Corporate Taxation

Question 1

How is shareholder basis calculated for a new interest in a Corporation?

Answer 1

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

Question 2

Describe how loss is taken on Section 1244 small business Corporation stock?

Answer 2

A loss on worthless stock is an ordinary loss.

Question 3

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

Answer 3

Taxpayer must be original stock owner, and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Only applies to the first $1 million of stock.

Both common and preferred stock is allowed

Question 4

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

Answer 4

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

Question 5

How are Corporate organization costs handled?

Answer 5

Amortization of costs begin the month the Corporation commences business activity

If the Corporation doesn’t amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

Question 6

How are excess charitable contributions treated in a C-Corporation?

Answer 6

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

Question 7

When can a board of directors authorize charitable contributions for a tax year?

Answer 7

The Board of Directors can authorized charitable contributions up to 4/15 and have them count in the previous tax year

Question 8

How is the dividends received deduction (DRD) calculated, and what are the limitations?

Answer 8

80% Interest = 100% DRD

20-79% = 65% DRD

less than 20% = 50% DRD

Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

Question 9

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

Answer 9

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

Question 10

How are capital losses handled in a C-Corporation?

Answer 10

Capital Losses are deductible only to the extent of Capital Gains

Question 11

How are capital gains taxed in a C-Corporation?

Answer 11

Capital Gains are taxed at ordinary income rates

Question 12

How are Corporate losses carried back/forward?

Answer 12

Corporations can carry back losses 3 years and carry forward losses 5 years as a STCL

Question 13

How are bad debt losses handled in a Corporation?

Answer 13

Bad debt losses are classified as ordinary

Question 14

What is the casualty loss floor for a C-Corporation?

Answer 14

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property’s basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

Question 15

How is investment interest expense handled in a C-Corporation?

Answer 15

Unlike individual taxation, investment interest expense is not limited to investment income.

Investment interest on tax-free investments are NOT deductible.

Question 16

What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?

Answer 16

Reconciles beginning to ending retained earnings

Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings

Question 17

What is the purpose of Schedule M-3 on a Corporate tax return?

Answer 17

Like M1, but for Corporations with $10M+ in assets

Question 18

How are affiliated (80%) Corporation tax returns handled?

Answer 18

Consolidation election is binding going forward

Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.

One accumulated earnings tax allowed

Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value

Question 19

How are Corporate distributions to shareholders handled?

Answer 19

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)

Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain

Distribution amount = FMV of Property + Cash - Liability Assumed

Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

Question 20

What is the order of treatment in a Corporation’s distribution to a shareholder?

Answer 20

1. Distribution is a dividend to the extent of current and accumulated earnings and profits
2. Shareholder basis is then exhausted
3. Remainder, if any, is a Capital Gain

Question 21

What is the treatment of a gain in a complete Corporate liquidation?

Answer 21

If Capital Property, then Capital Gain

If Non-Capital Property, then Ordinary Income

Gain characterization is the same for both the Corporation and the shareholder

Question 22

What is the treatment of a loss in a complete Corporate liquidation?

Answer 22

Corporation: Depends on if property is capital in nature, otherwise ordinary loss

Individual: capital loss only

Question 23

What is the treatment of the liquidation of a subsidiary?

Answer 23

No G/L to parent company

Question 24

What is a consent dividend? How is it treated?

Answer 24

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

Question 25

Describe the requirements for a personal holding company.

Answer 25

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock

60% of the PHC’s income must be from passive means

PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

Question 26

How is Corporate accumulated earnings tax (AET) different from PHC taxation?

Answer 26

Not Self-Assessing like a PHC

Question 27

How is the accumulated earnings credit calculated for a Corporation?

Answer 27

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

Question 28

What are the requirements for holding S-Corporation status?

Answer 28

Only individuals, estates and trusts can be shareholders

Domestic only, no international S-corps or foreign shareholders

Up to 100 shareholders allowed, and only one class of stock allowed

Calendar tax year only

Question 29

How is an S-Corporation election made?

Answer 29

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election, 100% of the shareholders must consent

Question 30

How is an S-Corporation terminated?

Answer 30

To terminate election, 50% of the shareholders must consent

No S Corp election allowed for 5 years after termination

S Corp termination effective immediately following an act that terminates status

Question 31

What items are not included in calculating an S-Corporation’s ordinary income?

Answer 31

These items are included on Schedule K, not in ordinary income:

Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction 
1231 Gain or Loss
Charitable Contributions
Portfolio Income (dividends or interest)

Question 32

How is S-Corporation shareholder basis calculated?

Answer 32

Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis

Question 33

What is the formula for an S-Corp Built-in Gains Tax?

Answer 33

FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 21% Corporate Rate