Corporate Taxation

Question 1

What tax rate are net capital gains taxed at for a corporation?

Answer 1

Ordinary (corporate) income tax rates

Question 2

While the cash basis of accounting is used for tax purposes by most taxpayers, the accrual basis method of accounting for tax purposes is required for the following:

Answer 2

1) The accounting purchase and sales of inventory (and inventories must be maintained) provided the business has greater than $25 million of average annual gross receipts for the three-year period ending with the prior tax year.
2) Tax shelters
3) Certain farming corporations (other farming or tree-raising businesses may generally use the cash basis) provided the business has greater than $25 million of average annual gross receipts for the three-year period ending with the prior tax year.
4) C corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner provided the business has greater than $25 million of average annual gross receipts for the three-year period ending with the prior tax year.

Question 3

What is the dividend received deduction?

Answer 3

The dividends-received deduction is 50% of dividends received from corporations owned less than 20% by stock and value by the recipient corporation.

The corporate dividends-received deduction is affected by a requirement that the investor corporation must own the investor’s stock for a specified minimum holding period of more than 45 days.

The dividends-received deduction allows for a special deduction of 65% of the dividends received from a 20% to <80% owned domestic corporation, not 100% of the dividends received (which applies only to ownership of 80% or more).

An 80%+ owned subsidiary in a consolidated return receives a 100% dividends-received deduction.

Question 4

What is the charitable deduction of a corporation limited to?

Answer 4

The charitable deduction of a corporation is limited to 10% of its taxable income computed without regard to:

1. The contribution deduction
2. The dividends-received deduction
3. Net operating loss carryback
4. Capital loss carry-back

A charitable deduction is limited to the amount paid during the year or by the 15th day of the fourth month after the taxpayer year ends.

Any amount in excess of the “10% limitation” may be carried forward for five years.

Question 5

How are insurance premiums treated?

Answer 5

1) Premiums paid for insurance on an officer’s life where the corporation is the owner and beneficiary of the policy are not deductible.
2) Group-term life insurance premiums paid on employees’ lives, with the employees’ dependents as owners and beneficiaries of the policies are considered to be a fringe benefit and would therefore be deductible by the corporation.

Question 6

What is the maximum amount of organization costs that a Company could deduct for tax purposes on its income tax return?

Answer 6

Organization costs are costs of forming a new corporation (e.g. legal fees to obtain corporate charter and filing fees, necessary accounting services, expenses of temporary directors, and incorporation fees paid to the state).

The first $5,000 of such costs is immediately deductible as long as the expenditures do not exceed $50,000.

Any amounts after the applicable immediate deduction are amortized over 180 months, beginning with the month in which the active trade or business begins.

The costs associated with the sale and issuance of the corporation’s own stock (e.g. underwriting fees) and commissions paid to the underwriter are not organizational costs. These types of costs must be capitalized.

Question 7

What is the charitable deduction of a corporation limited to? (Question 2)

Answer 7

A C corporation can deduct charitable contributions up to 10% of its taxable income after adding back the dividends-received deduction. That is the maximum allowable charitable contribution deduction. A corporate charitable deduction that exceeds the limit for deduction in one year can be carried over to the succeeding five tax years. It cannot be carried back.

Question 8

What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year?

Answer 8

$0
Unlike individuals, corporations may not deduct any capital losses in excess of capital gains in a year. Instead, any excess capital losses may be carried back three years or forward five years and can only be applied against capital gains.

Question 9

What is the corporation’s basis when property is exchanged for the issuance of stock?

Answer 9

There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. A shareholder recognizes gain when at leaset 80% of both the voting and nonvoting stock is not owned by the shareholders immediately after the transaction AND there is taxable boot (cash is withdrawn or cancellation of debt exists) on the transaction.

Question 10

Is capital loss deductible for a corporation?

Answer 10

Capital loss (netted against capital gain) is not currently deductible. Instead, it is carried back three years and forward five years to be used against net capital gains generated in those years.

Question 11

What types of charitable contributions are deductible?

Answer 11

• College matching contributions are deductible
• The Board’s authorized contribution is also deductible if it satisfies the two rules under which an accrual-basis corporation can deduct an accrued contribution: 1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 4th month after the end of the taxable year of accrual

Question 12

What types of entities may need to pay the accumulated earnings tax?

Answer 12

The accumulated earnings tax can be imposed on regular corporations (C corporations) or on personal service corporations. Not personal holding companies.

The accumulated earnings tax may be imposed on a corporation whose accumulated (retained) earnings is in excess of $250,000 (less for personal service corporations) and for which no justified reason for the retention exists.

Question 13

What makes a company a personal holding company?

Answer 13

There are two criteria in determining whether a company is a personal holding company: a) more than 50% of the stock must be owned by 5 or fewer individuals, and b) at least 60% of the adjusted ordinary gross income must consist of certain investment income (e.g., interest, dividends etc.). So, the stock ownership test is 50% while the income test is 60%.

A corporation is a personal holding company if 60% of adjusted ordinary gross income consists of:

1. Dividends
2. Taxable interest
3. Royalties, but not mineral, oil, gas or copyright royalties.
4. Net rent, if less than 50% of ordinary gross income.

Question 14

How much is the dividends received deduction?

Answer 14

Dividends are fully includible in gross income. However, a corporation is generally entitled to a special deduction from gross income for dividends received from a domestic corporation that is subject to income tax. This deduction is (1) 50% of dividends received from corporations owned less than 20% by the recipient corporation; (2) 65% of dividends received from a “20% owned corporation”; (3) 100% of qualifying dividends received from members of the same affiliated group to which the recipient corporation belongs; and (4) 100% of dividends received by a small business investment company.

Question 15

What types of corporations would be classified as a personal service corporation?

Answer 15

A personal service corporation (PSC) is primarily involved in the performance of one of the following fields: accounting, law, consulting, engineering, architecture, health, and actuarial science.

A PHC is subject to the regular tax on corporate income as well as a 20% tax on its undistributed PHC income.

Question 16

How is the dividends-received deduction applied when calculating net operating loss?

Answer 16

The dividends-received deduction (DRD) for entities that are controlled 0% to <20% (which is how a Fortune 500 corporation would be controlled) is the LESSER of 50% of dividends received or 50% of taxable income computed without regard to the DRD, and NOL deduction, or any capital loss carry back (but this does not apply in the case when deducting the full DRD results in an NOL).

A net operating loss (NOL) for corporations is the excess of deductions over gross income; however, the dividends-received deduction is allowed to be deducted before calculating the NOL.

Question 17

What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?

Answer 17

Shareholders treat property received in a complete liquidation of a corporation as full payment for their stock. Therefore, the shareholder must recognize capital gain or loss equal to the difference between the FMV of the property received and the basis of the stock surrendered.

In other words, in a corporate liquidation, distributions are subject to two levels of taxation. First, the corporation must recognize gain or loss as if it sold the assets for the FMV. Second, the shareholders would report gain or loss determined by the difference between the FMV of the assets received and the shareholders’ adjusted basis of the stock. The gain at the corporate level would be calculated as the combined FMV less the combined basis.

Question 18

What is a Type A reorganization?

Answer 18

A Type A reorganization is this form of a consolidation (e.g., A + B = C). Generally, no gain or loss is recognized by the shareholders of the various corporations except when they receive cash or other consideration in addition to the stock or securities. In addition, no gain or loss is recognized by the acquired corporation or the acquiring corporation pursuant to a tax-free reorganization.

Question 19

What is the amount of Section 1244 small business stock loss that a taxpayer can deduct again ordinary income?

Answer 19

The amount of loss on the sale of Section 1244 stock that is treated as ordinary is $100,000 for married filing joint taxpayers and $50,000 for single taxpayers. Any remaining loss is treated as a capital loss subject to the capital loss limitation rules, under which married filing joint taxpayers may deduct up to $3,000 of capital losses against ordinary income.

Question 20

How is the corporation’s recognized gain computed if the FMV of property is less than a non recourse liability assumed.

Answer 20

If a property’s FMV is less than the amount of the liability assumed, the property’s fair market value is assumed to be the amount of the liability assumed by the shareholder. The recognized gain would be calculated as liability less basis.

Question 21

How is taxable dividend income calculated for a C corporation shareholder?

Answer 21

A dividend paid in property other than money is taxable to an individual taxpayer to the extent of the property’s FMV, but not in excess of the current and accumulated earnings and profits of the distributing corporation. It is taxable to the extent of current earnings, plus accumulated earnings and profits, plus any gain generated on the distribution itself.

Question 22

What are the rules for NOLs for C corporations?

Answer 22

• A C corporation’s net capital losses are carried back 3 years and forward 5 years.
• A C corporation’s net operating losses may be carried forward indefinitely.
• A corporation’s capital losses can be used only to offset capital gains, and any excess is carried back 3 years and forward 5 years.
• A C corporation cannot deduct net capital losses from ordinary income.
• A corporation’s capital loss carry back or carryover is always treated as a short-term capital loss.

Question 23

Are premiums paid on key-person life insurance policies deductible for tax purposes for corporations?

Answer 23

No

Question 24

What is the basis of property received from the corporation’s perspective?

Answer 24

As a general rule, the basis of property received by a corporation by a transferor/shareholder is the greater of the basis of the transferred asset in the hands of the transferor/shareholder, or the debt assumed by the corporation. Therefore, The Worthington Corp.’s basis in the building is the same as Gearty’s basis immediately prior to its contribution to the corporation.

The basis in the building is computed separately from any debt that it assumes related to the building.