Corporate Taxation Flashcards
How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred
+ Gain recognized (if less than 80% ownership)
- Boot received
= Shareholder basis.
Liabilities > basis on contributed property to a Corporation, a gain is recognized.
shareholders >80% control after a property transfer, no taxable event occurs.
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
Transferor's basis \+ Gain recognized by shareholder = Basis OR FMV of Corporate Interest - Adjusted basis of property = Gain
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS.
NOT FMV of property.
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
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)
Shareholder equity must not be in excess of $1 million
Both common and preferred stock is allowed
What are the basic rules for filing a form 1120?
Return is due regardless of income level
Return is due 4/15 if on a calendar year basis, or 3 1/2 months after end of fiscal year
An automatic six-month extension is available
When are Corporate federal tax estimated payments required, and how are they calculated?
Required if more than $500 in tax liability expected
25% per quarter current year liability (2Q, 3Q, 4Q)
100% PY liability or 25% of PY tax in 1Q
What is the exemption in AMT tax for C-Corporations?
$40,000 Exemption
Reduced 25% if Taxable Income over $150k
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
Real Estate purchased 1986-1999 using Straight Line Depreciation must depreciate over a useful life of 40 years
Personal Property - use 150% MACRS, not 200%
Construction must use % completion method
What are the ACE adjustments in the C-Corporation AMT tax calculation?
Municipal Bond Interest Life Insurance Proceeds 70% Dividends Received Deduction Organizational Expenditures must be capitalized, not amortized
Note: AMT paid gets carried forward indefinitely, but never carried back
When are C-Corporations exempt from AMT?
Year 1 exempt
Year 2, if year 1 gross receipts were less than $5 Million
Year 3, if the average gross receipts for years 1 and 2 were less than $7.5 Million
Year 4 and beyond, if the average from the previous 3 years is less than $7.5 Million
How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?
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.
How are a C-Corporation’s deductible charitable contributions calculated?
10% of Taxable Income
Do not include in Taxable Income:
Charitable contributions, Dividends Received Deductions (DRD), or NOL Carrybacks allowed
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years
(No Carryback)
When can a board of directors authorize charitable contributions for a tax year?
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year
How is the dividends received deduction (DRD) calculated, and what are the limitations?
Ownership >80% Interest = 100%
DRD 20-79% = 80%
DRD < 20% = 70% DRD
Only allowed if no consolidated return is filed.
Qualified dividends from domestic Corporations only.
Take lessor of % per taxable or % per Dividends
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
Only take DRD % x Taxable Income
Note: If DRD brings a loss situation, then you can take the full DRD
If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed
How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
How are capital losses handled in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates
How are Corporate losses carried back/forward?
Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss
How are bad debt losses handled in a Corporation?
Accrual basis: Bad debt losses are classified as ordinary (Direct method)
Cash basis: No deduction
What is the casualty loss floor for a C-Corporation?
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)
How are net operating losses handled in a C-Corporation?
Carryback 2 years where income; forward 20 years.
How is investment interest expense handled in a C-Corporation?
Unlike individual taxation, investment interest expense is not limited to investment income.
Investment interest on tax-free investments are NOT deductible.
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction
Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Reconciles beginning to ending retained earnings Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward Dividends between them are eliminated,
Advantage- Gains are deferred.
Disadvantage:
losses are deferred.
One AMT exemption
One accumulated earnings tax allowed
Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)
Remainder (if any) is a return of capital.
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits
What is the treatment of a gain in a complete Corporate liquidation?
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
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: capital loss only
What is the treatment of the liquidation of a subsidiary?
No Gain/Loss to parent company
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid
Treat as if distributed by the end of the year
Describe the requirements for a personal holding company.
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
How is Corporate accumulated earnings tax (AET) different from PHC (Personal Holding Corp) taxation?
Not Self-Assessing like a PHC
How is the accumulated earnings credit (AEC) calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
What is a Personal Service Corporation (PSC)? What is the tax rate?
Health, Law, Accounting, etc (service organizations - must be licensed)
Flat rate of 35%
When can a C-Corporation use the cash method?
Personal Service Corporations (PSC)
Less than avg annual revenue of $5 million for 3 prior tax years
What is excluded from gross income for a C-Corporation?
Capital Contributions (from non-shareholders) Treasury Stock
What amount of Start-up and organization costs are deductible for a C-Corporation?
$5k startup and $5k organizational
Over $5k amortized 15 years (180 months)
Over $50k reduced
Organizational costs: not qualified costs related to transfer of assets or issuance/sale of stock
What is deduction for Charitable contribution for C-Corporation?
Capital Gain Property - deduction is the property’s FMV but must be used to related to org purpose
All limited to 10% of taxable income before: Charitable Contribution DRD NOL Carryback Capital Loss Carryback
What deductions are allowed when a C-Corp has an NOL?
NOLs from other years
Charitable contributions
Allowable Depreciation
Disregard Income limitations for DRD deduction
How much can a corporation deduct with the Foreign Tax Credit?
Applied to gross tax liability after AMT before toher credits.
Limit = US income tax x (Foreign taxable income / worldwide taxabale income)
Excess: Carryback 1 year; forward 10 years
How is a gain or loss of a Corporate Distribution to Shareholders handled?
Basis < FMV = Loss realized not recognized
Basis > FMV = Gain recognized
(Shareholder basis = FMV)
