards
Things to know
10% of ATI for charitable contributions
Dividends received deduction drd 70% 89% 100%
Tax form for c Corp
1120
Due 4/15 3/15???
If calendar year a 5 month extension
If fiscal year a 6 m .. fiscal is any 12m- 52-53 weeks, ends on the same day but does not have to end on the last day of the month* asked
A lot will be accrual- when rev when earned and expenses when incurred
Limited liability for members
Tax paying entity-
Article of Corp filed for it
Special deductions- love to test them
Charitable contributions - 10% of ATI
Drd- dividends received deduction : government loves to tax , dividends aren’t deductible but dividend income is taxable. Depending on how much stock of the Corp you own they will give you a 70% dividends received deduction an 80% or 100% if control . So all tax free at 100% .
Phc
Personal holding company tax
Tried to get taxed as Corp instead of individual bc rate is lower
Kinda penalty tax like accumulated
Accumulated earnings tax
Government limits what Corp accumulates
Corp wants to accumulate bc paying out means double taxes as dividends since income is taxed . They want to invest and make more money instead of having it taxed
Make money , pay tax then pay a dividend which gets tax too
So it is penalized- then amt
Formation of c Corp / CONTROL
Shareholder transfers in to get stock
Roger cpa formation example- it is an extension of him bc he put in his money to create and wasn’t taxed. Therefore has CONTROL.
No gain or loss reported if transfer causes transferor to be in control - tax free exchange. Non event
Transfer in at carryover basis and carryover period
If cash given 70%, property 20%, services 10%.. the two with cash and property is 90% so they have control so non taxable
Greater or equal to 80% is control
Services aren’t property, not cash, like bartering, so taxable
So if person still gets like 20% of stock others wouldn’t have 80% so theirs would be taxable since no control
Non event
Not taxable. For carryover basis and carry over holding period.
Ex held prop for 10y and transferred, for stock and Corp has asset that has long term for 10y and a day. Basis is 10$ so still basis but can be sold for fmv
Wage transaction
Services
Taxable for fmv of stock
Or if no control less than 80% of stock, it is also a wage expense to Corp
Services
Taxable
Subject to SE and SSI tax depending on if employee or independent contractor
Property
Tax basis : if in control or part of in control
Or
Fmv: if their share percentage for cash and property is less than 80% then taxable which leads to everything at FMV
Non recognition of gain
Applies to amounts transferred solely in exchange for stock , if shareholder receives chase or property with stock then gain is recognized up to amount of cash or fair value of other property received. Includes securities. Boot.
Corp gain is carryover basis plus gain recognized . They recognize the portion of the gain for boot.
Shareholder contributes liability
The basis is reduced by liability relief
If liability is greater than basis then gain is recognized.
When they sell the stock, it’ll be a bigger gain, basically balancing off with the Corp
Revenues
Recognizes at the earlier of when earned or collected
Cash xxxx
Revenue xxxx
M1 reconciliation
Between income per books and income per tax
Life insurance
If Corp is the beneficiary, can’t take the deduction since premiums are not taxable .
If premiums are for the families , then payments are deductible . Fringe benefit
Organizational expenses
Up to 5k
Phases it after 50k dollar for dollar
The rest amortizable 180 months. Must start that month or they are capitalized until the entity is liquidated
Brain expenses.
Additional paid in capital
For stock- cost of issuing.
So debit apic
Cash xxxx
Salaries wages fringe benefits and payroll taxes
Deduct up to 1M for too 5 executive officers of Corp - form 11-25E
This is apart from employees
Entertainment expenses for officers, directors 10% plus owners
Deducted to extent that included in individual gross income. return
Salaries and wages. Can accrue as long as paid within 2.5 months of year end. Same with vacay
Estimated loss
Not deductible until actual loss
Direct write off for tax, for book its allowance
Interest expense
Not deductible if loan proceeds are to buy tax exempt expenses
Casualty, reimbursed employee expenses
50% meals and entertainment
For casualty losses there’s no floor or agi percentage?
Goodwill franchise trademarks
Amortized over 15 years
Fees fines penalties
Never deductible
Federal and state taxes deductible?
Only state and local
R&D
Expense immediately or over a minimum of 60m
Usually 60 m bc no rev to offset
Dividends * DRD
Special deduction .
Government loves double taxation and triple
To minimize multi tax problem, government created the DRD
Dividends received deduction depends on how much you own-
First, if you own Greater or equal to 20% but less than 80% we’ll give you and 80% DRD - of 100$ dividend, 80 will not be taxed but 20 will be taxed
Investor doesn’t qualify if from foreign Corp, borrowed money, received from tax exempt bond, and if you held it less than holding period. Rare exception: to 70 and 80 percent rule, if drd is less than taxable income and that is less than dividend, then you only get 80% of dividend, not taxable income. See example “when it falls in the middle
Then drd of 70% for people who owe less than 20% of the stock
If 80% or more which is control, you can consolidate,
Charitable contributions
Limited to 10%of income before deductions- ATI
Carry forward 5 years
ATI-
Net income, adjusted by charity , drd, nol-capital loss
Income before special deductions
Not net income,
Ordinary asset
Current asset
35%
1231 asset
Non current, over a year
Gain - capital gain
Loss : ordinary loss
Capital
Not ordinary and not 1231. Not business asset
Always
Short term
Zero net capital loss - offset against capital gains , not deductible
Cap- back 3 years
Gains - 5 years forward
NOL
Expenses exceeded revenue
Sideways NOL.
Back 2 forward 20
Amend return for past 2 years to offset
Carry forward 20
Deduction vs credit
Deduction is before tax- can lead to liability
Credit is after tax- can lead to no liability - dollar per dollar deduction
Foreign tax credits
Us tax liability x foreign income/total income = tax credit
Example was 6$ credit and foreign tax as 8$ so the remaining 2$ is what is carried forward or back
Charitable contributions
Limited to 10%of income before deductions- ATI
Carry forward 5 years
ATI-
Net income, adjusted by charity , drd, nol-capital loss
Income before special deductions
Not net income,
Ordinary asset
Current asset
35%
1231 asset
Non current, over a year
Gain - capital gain
Loss : ordinary loss
Capital
Not ordinary and not 1231. Not business asset
Always
Short term
Zero net capital loss - offset against capital gains , not deductible
Cap- back 3 years
Gains - 5 years forward
NOL
Expenses exceeded revenue
Sideways NOL.
Back 2 forward 20
Amend return for past 2 years to offset
Carry forward 20
Deduction vs credit
Deduction is before tax- can lead to liability
Credit is after tax- can lead to no liability - dollar per dollar deduction
Foreign tax credits
Us tax liability x foreign income/total income = tax credit
Example was 6$ credit and foreign tax as 8$ so the remaining 2$ is what is carried forward or back
Accumulated earnings tax
Corp- holds money, so government doesn’t have taxable income they can get income tax from - 20%
If Corp accumulates too much, then the Corp gets penalized .
Can accumulate for expansion and debt hurt not to avoid taxes, or loans to shareholders
Comes from audits . Appropriated in a schedule, u appropriated amount is checked agains allowed amount
Shareholder can pay the consent divided , tax as if they got the dividend. They’re willing to bc basis in the co goes up
Or if phc is paid .
Not self assessed
Penalty tax
Safe Harbor
Reduces or eliminates penalty
250k + federal taxes due - manufacturing
150k for service company for personal services
Phc
Personal holding company tax- penalty tax
Individuals would incorporate to avoid tax rates , would take out stock , would get taxed at 35% instead of 39.5% for individual.
Phc if:
Gross income test : greater or equal to 60% is from passive activity- taxable, so wouldn’t include muni bonds. Includes like rental etc
Alter ego test : number of people , if less or equal to 5 own greater than 50% of the stock and 60% of the revenue from passive sources like taxable interest, dividends, rental, royalty,then tax in uphci is gonna be taxed at 20%.
Self assed on form 1120 phc
Avoided by actual dividend or consent divided
Penalty taxes
Phc & accumulated earnings tax
M1 reconciliation
Reconcile between book income and taxable income.
Temporary and permanent adjustments
Reconciaking to income before
special deductions - DRD NOL
Purpose is to identify for Irs amounts reported differently between GAAP and for tax . Calculation begins with book, then increased and decreased by items that cause taxable income to be higher or lower both temporary and permanent. Temp, bad debt, warranty, depreciation.
Temporary
Timing or temporary difference
Permanent
Never taxable or never tax deductible
Like expenses for Corp beneficiary life insurance
M2
Basically a recon of inappropriate data retained earnings
Retained earnings plus or minus prior period adjustments equals adjusted beginning plus net income minus dividends equals retained earnings
Statement of retained earnings
Government wants to squeeze more money
M3
Temporary and permanent differences
Companies with assets of 10m or more
So they look at details
Depletion
Depreciation
Own line items
Corporate distributions**
When you receive you want to call it return of capital-
Irs wants to call it dividend
EARNINGS- taxable
Current CEP :
Accumulated AEP
RETURN OF BASIS/capital- not taxable
Go over section
Tricky with property :
Stock redemptions
Repurchase of shares from a shareholder treated as exchanges resulting in cap gain or loss treatment to the shareholder
Non liequdated
Just making distribution: taxed on gain but no loss deduction
For shareholder ordinary income- gain or loss . Up to e&p
Rest is return of basis
Liquidating
Closing up
Ordinary gain or loss for Corp
For shareholder is capital gain or loss
Proceeds minus basis is cap gain or loss
Exception to liquidating distribution
When subsidiary To parent then no gain or loss , tax free exchange . Everything carryover basis
Corp reorganization
Tax redetermination
Carryover basis
Mergers and acquisitions
Carryover no gain or loss unless boot
Consolidate
Inter company transactions are consolidated
Get rid of drd
Section 1244 stock
To encourage businesses
Most start ups fail. If you are part of the first million of stock then if well capital gain, if bad 50k ordinary loss . The rest you carry as capital loss 3000 indefinitely
Only applies to first 1M sold by original investor
AMT
4 adjustments that show you
Start with taxable income
Plus or minus preferences or adjustments : Lupe
Usually and increase of taxable income , amti before ace
Plus ACE : slim about 75% Equals amti before exception - exemption Amti X rate lower bc they took some benefits
Gives alternative minimum tax
PILE
Preferences and adjustments
Private activity bond interest : type of mini bond but is private. To finance non govt or student loans etc
Installment sales of inventory : accrual, installment sales vs accrual
Long term construction contract : calculated using percentage of completion
Excess depreciation on personal property : excess over 150 declining when double was used
SLIM
Adjusted current earnings
75%
S is 70% DRD , they add it back , not all 3/4 of the 70%
Life Insurance proceeds -
Muni bond interest - municipality ,
Exemption
400k
Reduces by 25% of amti before exemption minus 150k
So if 200k, it loses 25% of 50k
