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REG - Federal Taxation > Corporate Taxation > Flashcards

Corporate Taxation Flashcards

1
Q

Formation

A

NO GAIN OR LOSS recognized to the shareholder or corp. IF THE FOLLOWING:

  1. ONLY property received from the corp is stock (doesn’t incude stock rights, warrants, or debt)
  2. The STOCK is received in exchange for PROPERTY OR CASH (no services)
  3. 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
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2
Q

IF boot is received during formation:

A

Then income will be recognized to the lower amount of:

  1. realized gain
  2. FMV

*Still needs to meet the control test

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3
Q

Liability Assumption - Formation

A

***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

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4
Q

Shareholder’s Basis

A

Basis of all property transferred to corp
+ Gain recignized
- Boot received
- Liabilities assumed by corp

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5
Q

Holding Period (shareholder)

A

Determined as follows:
1. Capital/Sec1231 property hp is tacked onto the stock hp

  1. ALL other - does NOT tack on - BEGINS on day AFTER transfer

**For corps, hp is ALWAYS carried over

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6
Q

Income (Form 1120)

A

Income/deduction rules are the same as individuals

ESTIMATED tax paymetn are REQUIRED if the tax liability exceeds $500

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7
Q

Capital Losses

A

Can only offset with gains – no deduction for loss and no pref. rates for gains

Carryback 3 years, forward 5 years

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8
Q

2 1/2 month rule (accrual)

A

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
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9
Q

PSC - Personal Service Corp

A

Principal activity is performance of personal services by employees who own substantially ALL of the stock

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10
Q

Closely Held Corp

A

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

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11
Q

Passive Losses

A

Loss limits do not apply to corps

**passive losses cannot offset portfolio income - only active

**PSC - treated as individual — no active or portfolio offsets

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12
Q

Year-Ends

A

Can choose a fiscal year.. UNLESS make S election or as a PSC

PSC - MUST use a calendar year end

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13
Q

Schedule M-1

A

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)

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14
Q

Schedule M-3

A

Same as M-1 in theory…BUT only reported by companies that have total assets of 10 million or more

Much more detailed

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15
Q

Charitable Contributions

A

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)

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16
Q

Dividends Received Deduction

A

% 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
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17
Q

Organization Expenses

A

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)

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18
Q

Start-Up Costs

A

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)

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19
Q

Domestic Production Deduction

A

Corps engaged in production activities within the U.S. qualify

= 9% * the lower of:

  1. Qualified production activity income = gross receipts less (cogs, direct costs, wages, pro-rate indirect)
  2. Taxable income

**MAY never EXCEED 50% of wages allocable to production income

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20
Q

Corporate Tax Formula FOR DEDUCTIONS

A

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

21
Q

AMT Formula

A 
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)
22
Q

AMT

A

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

23
Q

ACE Adjustment

A

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)

24
Q

AMT Credit

A

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

25
Q

Accumulated Earnings Tax

A

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)
26
Q

PHC - Personal Holding Company Tax

A

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
27
Q

Penalty Taxes

A

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

28
Q

Accumulated Taxable Income

A 
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
29
Q

PHC Tax Formula

A 
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
30
Q

Related Corporation

A

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

31
Q

Controlled Groups -

A
  1. Parent-subsidiary
  2. Brother-Sister groups
  3. 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

32
Q

Parent-subsidiary

A

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)

33
Q

Brother-Sister groups

A

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

34
Q

Affiliated Group

A

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

35
Q

Ordinary Distributions (Dividends)

A

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

36
Q

Property Distributions

A

Amount Distributed = FMV - LIAB on property

BASIS = FMV

37
Q

E &P

A

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
38
Q

Current E&P

A

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

39
Q

Corporate Gain - Distribution

A

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

40
Q

Redemptions

A

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:

  1. After distribution, the shareholder must own LESS than 80% of total interest before dist.
  2. LESS than 50% of total combined voting power of ALL stock

Realized
(basis)
Cap Gain

**GAIN but not loss rule applies

41
Q

Liquidations

A

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)

42
Q

Liquidations - Shareholder Consequences

A

Treat the distribution as a sale/exchange; GAIN OR LOSS is recognized

BASIS = FMV (at date of distribution)

**gain/loss always recognized

43
Q

Liquidation of a Subsidiary

A

NO GAIN OR LOSS recognized

BASIS in the assers will STAY the SAME

44
Q

Reorganization

A

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

45
Q

Stock for Asset Reorg -

A

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)

46
Q

Stock for Stock Reorg -

A

B - stock for stock; acquiring must own @ LEAST 80% after transaction; ONLY VOTING; NO BOOT

47
Q

Divisive Reorg -

A

D

48
Q

Consequences to Shareholders - Reorgs

A

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

49
Q

Consequences to Corporations - Reorgs

A

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

REG - Federal Taxation (16 decks)

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