Corporate Taxation Flashcards
Formation
NO GAIN OR LOSS recognized to the shareholder or corp. IF THE FOLLOWING:
- ONLY property received from the corp is stock (doesn’t incude stock rights, warrants, or debt)
- The STOCK is received in exchange for PROPERTY OR CASH (no services)
- The group (can be > 1) transferring property & receivng stock as part of echange collectively own AT LEAST 80% of VOTING POWER and each NONVOTING class of stock
IF boot is received during formation:
Then income will be recognized to the lower amount of:
- realized gain
- FMV
*Still needs to meet the control test
Liability Assumption - Formation
***NOT considered boot, won’t produce gain
IF LIABILITIES asssumed by the corp exceed the TOTAL adjusted basis of the property transferred, THEN GAIN IS RECOGNIZED
= LIAB - BASIS
***this is because there is no way to have negative basis
Shareholder’s Basis
Basis of all property transferred to corp
+ Gain recignized
- Boot received
- Liabilities assumed by corp
Holding Period (shareholder)
Determined as follows:
1. Capital/Sec1231 property hp is tacked onto the stock hp
- ALL other - does NOT tack on - BEGINS on day AFTER transfer
**For corps, hp is ALWAYS carried over
Income (Form 1120)
Income/deduction rules are the same as individuals
ESTIMATED tax paymetn are REQUIRED if the tax liability exceeds $500
Capital Losses
Can only offset with gains – no deduction for loss and no pref. rates for gains
Carryback 3 years, forward 5 years
2 1/2 month rule (accrual)
can deduct unpaid BONUSES & CHARITABLE CONT. IF:
- approved by the board before end of the year
- paid within 2.5 months after end of tax year
PSC - Personal Service Corp
Principal activity is performance of personal services by employees who own substantially ALL of the stock
Closely Held Corp
IF any time during the last half of the tax year, MORE THAN 50% in value of its outstanding stock is owned (directly or indirectly) by FIVE OR FEWER PPL
**passive losses cannot offset portfolio income - only active
Passive Losses
Loss limits do not apply to corps
**passive losses cannot offset portfolio income - only active
**PSC - treated as individual — no active or portfolio offsets
Year-Ends
Can choose a fiscal year.. UNLESS make S election or as a PSC
PSC - MUST use a calendar year end
Schedule M-1
Reconciliation of book income to taxable income
NONDEDUCTIBLE expenses are ADDED back to book income (fed tax expense, net cap loss, expenses in excess of limits)
INCOME that is taxable but not included in BI (e.g. prepaid income) (ADDED TO BI)
NONTAXABLE income included in BI (subtracted from BI —e.g. municipal interest, life insurance)
DEDUCTIONS not expensed from BI (subtracted from BI –e.g. div rec ded, 179 expense)
Schedule M-3
Same as M-1 in theory…BUT only reported by companies that have total assets of 10 million or more
Much more detailed
Charitable Contributions
Contributing inventory – ill, needy, or infants
DEDUCTION = AB + 50% (FMV - AB)
**never exceeding twice the AB
- 3 1/2 month rule -
LIMIT IS 10% of Taxable income BEFORE DIV. REC. DED. & CARRYOVERS
CAN CARRY OVER FOR 5 YEARS (same as indiv)
Dividends Received Deduction
% of DOMESTIC dividends to prevent triple taxation
IF corp owns less than 20%; DED = 70%
IF corp owns 20-79%; DED = 80%
IF corp owns 80% or more; DED = 100%
LIMITED TO:
- taxable income * same % used to compute
- NOT required if the full drd would create or add to a NOL
- **choose the lower of TI% or Div*% IF NO LOSS created
Organization Expenses
Typical expenses are legal services incident to org, accounting services, organizational meetings or directs/shareholders, and fees paid to incorporate
- *MUST BE incurred before END of TAX year business begins; if not no ded or amort just sit as intangible assets
- **issuing/selling syndication costs NOT allowed
$5,000 in the year incurred
reduced if expenditures exceed 50,000
e.g. 52k incurred - ded allowed = 3k… remaining amort over 180
Expenses NOT deducted MUST be amortized over 180 month, beginning in month business begins (or elect not to)
Start-Up Costs
Same rule as org. expenses applies here
Expenditures that would be deductible as trade or business expenses (ordinary, nec, reasonable) EXCEPT that the corp has not yet started its trade or business operation
5,000 + amort (50k phase out)
Domestic Production Deduction
Corps engaged in production activities within the U.S. qualify
= 9% * the lower of:
- Qualified production activity income = gross receipts less (cogs, direct costs, wages, pro-rate indirect)
- Taxable income
**MAY never EXCEED 50% of wages allocable to production income
Corporate Tax Formula FOR DEDUCTIONS
Gross Income
Less: Deductions (w/o charitable, drd, dpd, nol carryback, loss carryback)
___________________________________________
Taxable Income FOR charitable limitation
Less: Charitable Cont. (10% limit of above)
___________________________________________
Taxable Income for DRD (NOL, carryforwards not allowed)
Less: DRD
____________________________________________
Taxable Income before carrybacks
Less: DPD, NOL Carryback, STCL carryback
____________________________________________
TAXABLE INCOME
AMT Formula
Taxable Income before NOL deduction \+/- Adjustments (minus ACE) \+ Preferences \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ AMTI before ACE/NOL \+/- ACE adj \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ AMTI before NOL - NOL deduction (limited to 90% AMTI before NOL) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ AMTI - Exemption (40,000) phased out over 150k (25% of amnt over) --completely at 310; 160 over \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ AMT Base *20% \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ TMT before FTC - FTC \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ TMT - Regular Liability \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ AMT (IF POSITIVE)
AMT
greater of TI or Tentative minimum tax
TMT assumed to be ZERO in FIRST year of operation
AMT does NOT apply for small corporation (3yr average annual receipts = < 7.5mil) (limit is 5mil first testing year)
*****IF fail one, FAIL for ALL
Year 1: Exempt from AMT
Year 2: Testing period is year 1 (5mill)
Year 3: Avg 1/2 - 7.5mil
Year 4: Avg 1, 2, 3 - 7.5mil
ACE Adjustment
AMTI is increased by 75% of the excess of ACE over pre-ACE AMTI
OR AMTI is reduced by 75% of the excess of pre-ACE AMTI over ACE
Negative adjustment is limited to the aggregate of the positive adjustments under ACE for prior years reduced by any previously claimed negative adjustments
****AMTI > ACE - more often than not (increased adj)
AMT Credit
limited to the amount of AMT generated from timing differences and this IS available in a year in which the tenative tax is LESS than the regular tax
May be carried forward indefinitely
Accumulated Earnings Tax
Accumulated taxable income represents earnings that are retained in the business in which there is NO reasonable business need to retain the earnings for the future
CREDIT 250,000 manufacturing companies - beg e/p 150,000 service companies - beg e/p OR reasonable busines needs (greater of 2)
PHC - Personal Holding Company Tax
PHC tax for a previous year can be avoided by paying a deficiency dividend within 90 days after a determination by the IRS that the tax applied
TO be PHC:
- more than 50% of stock must be owned by 5 or less ppl in last half of tax year
- 60% or more of income must consist of inc such as dividend, interest, rent, royalties, etc
Penalty Taxes
Rate for PHC and AE tax is the TOP TAX rate on dividend income 20% — they are mutually exclusive; ONLY ONE will apply in any year
They force corporations to distribute dividend income to shareholders
Accumulated Taxable Income
Taxable income \+ DRD \+ NOL deduction - Fed Income taxes - Excess charitable contributions - Net capital loss \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Adjusted TI - Dividends Paid - AE CREDIT \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Accumulated TI * RATE on dividend income \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ AE TAX
PHC Tax Formula
Taxable Income - corporate income tax - Excess charitable contributions - Net capital gain (after tax) \+ DRD \+ NOL carryover \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Adj. TI - Dividends paid \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Undistributed PHC Income * by highest tax rate on dividend income
Related Corporation
There is a tax incentive to create multiple corporations in order to avoid the limits placed on individual corporations
Congress created limits on these related corps to mitigate these incentives and create a mechanism for identifying and taxing related economic activities
Controlled Groups -
- Parent-subsidiary
- Brother-Sister groups
- Certain insurance companies
- ONLY ONE accumulated earnings tax credit
- LIMITED to TAXABLE INCOME in each of the first two brackers as though the group was one corporation
determined on the last day of the tax year
Parent-subsidiary
focused on companies owning other companies
every company in group is owned at least 80% by other companies in the group; voting power or value
**CAN be one common parent not owned 80% or more by others (needs to own more than 80% of one)
Brother-Sister groups
focused on individuals owning other companies
2 or more corporations owned by 5 OR FEWER ppl who have a common ownership of MORE THAN 50% of companies
AND
own at LEAST 80% of stock of each of these companies
For tax brackets, accumulated earnings credit, and AMT NO 80% needed
Affiliated Group
Exists when one corporation owns AT LEAST 80% of the voting power of another AND holds SHARES of AT LEAST 80% of companies value
CAN ELECT TO FILE CONSOLIDATED TAX RETURN
except insurance co, s corp, or foreign corp
MUST BE MET ON EVERY DAY OF THE YEAR
DIVIDENDS between these corps are ELIMINATED on the CONSOLIDATED return
GAINS are deferred until DISPOSED outside the group
PARENT has basis in stock that it owns in all of subsidiaries inside group — allocable portion of income, losses, and dividends —
MEMBERS must conform tax year to PARENT’s tax year
Ordinary Distributions (Dividends)
Step 1: Taxable as dividend income to the extent of the shareholder’s pro-rate share of E/P
Step 2: Excess is TAX FREE to the extent of shareholder’s basis in stock
Step 3: Remaining is taxed as a CAP GAIN
Property Distributions
Amount Distributed = FMV - LIAB on property
BASIS = FMV
E &P
Cumulative earnings of the Corp that have not been distributed – economic ability to pay a dividend
Computed by making adjustments to taxable income
Adjustments;
- increased for all items of income;
- decreased for all deductions, cash distributions, and (> of FMV or AB) - Liab for property distributions;
- SL meth must be used
Current E&P
E&P for current tax year
- **Accumulated - all co had as of beginning of tax year
- ***ONLY have dividend income to the extent of having a positive E&P
Current +, Accumulated + = divedend for both
Current -, Accumulated - = NO divedend
Current +, Accumulated - = divedend for CURRENT
Current -, Accumulated + = NET FIRST
Corporate Gain - Distribution
For ANY type of distribution - dividend, redemption, liquidation…
GAIN but not loss is RECOGNIZED as if the property were sold to the shareholder at FMV
Redemptions
A sale of STOCK back to the ISSUING corporation
if you don’t give up any voting power or any rights to share in profits–might be more of a dividend
REQUIREMENTS:
- After distribution, the shareholder must own LESS than 80% of total interest before dist.
- LESS than 50% of total combined voting power of ALL stock
Realized
(basis)
Cap Gain
**GAIN but not loss rule applies
Liquidations
Occurs when an entity ceases to be a going concern and distributes its assets
Expenses incurred in the liquidation are DEDUCTED on the last corporate return
GAIN or LOSS IS RECOGNIZED on the distribution in complete liquidation
***FMV is usually not less than the LIABILITY attached to the property; HOWEVER if it is greater than the FMV, then the LIABILITY becomes the deemed FMV
*****LOSS is NOT recognized IF property had been contributed in last five years OR if it is distributed to a related party (corporate side)
Liquidations - Shareholder Consequences
Treat the distribution as a sale/exchange; GAIN OR LOSS is recognized
BASIS = FMV (at date of distribution)
**gain/loss always recognized
Liquidation of a Subsidiary
NO GAIN OR LOSS recognized
BASIS in the assers will STAY the SAME
Reorganization
Where two corporations (acquiring and target) choose to EITHER MERGE or CONSOLIDATE; or where one corp spins off part of its operations into a separate corporation
If you do not meet one of reorg classes, then ALL gains and losses are RECOGNIZED
Stock for Asset Reorg -
A or C
A - Statutory merger; T MUST DISSOLVE; Voting/NonVoting can be used; @ LEAST 50% given to T is stock
C - stock for asset; no statutory limit; ONLY VOTING; BOOT ALLOWED (20% or less); substantially ALL OF ASSETS (90% net, 70% gross)
Stock for Stock Reorg -
B - stock for stock; acquiring must own @ LEAST 80% after transaction; ONLY VOTING; NO BOOT
Divisive Reorg -
D
Consequences to Shareholders - Reorgs
NO GAIN OR LOSS is recognized involved in a tax-free reorg if they receive ONLY stock in exchange for property
IF BOOT RECEIVED; GAIN RECOGNIZED = Lower of
- Boot received
- Realized gain
BASIS computation =
basis in stock surrendered
+ gain received
- boot received
Consequences to Corporations - Reorgs
Generally, NO gain or loss is recognized
IF Acquiring or Target transfers appreciated property, GAIN BUT NOT LOSS recognized
BASIS computation =
Transferor’s basis in asset
+ gain recognized by transferor
