Corporations and S-Corps Flashcards
Schedule M-1
See notes.
Corporate Reorganizations
No gain or loss recognized by the corporation or the shareholder.
Distributions
A distribution is a dividend that is included in the recipient’s gross income to the extent that it is made from the current or accumulated earnings and profits (E&P) of a corporation.
Any additional distribution is treated by the shareholder as a nontaxable return of capital to the extent of the shareholder’s basis in the stock
Complete liquidation
The amount realized on the liquidation of a corporation is the amount of money received plus the FMV of property received. The recognized gain is the amount by which this exceeds adjusted basis of the corporation’s stock.
Net Capital Gains / Losses
Corps capital losses only deductible to extent of capital gains if no capital gains then cannot deduct against ordinary income. – This is different for individuals
Carried back 3 years and forward 5
Treated as a STCL in a carryover year
Subsidiary Liquidation
When a subsidiary is liquidated into its parent pursuant to a plan of reorganization, no gain or loss is recognized on distribution of assets. As no gain or loss is recognized, the basis remains the same in the hands of the parent as it was in the subsidiary.
Section 351 Exceptions
When property other than stock is received in a Sec. 351 transfer, any gain is recognized to the extent of the lesser of the realized gain or the amount of other property received
The amount of the shareholder’s liability assumed by the S corporation is treated as recognized gain from the sale or exchange of an asset only to the extent it exceeds the adjusted basis of all property contributed by the shareholder
Sec. 357(a) provides that the transfer of the mortgage on the building does not prevent the exchange from qualifying under Sec. 351(a) because tax avoidance was not the purpose of the liability assumption
NOL of Corporation
Carried back 2 years and forward 20
Charitable contributions not allowed in computing NOL
Allowable depreciation may not create / increase an NOL
Must be applied to earliest tax year and used to fullest extent
Can carryback an NOL and create a refund (just file an amended return)
NOL of Corporation
Carried back 2 years and forward 20
Charitable contributions not allowed in computing NOL
Allowable depreciation may not create / increase an NOL
Stock Redemptions
The general rule is that a corporation does not recognize gain or loss on the distribution of property with respect to its stock. But a corporation that distributes appreciated property must recognize gain equal to the excess of the FMV of the property over its adjusted basis, as if the stock were sold to the distributee immediately before the exchange.
Passive Activity Losses in relation to Coporations
The passive activity loss rules apply to individuals, estates, trusts, closely held corporations, and personal service corporations. A corporation is considered closely held if, at any time during the last half of the year, 50% or more of the value of its stock is held by five or fewer individuals. The passive loss rules do not apply to widely held corporations, which would be any other C corporation
Distribution of Stock Rights
a shareholder does not include a distribution of stock or rights to acquire stock in gross income unless it is (1) a distribution in lieu of money, (2) a disproportionate distribution, (3) a distribution on preferred stock, (4) a distribution of convertible preferred stock, or (5) a distribution of common and preferred stock, resulting in receipt of preferred stock by some shareholders and common stock by other shareholders.
Corporation Sale of Stock
A corporation does not recognize any gain or loss on the sale or exchange of its own stock, including treasury stock. Ral Corp. should report no gain.
S Corp Pro Rate
Sec. 1377(a) defines pro rata share as the taxpayer’s share of loss determined on a per-day and then a per-share basis. Therefore, the amount of loss allocated to George is $4,537 ($72,000 × 12.5% × 184 ÷ 365).
Unique Accrual / Charitable Contribution Rule
A corporation that reports income on the accrual basis may elect to treat a contribution as paid (and therefore deductible) during the taxable year if the board of directors authorizes the contribution during such year and the contribution is paid within 2 1/2 months following the close of the taxable year.
Deductions are limited to 10% of adjusted taxable income.
Distributions
A corporate distribution is taxable to the recipient to the extent that it comes from accumulated or current earnings and profits [Sec. 301(c)(1)]. Any remaining distribution is treated as a return of capital.
If the distribution does not come out of E&P and is a return of capital, this reduced the basis of the individual shareholder.
Consolidated Returns
A corporation must own 80% of the total voting power and 80% of the total value of the stock (excluding certain preferred stock issues) in order to file a consolidated return.
Personal Holding Company Tax
Personal holding company tax is an additional tax assessed to corporations that are owned by 5 or fewer individuals and having 60% of their adjusted gross income consisting of net rent, interest, royalties, and dividends.
Corporation- Capital Losses
A corporation may deduct capital losses in the tax year incurred but only to the extent of capital gains (without regard to whether they are short or long term).
Deductions for Charitable Contributions
Deductions for charitable contributions are limited to 10% of taxable income before any charitable contributions and any dividends-received deduction. The charitable contribution deduction is computed as follows:
To calculate 10%- add dividends but do NOT take DRD
Dissenters (Appraisal) Rights
A shareholder with dissenters’ rights may demand that the corporation purchase the shares for their fair value in cash immediately before the action is taken, plus interest accrued from that date to the date of payment (RMBCA).
Accumulated Earnings Credit
Is the greater of
(1) the difference between $250,000 and the accumulated earnings and profits at the end of the prior year or
(2) the difference between current earnings and profits retained for the reasonable needs of the business (minus the long-term capital gain adjustments of the current year) and the accumulated earnings and profits at the end of the prior year.
Redemption in Partial Liquidation
The shareholder will treat any gain on the redemption as a capital gain. The amount of the distribution is the FMV of the property.
DRD Ownership %s
Less than 20% = 70% deduction
Between 20% and 80% = 80% deduction
Greater than 80% = Full deduction
Deduction is lesser of:
80% of dividend income
80% of taxable income without DRD
Complete Liquidation
Sec. 336(a) provides that a corporation should treat a complete liquidation as a sale using the fair market value. However, Sec. 336(b) requires that the fair market value used should not be less than any liability accepted by the distributee. Since Len is transferring property with a liability of $38,000, which is higher than the $35,000 FMV, the $38,000 is used as the new FMV.
DRD
The distributee corporation must own the distributing corporation’s stock for more than 45 days (90 days for dividends more than a year in arrears received on preferred stock) to qualify for the dividends-received deduction.
Extensions
Generally, a corporation is allowed an automatic extension of 6 months for filing its income tax return if the corporation files the appropriate form (7004) and pays its estimated unpaid tax liability on or before the due date of the return. However, until tax year 2026, June 30 fiscal-year C corporations are given 7 months
Charitable Contributions
Ccharitable deduction is limited to 10% of taxable income computed before the
charitable contribution deduction,
net operating loss carryback,
capital loss carryback, and the
dividends-received deduction.
Include dividend income in the 10%
Carried forward 5 years. No carryback allowed
Casualty Losses
Casualty losses are deductible. The $100-per-loss and 10%-of-AGI floors apply to personal, not business, losses. When business property is completely destroyed, the amount deductible is the property’s adjusted basis immediately before the loss;
Organizational Costs
s
Estimated Taxes
Sec. 6655(b) provides that a corporation will not be considered to have underpaid its income tax if it pays the lesser of (1) 100% of the tax shown on the return for the tax year or (2) 100% of the tax shown on the return for the preceding year. The definition of tax for this purpose is found in Sec. 6655(f). This definition includes the alternative minimum tax.
Under Sec. 6655(d), the minimum installment is 25% of the required annual payment (the lesser of 100% of current tax or 100% of preceding year’s tax).
Sec. 6655(e) requires that the estimated payment in the subsequent quarter be large enough so that 100% of the shortfall is paid in. A corporate taxpayer who continues to use the annualization exception for making its estimated tax payments will, in later quarters, have paid in 100% of the tax due on the new annualized income
AET Tax
PHC are exempt from this tax
Foreign Tax Credt
The maximum amount of foreign taxes that may be credited is the proportion of the taxpayer’s tentative U.S. income tax (before consideration of the Foreign Tax Credit) that the taxpayer’s foreign taxable income bears to the taxpayer’s worldwide taxable income for the year. The proportion of Jackson’s foreign income to its worldwide income is $125,000 ÷ $500,000. Therefore, Jackson’s allowable Foreign Tax Credit for 2016 is limited to $50,000 × ($125,000 ÷ $500,000), or $12,500.
A deduction is allowed for foreign income taxes paid or accrued during the taxable year. Alternatively, both individual taxpayers and corporations may claim a Foreign Tax Credit on income earned and subject to tax in a foreign country or U.S. possession. One may not claim both the deduction and the credit.
E&P
Pitkin Theatres, Inc., distributes land to its sole shareholder. The land is valued at $30,000 and has a basis of $10,000. The land is subject to a $16,000 mortgage, which the shareholder assumes. Pitkin has $20,000 in earnings and profits. Ignoring any potential effect of any taxes on the distribution, the net effect of the transaction on earnings and profits (E&P) is
E&P are increased by current E&P and decreased by the corporation’s distributions to its shareholders. A distribution of appreciated property increases E&P by the gain recognized on the distribution ($20,000) and decreases E&P by the FMV of the property ($30,000) net of any liability assumed by the shareholder ($16,000). Therefore, Pitkin’s E&P will have a net increase of $6,000 ($20,000 – $30,000 + $16,000).
Tough Question to Look Over
You transfer property with an adjusted basis of $20,000 and a fair market value of $31,000 in exchange for 100% of the stock in a new corporation. You receive 100 shares of stock having a fair market value of $16,000 and $10,000 in cash. The corporation also assumes a $5,000 mortgage on the property. Which of the following is correct?
The gain realized on this transaction is $11,000 [($16,000 FMV of stock + $10,000 cash + $5,000 assumption of liability) – $20,000 adjusted basis of transferred property]. However, the transaction qualifies under Sec. 351 for nonrecognition. Transfer of mortgaged property to a controlled corporation does not require the recognition of gain unless the liabilities transferred or assumed are greater than the basis of all the property transferred. Accordingly, the only gain that must be recognized is the gain attributable to the amount of boot property received. The $10,000 cash received is boot property.
When distributing appreciated property unusual chain of events needs to be understood
1) Corporation has no E&P (dividend would not be taxable income)
2) Corporation distributes appreciated property
3) Corporation has a recognized gain
4. ) Corporation gain increases/ creates corporate E&P
5. ) Dividend to shareholder is now taxable (to the extent of E&P)
Types of Reorganizations
A - Merger or consolidation
B- Stock for stock
C- Acquisition of one corporation for another corps assets
D- Dividing the corporation into 2 separate entities
E- Recapitalization
F- Mere change in identity, form, or place of organization.
S-Corp Accumulated Adjustments Acount
Increases: Seperately and non-separately stated income and gains (except from tax-exempt income and certain life insurance polices)
Decreases: Distributions. may not go below zero Seperately and non-separately stated expense and losses
Net business income (S-Corp)
Net business income includes all income and deductions that are not separately stated. Separately stated items include (1) Sec. 1231 gains and losses, (2) net short-term capital gains and losses, (3) net long-term capital gains and losses, (4) dividends, (5) charitable contributions, (6) taxes paid to a foreign country or to a U.S. possession, (7) tax-exempt interest and related expense, (8) investment income and related expense, (9) amounts previously deducted, (10) Real estate activities, (11) Sec. 179 deductions, (12) credits, and (13) deductions disallowed in computing S corporation income. Therefore, net business income equals $46,500 [$50,000 (net business income) – $3,500 (business expense)]. Since dividends are a separately stated item, they are not included in net business income.
Organizational Costs
S corporations. Sec. 248 allows corporate organizational costs to be amortized over a period of not less than 180 months. Up to $5,000 of organizational expenses may be deducted in the taxable year in which the business begins. The $5,000 is reduced by the amount by which the cumulative costs of the organizational expenditures exceed $50,000.
S-Corp Distributions
For 2016, VBN, an S corporation, has accumulated earnings and profits (E&P) of $50,000 and a zero balance in its accumulated adjustment account. VBN distributes $230,000 to its sole shareholder, Raymond. His basis in the stock is $140,000. How should Raymond handle the distribution?
Since the S corporation does not have an accumulated adjustment account balance, any distribution is first treated as a dividend to the extent of accumulated E&P. After the accumulated E&P balance is reduced to zero, any distribution remaining will reduce any remaining basis of the shareholder’s stock, and then any remainder will be treated as a capital gain from the sale of property. Therefore, Raymond will handle the distribution by treating $50,000 as a taxable dividend, $140,000 as a return of capital, and $40,000 as capital gain.
Distributions of Appreciated Property
When appreciated property is distributed, the corporation recognizes a gain equal to the excess of the FMV of the property over the adjusted basis. The E&P are increased by the recognized gain ($40,000) and decreased by the FMV of the property distributed ($50,000). Therefore, the net effect of the distribution is a decrease of $10,000.
