R3 Flashcards
Domestic Production Deduction
- 9% of the:
- lesser of
1. QPAI (qualified production activity income)
2. taxable income disregarding the QPAI deduction
Are federal payroll taxes deductible?
Yes
General Business Credit
- may not exceed NET INCOME TAX LESS the GREATER of:
1. 25% of regular tax liability above $25,000
2. tentative minimum tax for the year
Organizations not eligible for the dividends received deduction (DRD)
- personal service corporations
- personal holding companies
- (personally taxed) S corporations
(don’t take it personally)
How to calculate ACE for AMT purposes
75% of the difference between AMTI & ACE
Corporate Exemption Amount for AMT
*$40,000 less
25% of AMTI over $150,000
Which tax credit is available to corporations for AMT purposes?
Foreign Tax Credit
**can either be a credit or a deduction, but NOT both
What is the corporate AMT tax rate?
20%
What is the tax rate for accumulated earnings tax?
20%
same as dividends since it is a tax on dividends that should have been paid and taxed
Are property dividends taxable?
- they are taxable to the corporation IF they have appreciated in value
- tax is on the gain amount
- amount realized is GREATER of:
- *FMV or liability given up
Stock Redemption & Income Type
- Proportional –> ?
- Disproportional –> ?
- Proportional = dividend income
2. Disproportional = capital gain/loss
Formula to compute the shareholder basis in stock of newly formed corporation
NBV of property transferred \+ FMV of services provided \+ gain recognized - liability given up (100%) - cash (boot) - FMV of personal property (boot) = basis in stock
How long do corporations have to pay out bonuses or charitable deductions if they have been accrued in order to be deductible on the current year’s return?
2 1/2 months (March 15 for calendar year)
Unrelated Investment = ?%
20%
What effect does tax exempt income have on the basis of an S corporation shareholder?
It increases it, even though it is tax exempt
Return Due Dates (assuming calendar year) for:
- Corporation
- Individual
- Tax Exempt
- *assuming calendar year
1. Corporation: March 15
2. Individual: April 15
3. Tax Exempt: May 15
Can you deduct interest expense that was used to acquire tax-free income?
No
Which two taxes is Personal Holding Company tax reduced by?
- federal income tax
2. net long-term capital gain (net of tax)
How long do corporations have to pay out dividends in order to qualify for a reduction used in calculating the Accumulated Earnings Tax?
*due by the tax due date (usually March 15)
Process for determining the Accumulated Earnings Tax
- Start with beginning E&P
- Subtract out “corporation needs”
- Lifetime Credit ($250,000 for regular corp; $150,000 for service corp)
If there is still more E&P…. - Taxable income before
a. DRD
b. NOL
c. charity deduction
d. capital loss carryover - Deduct all: charity, capital losses, and taxes (including federal)
- Deduct dividends
- Subtract out the remaining credit
- Multiply by 20%
When appreciated property is distributed as a dividend, make sure to add this back into E&P before calculating dividend income.
Taxable gain recognized by corporation
Definition of Personal Holding Company
- 50% ownership by 5 or fewer individuals
- 60% or more of income comes from:
N et rent
I nterest (taxable)
R oyalties
D ividends (unrelated corporation)
Estimated Payments of Corporate Tax for:
- Small Corporations
- Large Corporations
- Small Corporations are required to pay the lesser of
a. 100% of tax for current year
b. 100% of tax for preceding year (unless they owed no tax) - Large Corporations ( >$1 million in any three preceding years):
a. 100% of the tax shown on the current year
Underpayment Penalty for estimated payments of corporate tax
Two Conditions
- estimated payments are not made
- amount owed on the return is $500 or more
Unequal quarterly payments may be made for the estimated corporate tax using which method?
annualized income method
Which tax (one of two) comes after determination of AMT?
- Accumulated Earnings Tax
or - Personal Holding Company Tax
Can S corporations consolidate on tax returns?
No
When calculating NOL, which deductions are/are not allowed?
- charitable contribution deduction is NOT allowed
2. dividends received deduction IS allowed
After which deduction is the DRD calculated?
charitable contribution deduction
Special Deductions for Corporation
- dividend received deduction
2. charitable contribution deduction (10%)
Shareholder basis in property received as dividend
FMV (not influenced by the liability; ?only influences the taxable portion?)
Corporation basis in property that was contribution during formation
Greater of:
1. adjusted basis in hands of shareholder + gain RECOGNIZED
or
2. debt assumed by corporation (if it is in excess of the basis of all property contributed e.g. cash)
How to determine gain for corporation on liquidating distribution of intangibles
FMV - basis
*NOT FACE VALUE
3 Requirements in order for no gain to be recognized for start up of corporation
- contribution of PROPERTY only; not services
- transferors hold at least 80%
- boot not involved
*if services are part of the contributed portion, that % is not counted towards the 80% and everyone may have to recognize gain
Dividends Received Deduction
*must hold stock for at least 45 days
0-20% - 70%
21-79% - 80%
80% - 100%
Limited to lesser of:
- amount calculated above
- percentage used above multiplied by modified AGI
EXCEPTION: if it creates or adds to a loss, full amount as calculated up top is used
Calculating REALIZED gain for shareholder in corporation formation
FMV of property contributed - basis
When will the transferor/shareholder recognize a gain when contributing property in the formation of a corporation?
- any boot received
2. liabilities IN EXCESS of basis for the property
Automatic extension for corporate tax return
6 months
Executive Compensation Limit
$1,000,000 for CEO + next 4 highest compensated officers
Bad Debts
- must use specific charge-off method
* only available to accrual basis taxpayers
Business Interest Expense
- incurred & paid
- on investments up to net investment income
- prepaid –> deduct when incurred
Business Losses or Casualty Losses
100% deductible (not subject to 10% or $100)
Partially Destroyed
Lesser of:
1. basis
2. decrease in FMV
Completely Destroyed
1. basis
Organizational Expenditures and Start-Up Costs - Excluded
*issuing, selling, commissions, underwriter’s fees, transfer of assets to a corporation fees
Life Insurance Premiums Deductibility
corporation is beneficiary = no
individual is beneficiary = yes
Business Gift Exclusion
$25
Taxes that are deductible for business
state, local, federal payroll
Are political contributions a type of deduction?
No
Business Net Operating Loss Carryback/forward
2
20
FIFO or LIFO must also be used for tax purposes if elected?
LIFO
Consolidated Tax Return Requirements
**will receive 100% dividend deduction
- own 80% or more of voting power
- own 80% or more of all outstanding stock
Can brother-sister corporations consolidate?
No
Brother-Sister Corporations
- common ownership by an INDIVIDUAL who owns 80% or more of ownership in each company
- cannot be owned by another corporation
Adjustments for Corporate AMT
L ong-term contracts
I nstallment sales
D epreciation (excess taken over SL on books)
Preference Items for Corporate AMT
P rivate activty bond interest
P ercentage depletion
P re-1987 depreciation
ACE
Adjusted Current Earnings
ACE Components
M unicipal bond interest
O rganizational expense amortization
L ife insurance proceeds
D epreciation in excess of amount for AMT
D ividends received deduction ONLY FOR 70%
AMT Exemption Amount
Start with $40,000
Deduct 25% of AMTI over $150,000
Minimum Tax Credit for Corporations
*carried forward indefinitely and used to offset REGULAR tax
Determining E&P
Start with taxable income
- negative adjustments
+ positive adjustments
+/- temporary adjustments
E&P and Dividend Income
Current E&P = pro rata (% of total distribution)
Accumulated = chronological
Current or Accumulated = dividend income
No E&P and basis = capital return and decrease basis
No E&P and no basis = capital gain
Are stock dividends taxable?
No, UNLESS they were taken when an option for cash or other property existed
Corporate Liquidation
taxable event whether assets are sold or distributed to shareholders
Tax Free Reorganizations
A, B, C, D, E, F
- parent/subsidiary liquidation (inherit the basis)
- reorganization must have continuity of business
1244 Stock - Worthless Stock
Requirements
- original owner of stock
- not more than $1,000,000 issued
- first $50,000 is ordinary loss, rest is capital loss
Small Business Stock
- can exclude anywhere between 50% and 100% of gain
* must hold for five years
Eligible Shareholders for S Corporation
100 US shareholders are common
*can have voting and nonvoting stock, but it can only be common stock
S Corporation Election Effective Date
- if it is made before March 15, it can be retroactive to the beginning of the year
- otherwise it begins at the beginning of the next year
Fiscal Year for S Corporation
*must be calendar
S Corporation Built-in Gains Tax
Two Conditions:
- C corporation elects S corporation status
- FMV exceeds the adjusted basis
Exemptions
- wait 10 YEARS to sell
- can show appreciation happened after S status
- never was a C corporation
How are allocations of income made for an S corporation?
- per-share, per-day basis
* losses are limited to the adjusted basis plus direct shareholder loans to the corporation
S Corporation Fringe Benefits
Deductible
*non-shareholder employees and those employee shareholder owning less than 2%
Nondeductible
*shareholders owning more than 2%
S Corporation earnings are taxed regardless of whether these earnings have been _______
distributed
AAA
Accumulated Adjustments Account
- tax effects of distributions since inception
- distribution decreases shareholder’s basis
Loss Limitation for S Corporation Shareholder
*basis + direct shareholder loans - distributions
Is tax-exempt income included in the basis for S Corporations?
Yes
Taxability of Distributions to S Corporation Shareholders
No C Corp E&P
*anything in excess of basis is capital gain
C Corp E&P
- first decrease basis by AAA
- then follow normal E&P rules
S Corporation Status Terminates
- holders of a majority of the corporation’s stock consent to a voluntary revocation
- fails to meet eligibility requirements
- more than 25% of income for past three years has been passive
Re-election time period
5 years
501(c)(3) Corporation Requirements
- no part of the net earnings may inure to the benefit of any private shareholder or individual
- no substantial part of the activities may be non-exempt activities
- the organizations may not directly participate or intervene in any political campaign
509 Private Foundations Requirements
- file Form 990-PF
- involuntary termination - become public charity
- voluntary termination
Unrelated Business Income (UBI)
- derived from an activity that constitutes a trade or business
- regularly carried on
- not substantially related to the organization’s tax-exempt status
Taxation of UBI
File form 990-T
- $1,000 Specific Deduction
- BINGO games are not UBI so long as they are limited by state law
Annual Filing Requirements for NFP
Due: May 15 File Form 990 Exempt: $50,000 or less in gross receipts C hurches H igh schools - religious R eligious orders I nternal support activities S ocieties - missionary T ax-exempt as dictated by Congress
Controlled Taxpayer
*any one of two or more taxpayers owned or controlled directly or indirectly by the same interests
Controlled Transaction
*any transaction or transfer between two or more members of the same group of controlled taxpayers
Uncontrolled Comparable
*the uncontrolled transaction or uncontrolled taxpayer that is compared
Arm’s Length Standard
*IRS adjustments necessary to determine true taxable income that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction or transfer
Avoidance of Penalties for Transfer Pricing
Section 482 Study
Competent Authority
Advance Pricing Agreement Program
State Income Tax Considerations
- property, payroll, sales
- Federal Limitations on a State’s Right to Impose Income Tax
- *only business consists of solicitation of orders
- *orders are sent outside the state for approval or rejection
- *orders are filled by shipment or delivery from a point outside the state
