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
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.
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 3/15 if on a calendar year basis; or 2 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; or
100% current year liability
100% previous year liability
Note: If corporation had more than $1 Million in revenue the previous year; the first estimated payment must be based on the previous year and the remainder based on the current year.
Describe the AMT calculation for C-Corporations
Taxable Income \+Tax Preference Items \+/- Adjustments = Pre-ACE \+/- ACE Adjustments = AMTI - 40;000 Exemption = Tax Base x 20% = Tentative Minimum Tax - Regular Tax Liability = AMT
What are the pre-ACE adjustments for C-corporation tax AMT calculations?
Real Estate purchased between 1986 and 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?
In year one
In year two; if year one gross receipts were less than $5 Million
In year three; if the average gross receipts for years 1 and 2 were less than $7.5 Million
In year four 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 corporate organization costs handled?
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
How are a C-corporation’s deductible charitable contributions calculated?
Sales -COGS= Gross Profit
Gross Profit + Rent; Royalties; Gross Dividends; Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions; Dividends
Received Deductions (DRD); or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions; DRD; NOL Carrybacks
x 10%
=Deductible Charitable Contributions
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?
80% Interest = 100% DRD
20-79% = 80% DRD
less than 20% = 70% DRD
Only allowed if no consolidated return is filed. Qualified dividends from domestic corporations only.
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?
Bad debt losses are classified as ordinary
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?
If loss includes NOL Carryforward; reduce the loss (add back the amount) to get the loss without the Carryforward
Then; carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year
Any leftover NOL = This year’s NOL
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)
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)
What is the order of treatment in a corporation’s distribution to a shareholder?
- Distribution is a dividend to the extent of current and accumulated earnings and profits
- Shareholder basis is then exhausted
- Remainder; if any; is a Capital Gain
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 G/L 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 - 15% tax rate on undistributed PHC Income
How is corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
How is the accumulated earnings credit 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 are the requirements for holding S-corporation status?
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
How is an S-corporation election made?
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
How is an S-corporation terminated?
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
What items are not included in calculating an S-corporation’s ordinary income?
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)
How is S-corporation shareholder basis calculated?
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
What are examples of qualified organization costs that can be expensed in the year of formation?
Costs incidental to formation:
- Legal fees for drafting the charter
- Incorporation fees
- Expenses for temporary directors
- Organizational meeting costs
What are examples of non-qualified organization costs that must be amortized?
Costs related to the transfer of assets to the corporation:
- Printing stock certificates
- Professional fees for issuing stock
