R3 Flashcards
C Corporation Formation
Corporation - GR: no gain or loss - basis of property is greater of a) adjusted basis (NBV) or b) liability taken on by corp Shareholder - GR: no gain or loss (nontaxable) IF a) 80% control and b) no boot - basis of common stock: cash: amount contributed property: adjusted basis reduced by any debt assumed corp + add gain recognized by shareholder (to bring stock basis to zero) services: FMV (taxable as ordinary income)
if the GR for shareholders doesn’t apply, it’s taxable so property is at FMV
Boot
NBV Assets - Liabilities = boot if negative
Gross Income Differences
Temporary Differences (in tax not in GAAP)
- interest income in advance
- rental income in advance
- royalties in advance
Permanent Differences (in GAAP not in tax)
- interest income from state and municipal obligations
- federal income taxes
- life insurance proceeds on key officer
Form M1 & M3
know them
Domestic Production Deduction
- 9% deduction on less or
a) qualified production activities income (QPAI)
b) taxable income - QPAI = domestic gross receipts - COGS - other directly allocable expenses or losses - proper share of other deductions
- domestic gross receipts are sales of property that’s manufactured, produced, grown, extracted, constructed, etc. in the US
- total deduction may not exceed 50% of W2 wages paid by the corp for a year
Executive Compensation
not deductible over $1,000,000
Bonus Accruals
deductible if paid by 2 1/2 to 3 1/2 months after year end (april 15)
Bad Debts– Specific Charge off Method
- Accrual Basis must use charge-off method
- tax deduction when specific AR is written off
- Cash Basis was never “income” so no tax deduction
- except in case of uncollectible check that has been deposited and recorded
Business Interest Expense
on business: deduct when incurred and paid (same w prepaid)
on investments: up to net taxable investment income
tax-free stuff (like bonds): not deductible
Charitable Contributions
- max deduction of 10% of taxable income
- excess carry forward 5 years
- calculated from income before DRD or charitable cont.
- accruals must be paid by april 15 to be taxable
- taxable income calculation (in another slide)
total taxable income
calculated BEFORE the deduction of
- any charitable contribution deduction
- dividends received deduction
- NOL carry back
- capital loss carrybacks or
- US production activities deduction
Business Losses or Casualty Losses Related to Business
100% deductible
- no $100 reduction or 10% AGI reduction, just reduction for insurance proceeds
- partially destroyed: loss is lessor of
a) decline in value of property or
b) adjusted basis of property before casualty - fully destroyed: loss is adjusted basis
Organizational Expenditures and Start-up Costs
up to 5,000 of organizational expenditures and of start up costs each
- $5,000 + excess/180 months (15 yrs)
- includes: legal services drafting corporate charter, accounting services, and fees paid to the state
- excludes: costs of issuing and selling stock, commissions, underwriter’s fees, and costs incurred in transfer of assets to a corp
tax: 5000 + excess/180 months
GAAP: expense
Amortization, Depreciation, and Depletion
goodwill, covenants, franchises, trademarks, and trade names amortized on straight line basis over 15 years beginning w month intangible was acquired
tax: amortized over 15 year straight line
GAAP: not amortized
Life Insurance Premiums
- Corp named as beneficiary: not tax deductible
- Employee named as beneficiary: tax deductible
Business Gifts
deduct $25 per person per year
Business Meals and Entertainment
50% tax deductible
Penalties and Illegal Activities
Not deductible
Taxes
- state and local taxes and federal payroll taxes are deductible
- federal income taxes are not deductible (add back to book income)
- foreign income taxes may be used as a credit
Lobbying and Political Expenditures
generally not deductible except direct-type lobbying expenses for local governments
Capital Gains and Losses
- capital losses only offset capital gains (unlike individuals who have 3,000 capital loss deduction)
- 3 year carryback 5 year carryforward
- capital gains taxed at ordinary income rates
commonly tested
Net Operating Losses
- same NOL rules as individuals
- carryback 2 carryforward 20
- form 1120X must be filed w/i 3 years
- when calculating NOL don’t use charitable contribution deduction but can use DRD
Inventory Valuation Methods
all taxpayers who have inventory are required to use accrual basis of accounting
- tax method used for acct. purposes must be used for income tax purposes
- cost method
- lower of cost or market method
- rolling-average method
- retail method
- FIFO
- LIFO
- uniform capitalization rules
- more R3-21
General Business Credit
credit may not exceed net income tax less the greater of:
- 25% of regular tax liability above 25,000 or
- tentative minimum tax for the year
net income tax = regular tax + AMT - nonrefundable tax credits
- carryback 1 year carryforward 20 years
deferred taxes are only established for temporary differences
Dividends Received Deduction
- holding period 46 days
percentage ownership | DRD
0 to 20% 70%
20 to 80% 80%
80 to 100% 100% - 0 to 20% referred to as “unrelated”
- DRD is the lesser of:
a) % of dividends received or
b) % of taxable income including charity deduction - EXCEPTION if DRD results in NOL
entities DRD doesn’t apply to (dont take it “personally”)
- personal service corporations
- personal holding companies
- (personally taxed) S corporations
affiliated corporations that file consolidated returns can deduct dividends 100%
Filing Requirements C Corp
April 15 if year end
fiscal years ending June 30, 15th day of 3rd month after close of tax year
Accrual Basis Method required for
- accounting for purchases and sales of inventory
- tax shelters
- certain farming corporations
- business has >$5 million average annual gross receipts for past 3 years
Estimated Payments of Corporate Tax (1/3)
- corps are req to pay estimated quarterly taxes on 15th of 4th, 6th, 9th, and 12th months
- unequal quarterly payments may be used w annualized income method
- underpayment penalty if payments not made and amt owed is 500+
Corporations other than Large Corps pay lesser of
- 100% current year tax or
- 100% prior year tax (can’t be used if last year was <12 months)
Large Corps (taxable income 1 million+) must pay 100% of current year
Consolidated Tax Returns
affiliated group can be taxed as single unit, eliminating intercompany gains and losses
affiliated group means common parent directly owns:
- 80%+ voting power of all outstanding stock and
- 80%+ value of all outstanding stock of each corp
- S corps, foreign corps, real estate investment trusts, some insurance companies, and most exempt organizations CANT FILE CONSOLIDATED RETURNS
- advantages & disadvantages
Brother-Sister Corporations
- can’t file consolidated returns
consolidate
GAAP = 50%+
Tax = 80%+
Corporate AMT (2/3)
20% tax on AMTI - exemption amount
pay the greater of tentative minimum tax or regular tax
4 major tested ares:
- adjustments and preferences and ACE
- exemption formula
- credits available
- minimum tax credit carryforward
Corp AMT adjustments
R3-32
LID inc or dec AMTI
long-term contracts (% of competion must be used for AMT)
installment sale dealer (not allowed for AMT)
depreciation adjustments between 1986 and 1999 (150% declining balance for personal property must be used vs regular tax depreciation which is 200% declining method) *
Corp AMT preferences
PPP inc AMTI
percentage depletion: excess of % depletion over adjusted basis of property
private activity
pre 1987 ACRS excess depreciation
Corp AMT adjusted current earnings (ACE)
MOLDD inc or dec AMTI muni interest income organizational expense amortization life insurance proceeds on key employees difference b/w AMT and ACE depreciation DRD for "unrelated"/70% ownership
ACE adjustment = 75% * difference between unadjusted AMTI and ACE
ACE adjustment can be negative but can’t be greater than the cumulative net postive ACE adjustments
Corp AMT Exemption Amount
exemption amount is $40,000 less 25% of AMTI in excess of 150,000
thus, exemption amount completely eliminated at AMTI in excess of 310,000
Corp AMT allowed credits
- only foreign tax credit allowed
- AMT credits may be carryforward indefinitely
Accumulated Earnings Tax (3/3)
- imposed on C corps w retained earnings > $250,000
- personal service corps entitled to 150,000
- tax rate is 20%
- to avoid unreasonable accumulation, there must be
a) demonstrated specific, definite, plan for use of reasonable needs or
b) need to redeem corporate stock included in deceased stockholder’s gross estate - excuses: charity, capital losses, taxes, dividends paid
Personal Holding Company Tax
- def. of PHC is corp > 50% owned by 5 or fewer individuals and having 60% adjusted ordinary gross income consisting of: NIRD
net rent (if less than 50% of ordinary gross income
interest that is taxable
royalties
dividends from unrelated domestic corporation - taxed 20% on income not distributed
- self assessed tax
Corporate Earnings and Profits
- required for corp income tax return
- start w corp taxable income and apply adjustments
negative adjustments
positive adjustments
postitive or negative adjustments **R3-41
Classification of Distributions
distributions are first applied to current EandP (pro rata) , then to accumulated EandP (chronological order), and then to return of capital
if excess remains, it’s classified as “excess distributions” and reported as capital gain distributions (taxable)
- stock dividends generally not taxable to shareholder, unless has choice of cash or prop.
current andaccu. EandP = dividend income
no EandP = return of capital
no EandP or basis = capital gain distributions
Taxable Amount of Distributions
- for both individual and corp shareholders receiving
cash: amount received
property: FMV - for corporation paying dividend
GR: payment of dividend isn’t taxable, just reduction of EandP
property: gain = FMV property (or liab) - NBV
Stock Redemption *R3-45
proportional
disproportional
??? lol
Corp Liquidation
Corp sells assets and distributes cash to shareholders (taxable event)
- corp recognizes gain or loss = sale price - basis
- shareholders rec. gain or loss = proceeds - stock basis
Corp distributes assets to shareholders
- corp rec gain or loss = FMV - basis
- shareholder rec gain or loss = FMV - stock basis
Tax Free Reorganizations
bc it’s nontaxable, no gain/loss recognized so basis to shareholder would be NBV
- mergers or consolidations Type A
- acquisition stock for stock Type B
- acquisition stock for assets Type C
- dividing corp into separate operation corps Type D
- Recapitalization Type E and
- mere change in identity, form, or place Type F
No gain/loss for parent/subsidiary liquidation
continuity of business in modified form
nontaxable to both corp and shareholder
Worthless Stock Section 1244
when sold or becomes worthless, original stockholder treated as ordinary loss (fully deductible) instead of capital loss
up to 50,000 (100,000 MFJ) any excess is capital loss which offsets capital gains and then max of 3,000 per year deductible
Small Business Stock
noncorporate shareholder who holds SBS for 5+ years generally can exclude 100% of gain on sale or exchange of stock
S Corp Eligibility
- must be individual, estate, or certain trusts
- no nonresident aliens
- corps and partnerships can’t be shareholders
- can’t be more than 100 shareholders
- only 1 class of stock, but diff in voting rights are allowed
Electing S corp status
by march 15 is retroactive to beginning of year
Built-in Gains Tax*
s corp
when 2 conditions occur:
1) C corp elects S corp status and
2) FMV of corp assets > NBV of corp assets on election date
35% tax (highest corp tax rate) on lesser of
- recognized built in gain or
- taxable income of s corp if it were c corp
exemptions
- s corp was never a c corp
- sale/transfer doesn’t occur w/i 10 years since S election is made
- s corp can demonstrate appreciated occurred after s election
LIFO recapture tax
s corp
C corps that elect S corp status must include in taxable income for last C corp year the excess of inventory computed under FIFO over LIFO
Tax on passive investment income
s corp
35% on lesser of net income or excess passive investment income if both are met:
1) s corp has accumulated c corp E&P and
2) passive investment income > 25% of gross receipts
C corp capital loss treatment
carryback 3 carryforward 5 as short term capital loss to deduct from net capital gain or section 1231 gains
Reorganization vs Liquidation
Reorg: taxfree to shareholders & corp
Liquid: taxable to shareholders & corp
C corp formation contributing services
- doesn’t count as part of the 80% test
- services at FMV and included as taxable ordinary income
S corp distribution taxability
E&P = taxable
Return of Capital = nontaxable (decreases basis in stock)
no E&P & no basis = capital gain dist. taxable
taxable income for s corp shareholder is their % of taxable income
taxable income for c corp shareholder is their % of distributions
S corp termination
- if previously c corp and had c corp E&P, then 3 years of 25% passive income will terminate
- majority of shareholders (doesnt matter if voting or nonvoting common stock) agrees to terminate
- can reelect in 5 years
S corp shareholders are taxed on separately stated items even if they aren’t distributed
evan owns 40% of EF. EF distributed 100,000 and reported 200,000 operating income.
What is included in evan’s gross income?
200,000*40% = 80,000 gross income
distribution doesn’t matter bc it’s separately stated
s corp recourse/nonrecourse loans
recourse loans don’t affect basis but will increase at risk
nonrecourse loan will affect basis but not at risk amount
Exempt Org Annual Return Requirement
CHRIST is exempt & 50,000 or less gross receipts
- churches
- high schools religious
- religious orders
- internal support auxiliaries
- societies missionary related
- tax exempt: organized by congress
due may 15
Corporation Life Insurance Proceeds vs Premiums
Life Insurance proceeds on key employees w corp named as beneficiary is a permanent diff so nontaxable
Life insurance premiums
- for key employees w corp named as ben., non deductible
- for employees w employees named as ben, deductible
installment method for tax vs book
- can use for tax
- can’t use for book/federal
Section 501(c)(1) and how to become an Exempt Org
Exempt organization as an act of Congress
almost all other exempt orgs must make written application for exempt status, be approved by the IRS, become incorporated, and issue capital stock
Exempt Org Termination
voluntary- notify the IRS
involuntary- private foundations will terminate when they become public charities
also if foundation commits repeated violations or a willful and flagrant violation of any private foundation provisions
Exempt Org UBI
unrelated business income
- derived from an activity that constitutes as a trade/business, regularly carried on, and not substantially related to the org’s tax-exempt purpose
- must comply w installment payments of estimated taxes
- $1000 deduction for UBI expenses, excess is subject to tax
- there can be a loss, treated as NOL 2/20
