Corporations Flashcards
Formula for SHAREHOLDER BASIS IN A CORPORATION
Adjusted Basis of property transferred
+ Gain Recognized (only if less than 80% ownership)
(includes assumption of a liability)
= Shareholder Basis
What is the tax effect if shareholders have 80% control after a property transfer?
No taxable event occurs.
What is the tax effect if liabilities exceed basis on contributed?
Gain is recognized
Formula for corporate property basis
Transferor’s Basis
+ Gain recognized by shareholder
= Basis
When is it a taxable event for a corp?
If you remove all shareholders who contributed services in exchange for ownership in the corporation and the remaining shareholders who contributed property add up to less than 80% ownership.
Formula to calculate gain on corp
FMV of Corporate Interest
= Gain
What is the shareholder and corp’s basis for property?
Must use ADJUSTED BASIS, not FMV of property
What is a Section 1244 – Small Business Corporation?
A loss on worthless stock is an ordinary loss.
Taxpayer must be the original stock owner
Taxpayer must be an individual or a partnership
$50,000 (Single) or $100,000 (MFJ) limit - remainder is a capital loss
Must have been issued in exchange for money or property (no interest in exchange for services)
Shareholder equity must not be in excess of $1 Million
Both common and preferred stock is allowed
What are the rules for filing a Form 1120?
Return due regardless of income level
Return due 3/15 if on a calendar year basis
An automatic six month extension is available
What are the estimated tax payments for corps?
Required if more than $500 in tax liability expected, or
100% current year liability
100% previous year liability
Note - If Corp. had > $1M in revenue previous year
o First Estimated payment based on previous year
o Remainder based on the current year
What are pre-ace adjustments?
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 ACE adjustments?
Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures Capitalized not amortized
AMT paid gets Carried Forward Indefinitely
o No Carryback
What are corporate AMT exemptions?
In year one
In year two
o If year one gross receipts were less than $5 Million
In year three
o If the average gross receipts for years 1 and 2 were less than $7.5 Million
In year four and beyond
o If the average from the previous 3 years is less than $7.5 Million
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.
What should corps do with organization costs?
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
Formula for C Corp charitable deductions
Step 1
Sales
Gross Profit
Step 2
Gross Profit
+ Rent, Royalties, Gross Dividends, Capital Gains
Total Income
Step 3
Total Income
(No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
Taxable Income before Charitable Contributions, DRD, NOL Carrybacks
Step 4 Taxable Income before Charitable Contributions, DRD, NOL Carrybacks x 10% Deductible Charitable Contributions
What is the treatment of charitable contributions?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
What are characteristics of dividends received deduction (DRD)?
Only allowed if no Consolidated Return is filed
Qualified dividends from domestic corporations only
80% Interest = 100% DRD
20-79% = 80% DRD
How are corporate losses treated?
A Loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
Capital Losses Deductible to the extent of Capital Gains
Net Short Term Capital Gains taxed at Ordinary Rates
Corporations can Carryback losses 3 years and Carry
Forward losses 5 years as a Short Term Capital Loss
Bad Debt losses are classified as Ordinary
How are casualty losses for corporations treated?
No floor on corporate casualty loss like there is with an individual taxpayer
If destroyed, the loss is the property’s basis (minus proceeds)
o Calculation: Adjusted basis - Proceeds from
Insurance = Loss
If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)
What is NOL?
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
Pension/profit sharing contributions are deductible. Investment interest on tax-free investments is NOT deductible.
Unlike individual taxation, investment interest expense is not limited to investment income.
M1
Reconciles book to tax income before Net Operating Loss/Dividend Received Deduction Permanent differences (tax-exempt interest) Temporary differences (accelerated depreciated tax, straight-line, etc)
M2
Reconciles beginning to ending retained earnings
Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
Ending Unappropriated Retained Earnings
M3
Like M1, but for Corporations with $10M+ in assets
What is an AFFILIATED (80%) CORPORATION?
Consolidation election is binding going forward
Dividends are eliminated
o Advantage: Gains are deferred
o Disadvantage: Losses are deferred
One AMT Exemption
One Accumulated Earnings tax allowed
In order to Consolidate, the parent must have 80% voting power and own 80% of the stock value
