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
What is CORPORATE DISTRIBUTION – SHAREHOLDERS?
- Use FMV of Property
- 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, 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)
- Notes:
o If a corporation distributes property with a FMV below basis, there is NO LOSS
o If a corporation distributes appreciated property that is capital in nature = Capital Gain
o If a corporation distributes appreciated property that is non-capital in nature = Ordinary Income
Shareholder Distribution Calculation
FMV of Property
=Total Distribution
What is the Order of treatment for corp distributions?
- 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
Formula for Acc. Earnings and profits
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 a “Dividend in Kind”?
Just another way of describing property distributed
How should earnings and profits be treated if Current and Accum. Earnings and Profits are positive?
o Deplete current amount with the dividend first
o Then, deplete the accumulated amount
How should earnings and profits be treated if Current Earnings and Profits are positive, but Accumulated Earnings and Profits are negative?
Deplete only the current amount
How should earnings and profits be treated if both are negative?
The Current Earnings and Profits cannot add to the deficit
What is the resolute of a Stock Redemption?
Capital Gain to the shareholder
What is the treatment of complete liquidation gain treatment?
- If Capital Property, then Capital Gain
- If Non-Capital Property, then Ordinary Income
Note: Gain characterization is the same for both the corporation and the shareholder
What is the treatment of COMPLETE LIQUIDATION LOSS TREATMENT?
- Corporation: Depends on if property is capital in nature, otherwise ordinary loss
- Individual: Capital Loss only
What is the treatment of COMPLETE LIQUIDATION OF A SUB?
No G/L to parent company
What is CONSENT DIVIDEND?
- Consented by the Board of Directors but not yet paid
2. Treat as if distributed by the end of the year
What are PERSONAL HOLDING COMPANIES?
- 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 - 20% tax rate
Formula for Adj. taxable income for PHC?
Taxable Income \+Dividends Received Deduction \+Net Operating Loss -Federal Foreign Taxes -Charitable contributions in excess of 10% limit -Net Capital Loss -Net LTCG over Net STCL (net of tax) = Adjusted Taxable Income
Formula for Undistributed PHC income x 20%
Adjusted Taxable Income -Dividends paid out during year -Dividends paid by 3/15 -Dividends Carried Over -Consent Dividends = Undistributed PHC Income x 20%
What is a CORPORATE ACCUMULATED EARNINGS TAX (AET)?
Not Self-Assessing like a PHC
What is the ACCUMULATED EARNINGS CREDIT?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
Who are S Corp shareholders?
Only Individuals, Estates, and Trusts
Can there be International S Corps?
No. Domestic only!
Can an S Corps can own a C Corp?
Yes, but no Consolidated Return
How many shareholders may an S Corp have?
Up to 100 shareholders allowed
How may classes of stock can a S Corp have?
Only one class of stock allowed
When must election for S Corp status be made?
Must be made by 3/15 and counts as being an S Corp since beginning of the year
What is the allowable tax year for S Corp?
Calendar tax year only
What is the tax return for an S Corp and when is it due?
1120S due 3/15
How much of the shareholders must consent in order to make election?
100% of shareholders must consent
How much of the shareholders must consent to terminate?
50% of shareholders must consent
o No S Corp election allowed 5 yrs after termination
o Termination effective immediately following an act that terminates status
What are the S Corp rules?
- No Foreign Taxes paid deduction allowed - goes on Schedule K
- No Investment Interest expense allowed - goes on Schedule K
- No 179 Deduction allowed
- No 1231 Gain or Loss
- No Charitable Contributions
- No Portfolio Income
S CORPORATION SHAREHOLDER BASIS
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 built-in gains?
- C-Corps that Convert to S-Corps are subject to a tax on the subsequent sale of Corporate Assets
- Prevents a C-Corp from avoiding Double-Taxation by converting to an S-Corp
FMV of Assets @ S-Corp Election Date
Built-in Gain x 35% Corporate Rate
