Corporate Tax I Flashcards
If corporation has 0 income in the prior year or this is their first year, what method do they use for estimates
Annualized income method
If a corporation’s tentative minimum tax exceeds the regular tax, the excess amount is
.
Payable in addition to the regular tax
What sources of income must Edge consider to determine if the income requirements for a personal holding company have been met?
(N) Net Rent (If less than 50% of ordinary gross income)
( I ) Interest that is TAXABLE (Non-taxable is excluded)
(R) Royalties (but not mineral, oil, gas or copyright roy’s)
(D) Dividends from an unrelated domestic corporation
When a corporation liquidates and distributes assets to shareholders, gain is recognized to the extent that
the fair market value of assets distributed to a shareholder exceeds the shareholder’s basis in the corporation’s stock
Tax on S Corp (Sting Tax) if:
1) C Corp elects S Corp Status AND
2) FMV of the Corp assets exceeds the adjusted basis of Corp assets on the election date
In computing undistributed personal holding company income, a personal holding company deducts
1) federal income taxes
2) net long-term capital gain less related federal income taxes
In filing a consolidated federal income tax return (owns 80% or more of a related company), a corporate group eliminates what?
Dividends from group members
Accumulated earnings tax on RE over $250,000 for a C Corp ($150,000 if Personal Service Corp) unless:
(N/A for Personal Holding Co’s, Tax Exempt Corps, or Foreign Investment Co’s.
1) Can show a reasonable need
2) Pay out dividends by the due date of the tax return.
Note: Add’l tax rate for accumulated earnings is flat 20%.
Only IRS assessed as a result of an audit, not self-assessed.
Corporation can take a credit for Foreign Income Taxes Paid ? Yes or No?
Yes - under certain circumstances.
Any distributions in excess of current + accumulated earnings and profits does what?
reduces the shareholder’s basis in their stock . It is treated as received on the sale or exchange of the stock. It is a nontaxable return of capital UP TO the shareholder’s basis. After that, it is a taxable CAPITAL GAIN distribution.
There is no delinquency penalty if a corporate taxpayer does 3 things:
1) files its return
2) pays at least 90% of the tax due by the due date AND
3) pays the balance due on or before the extended due date.
Statute of limitations for corporations is same as individuals, generally 3 yrs. from the later of the due date of the return OR the date the return was filed (including amended returns). Some rare cases where the statute is extended are:
1) Tax return can be reopened to avoid a hardship on the taxpayer or it IRS
2) Item is ruled deductible in a subsequent yr. after been taken in a closed year (IRS will reopen the statute of limitations to disallow the deduction in the prior year)
Corporate statue of limitation will be extended to 6 years for what % misstatement
25% misstatement or greater.
Note: If an omission was nonfraudulent, the statute of limitations cannot be reopened after it has expired
Definition of Personal Holding Corp:
1) 50% owned by 5 or fewer individuals
2) has 60% of adjusted ordinary inc. consisting of (NIRD):
N = Net rent (if less than 50% of ordinary gross income)
I = Interest that is taxable (nontaxable is excluded)
R = Royalties (but not mineral,oil, gas or copyright roy’s)
D = Dividends from an unrelated domestic corporation
Corporation Taxable Amount Paying Property Dividends - If a corporation distributes appreciable property, the tax results are as if it were sold, i.e. gain is computed
FMV of the Property
- NBV
Corp Gain
Example: Shareholder Taxable Amount when Receiving Property Dividends (This chain of events illustrates you have to INCLUDE the Corp Gain when considering if the Corp has any E&P-even when they started out with no E&P)
1) if Corp has no E&P (RE) then Div would NOT be taxable
2) Corp distributes appreciated property as a Div
3) Corp has recognized gain on property Div
4) Corp gain above increases/creates corporate E&P (RE)
5) Dividend to Shareholder is now taxable income (to extent of E&P)
Net Operating Loss of a Corporation is carried
back/forward what period?
Back 2/ Forward 20 (Remember Hind Sight is 20/20 )
Re: Expensable/Amortizable Organization Costs
Does not include any costs of selling corporate stock
Statute of Limitations “trick” question - The statute of limitations “begins”
It BEGINS the DAY AFTER the due date of the return or the date it was filed WHICH EVER IS LATER.
For Charitable Contributions Limitations - Total Taxable Income is calculated before these items:
1) Charitable contribution deductions
2) Dividends received deductions
3) NOL Carryback
4) Capital Loss Carryback
5) US Production activities Deduction
Unused capital losses of a CORPORATION that are carried back or forward are treated as __________capital losses whether or not they were short-term or long-term when sustained.
Short-term. Capital losses can only be used to offset capital gains up to the amount of the carryback or carryover, not ordinary income.
NOTE: INDIVIDUAL capital losses retain their short/long term status when carried back or forward.
Corp. had $300,000 in compensation expense for book purposes in Year 1. Included in this amount was a $50,000 accrual for Year 1 nonshareholder bonuses.
If they paid the actual Year 1 bonus of $60,000 on March 1, Year 2 - how much could they deduct on their yr 1 tax return?
Answer: $310,000. The additional $10,000 bonus paid on March 1, Year 2 is also deductible in Year 1, even though it was not accrued at year-end Year 1.
Inter-company sales of assets are
Eliminated for tax purposes. The gain is postponed until it is sold to an outside party.
Losses resulting from the sale, exchange or worthlessness of Section 1244 qualifying stock (also called small business stock) are treated as ordinary losses up to $50,000 in any tax year. However, this loss is available only to
Original owners (not thru inheritance)
Corporations - Capital Losses
Not allowed - have to offset capital gains. Note - do not have to match short-term losses to short-term gains, or long-term losses to long-term gains. Offset them all together.
The dividends-received deduction (“DRD”) is generally calculated as follows:
NOTE: Personal Service Corp, Personal Holding Corp & S-Corps have to pay tax on ALL dividends - no exclusions.
The LESSER OF:
70% (or 80%) of the dividends received
OR
70% (or 80%) of TAXABLE INCOME computed WITHOUT regard to:
1)Dividends received deductions
2)NOL Carryback
3)Capital Loss Carryback
4)US Production activities DeductionExcess Corporate Charitable Contributions can be carried
Forward for up to 5 years.
Small Corporate (taxable income was not $1 million or more in any of the 3 preceding tax yrs) estimated tax penalty rules:
1) Pay 100% of the tax owed on current yr’s return
OR
2)Pay 100% of the tax owed on previous yr’s return
(Note can’t use previous year computation if owed no tax, or previous tax year was < 12 months.
Must be in 4 equal installments (unless annualized method is used). Underpayment penalty is assessed if the payments aren’t made AND the amount owed is $500 or more.
Type B Re-organization requires:
1) Stock for stock exchange only
2) Acquiring company must be in control of the target company immediately after the acquisition.
An accrual basis employer may deduct bonuses paid to non-shareholder employees in the year of accrual if the bonuses are
Paid within 2 ½ months after the close of the tax year.
If additional bonuses are paid within the 2 1/2 months they can be deducted as well, even if they were NOT accrued??? Odd hey?
In a corporate formation, the corporation’s basis in the transferred assets is
the adjusted basis from the shareholder,
Shareholders treat property received in a complete liquidation of a corporation
as full payment for their stock. Computes Gain/Loss:
FMV of Property
Less Basis in Stock
= Gain/Loss
Corporation premiums paid on a key-person life insurance policy are deductible for GAAP (i.e. Book Income)
Not deductible for Tax = M1 Adjustment
The basis of a nontaxable stock dividend, where old and new shares are identical, is determined by
dividing the basis of the old stock by the number of new shares. The calculation is as follows:
Old Basis of 1,000 shares = $22,000= $22/share
Rec’d 10% NONTAXABLE
stock dividend of 100 Shares
New Basis of 1,100 shares = 22,000/1100 = $20/share
The ACCRUAL BASIS method of accounting for tax purposes is required for the following:
- The accounting purchase and sales of inventory (and inventories must be maintained)
- Tax shelters
- Certain farming corporations (other farming or tree-raising businesses may generally use the cash basis)
- C Corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner PROVIDED the business has GREATER than $5 million of average annual gross receipts for the three-year period ending with the prior tax year
Preferred shareholders are not common equity owners of a corporation, and they only get paid based on their preferred percentage; therefore, ANY/ALL dividend payments to a preferred shareholder are considered DIVIDEND INCOME to the preferred shareholder.
Preferred shareholders dividends are paid in full before common shareholders receive dividends. If dividends are limited by low E&P, all of the available E&P is considered dividends for the preferred shareholder, and any remainder paid to common shareholders is a return of capital.
Capital Losses cannot be deducted unless
it has offsetting capital gains. Carryback 3/Forward 5
The taxable amount of a dividend to an Individual or Corporation shareholder from a corporation’s earnings and profits is the
1)amount received in CASH
OR
2) the FMV of the PROPERTY received
As a general rule, a shareholder who contributes property to a corporation in exchange for common stock will not recognize gain or loss if immediately after the transaction when the transferring shareholders (there can be more than one transferor) own at least 80% of the corporation and the shareholder does not receive any boot.
If they receive Boot - then they will recognize
a gain to THE LESSER OF cash received or the realized gain.
An affiliated group
common parent owns
(1) 80% or more of the voting power of all outstanding stock
AND
(2) 80% or more of the value of all outstanding stock of each corporation.
The accumulated earnings tax can be imposed on what type of entities?
Regular corporations not classified as personal holding companies (Athens Material Handling),
The maximum Section 1244 loss (small business stock) that can be deducted by a single taxpayer in any year is.
$50,000 ($100,000 for married filing joint). All losses designated as Section 1244 losses are ORDINARY by definition.
Any loss in excess of this amount would be a CAPITAL LOSS subject to the having to be offset by capital gains. $3,000 maximum ($1,500 if MFS) if not offset by capital gains.
A personal service corporation (PSC) is primarily involved in the performance of one of the following fields:
accounting, law, consulting, engineering, architecture, health, and actuarial science.
Fringe benefits paid by an S corporation are deductible by the S corporation only for non-shareholder employees and those employee-shareholders owning
2% or less of the S corporation.
If own > 2%, then fringe benefits paid are deductible by the S corporation if included as part of gross income from the S corporation for the individual receiving the benefits (i.e., included as part of income on the shareholder’s W-2
Computing Shareholder Basis in an S-Corp:
Initial Basis
+ Income Items (separate & non-separately stated items) includes tax-free income
+Additional shareholder investments in Corp. stock
- Distributions to shareholders
- Loss or expense items
= Ending Basis
memorize
Alternative Minimum Tax Computation
Start with Regular Taxable Income
+ or - Adjustment Items (LID)
Long-term K’s
Installment sale dealer
Depreciation Adjustments
+ Add Back Preference Items (PPP)
Percentage depletion
Private Activity Bonds post ‘86 Tax Exempt Interest Inc
Pre ‘87 ACRS excess depreciation
+ - ACE (Adjusted Current Earnings) MOLDD X 75% ACE=MOLDD
Muni Interest Inc,
Org exp amortization
Life Ins proceeds on key Employees
Diff in Deprec AMT and ACE,
Dividends from unrelated corp (70% excludable)
=Alternative Minimum Taxable Income (AMTI)
- Less AMT Exemption ($40K-(25% of MTI over $150K)]
=AMT TAX BASE
X 20%
Equals TENTATIVE ALTERNATIVE MINIMUM TAX
Alternative Minimum Tax Computation (Abbreviated Formula)
Start with regular taxable income \+ or - LID \+ PPP \+ or - MOLDD (ACE Adj x 75%) - AMT NOL = Alternative Minimum Taxable Income (AMTI) - Less AMT Exemption[$40K-(25% of MTI over $150K)] =AMT Tax Base X 20% Tentative Minimum Tax
