R3 - Corporations Flashcards
When does a shareholder NOT recognize a gain from incorporation?
BOTH conditions are met:
- Gets 80% control
- Boot is NOT received by the shareholder
Corporation basis - general rule and exception?
The basis is the GREATER of:
- Adjusted basis + gain recognized by the shareholder
- Debt assumed by the corporation
Exception: total AB > total FMV
then the basis is total FMV
What is shareholder’s stock basis?
ADD:
Cash contributed
Asset NBV less liabilities assumed by the corp
Any gain recognized
LESS:
cash received
FMV of non-money boot received
What happens if the shareholder contributes services to the corporation?
Recognize FMV as ordinary income
If services is the only thing you contributed, you don’t count as part of the 80% control group
What kind of income is recognized in current year even though it is received in advance of accrual GAAP?
Interest
Rent
Royalty income received in advance
How is DPAD calculated?
9% of the lesser of:
- QPAI
- Taxable income without DPAD
The end amount is limited to 50% of the wages paid by the corporation for the year
What activity or service counts as domestic production gross receipts?
Manufactured, produced, grown
Extracted (natural resources)
Constructed
Services - engineering and architectural
How is executive compensation limited?
If publicly held and NOT under qualifying commission or performance based plan (nice loophole)
Then cannot deduct more than 1 million paid to CEO or other four most highly compensated officers
How are bonus accruals for employees and officers accounted for?
Officers - temporary M-1
Employees - can deduct if paid within 2.5 months after year end
How are bad debts accounted for?
Accrual - direct write-off only
Cash - no bad debt because no AR
How is prepaid interest accounted for by an accrual taxpayer? Cash taxpayer?
The same!!!
Prepaid interest expense must be allocated to the period it’s related to, whether or not you are cash basis
How is charitable contribution limited?
10% of taxable income, which is income before: Dividends received DPAD NOL carryback Capital loss carryback
Ok to deduct if accrued and paid within 2.5 months of year-end
How are business casualty losses accounted forks property is partially destroyed? Fully destroyed?
Partially - the lesser of decline in FMV or adjusted basis
Fully - adjusted basis ONLY
In either case must reduce by the insurance proceeds
How are organizational and start up costs accounted for?
Can expense 5,000 immediately.
Reduce 1 for 1 if over 50,000
The rest is amortized over 180 months (5 years) from the moth business started operations
What costs are NOT organizational?
Issuing or selling stock
Commissions
Underwriter fees
Costs incurred in the transfer of assets to the corporation
How are intangibles amortized?
SL over 15 years
When are lobbying expenses deductible?
When it’s direct type in connection with LOCAL governmental lobbying
How are capital gains accounted for by corporations?
No deduction in current tax year.
Carry back 3 years, carry forward 5
As SHORT TERM ONLY and no special rates for cap gains
How is NOL calculated and accounted for?
No charitable contribution is allowed in calculating NOL
carry back 2, carry forward 20
Which inventory valuation methods are not allowed for tax purposes?
Prime cost (no overhead) Direct cost (variable overhead only) Rolling average under certain circumstances (fluctuation in price)
When can LIFO be used for tax purposes?
If elected in the 1st year and the financial are accounted under LIFO as well
What if your inventory is unusable or unsellable?
Must be valued at the expected selling price within 30 days
Less the disposition costs
What is the time frame to qualify for dividends received deduction?
Must own for at least 46 days
During 91-day period
Beginning on the date 45 days before ex-dividend date
I.e. owned 45 days before or after
Dividend received deduction percentage?
0-20% ownership - take 70% Unrelated
21-79% - take 80%
80-100% - take 100%
What is taxable income limitation for DivRD?
Limited to the lesser of:
calculated percentage 70/80/100
Corresponding percentage of taxable income before NOL or capital loss
EXCEPTION: if using tentative DRD creates a loss and corresponding amount doesn’t - use DRD
be a loser
To which entities does DivRD NOT apply?
S corporations
Personal service corporations
Personal holding companies
Who is permitted a constant 100% DivRD?
Small business investment corporation
What are MACRS percentages in regard to type of property?
3-10 year class - MACRS 200
20 year class - MACRS 150
When is mid-quarter convention used?
When 40% or more of DEPRECIABLE property (no land!) is placed in service in the last quarter of the year
What are section 179 rules in regard to SUVs?
25,000 limit
SUV is 6,000 - 14,000 gross weight
But not a heavy pickup truck or a van
Is the taxpayer limited to MACRS only? Are there other options?
May elect to depreciate on SL basis
In this case may choose between regular recovery period or ADS (alternative depreciation system)
How can depletion be accounted for?
- Cost depletion
2. Percentage depletion (5-22%) - limited to 50% of taxable income unless oil or gas property - then no limit
How are research expenses amortized?
Over 60 months
as opposed to all other intangibles amortization of 180 months
What is sec 1231 property and what is its treatment?
Depreciable personal and real property held for over a year
LTCG treatment (0-15%) but ordinary loss (no netting) Best of both worlds
What is sec 1245? How are gains and losses accounted for under it?
Upon sale - the lesser of gain recognized OR!!! accumulated depreciation is recaptured as ordinary income, the rest is 1231
No losses under 1245
What is sec 1250? What is the general rule for recapture under this section?
Real property only, gains only
Recaptures only part of depreciation taken IN EXCESS of straight line
Generally applies to assets placed in service before 1987 because now real property must be SL
What is the amount of total taxable recapture as ordinary income under sec 1259 for corporations?
Ordinary income under 1250 + 20% of SL depreciation
Limited to recognized gain
The remainder is taxed at 25% maximum
Who is required to use accrual basis of accounting?
Inventory
Tax shelters
Certain farming corporations
If 5,000,000 of average gross receipts in 3 years and you are:
a corporation
a partnership with a C corp as a partner
a trust with unrelated business income
When is a corporation required to make estimates? Is there a penalty?
Always
May be unequal payments if using annualized income method
Underpayment penalty is assessed if the amount owed in over $500
What is a large corporation? How does being a small corp affect you?
Large - had taxable income of 1,000,000 or more in any 3 prior years
Must pay 100% of CURRENT year tax - the only option
Small has a choice of paying 100% of prior year tax
But NOT when prior year was a short year or there was no tax
Which entities are NOT allowed to file a consolidated return?
S corporations Foreign corporations Real estate investment trusts - most of them Exempt organizations - most of them Insurance companies - some of them
What is corporate AMT rate?
20% of (AMTI - exemption)
What is the very first starting point for calculating AMT?
Taxable income before NOL
What are the corporate AMT adjustments?
PIE/LIE
P - percentage of completion VS completed contract
I - installment sales
E - excess depreciation of property in service after 1986 over
SL-40 for real and 150DB for personal
What are corporate AMT preferences?
Same as individuals
P - private activity bonds
P - percentage depletion over adjusted basis
P - pre-1876 over SL
What goes into ACE adjustment?
M - muni interest
I - increase in CSV of life insurance
N - non-SL depreciation after 1989 vs ADS
D - DivRD if 70%
How is ACE adjustment for AMT calculated?
75% of (AMTI before AMT NOL - less ACE)
Can be positive or negative
What is corporate AMT exemption?
40,000 - 25%(AMTI - 150,000)
Almost the same as MFJ (45,000)
What is the only credit allowable for corporate AMT?
Foreign tax credit
How can AMT be used in future years?
As a credit against minimum tax
Carry forward indefinitely
What is accumulated earnings tax? How is it calcuted?
15% on accumulated retained earnings over 250,000
Lifetime amount
IRS assessed!!! As a result of audit
What is the accumulated earnings amount that a personal service corporation won’t get taxed on?
150,000 as opposed to 250,000
Who is exempt from accumulated earnings tax?
Personal holding companies
Tax-exempt corporations
Passive foreign investment corporations
How can a corporation avoid accumulated earnings tax?
Demonstrate reasonable needs for earnings accumulation
Need to redeem corporate stock included in deceased shareholder’s estate
What are the qualification criteria for personal holding company?
- Corporation, more than 50% owned - directly or indirectly - by 5 people or less during the last 6 months of taxable year
- 60% or more of adjusted ordinary gross income comes from:
- net rent
- taxable interest
- royalties other than mineral, oil, gas or copyright
- dividends from unrelated corporation
What are tax rates for personal holding corporation?
15-25%
Additional 15% tax on net income not distributed - self-assessed!
What is the taxable base for additional tax for PHC?
Taxable income
Less: federal income tax
Less: net long-term capital gain, net of tax
What is a personal service corporation and what are its tax rates?
Accounting, law, consulting, engineering, architecture, health and actuarial science
Flat rate of 35%
Name always negative E&P adjustments (7)
All non-deductible items:
Federal income tax Non-deductible penalties, fines, political contributions etc Meals and entertainment Officer's life insurance premiums Expenses for producing tax exempt income Non deductible charity Non deductible capital losses
Name always positive adjustments to E&P
Refunds of federal income tax paid Tax exempt income Refunds of items not subject to regular tax under tax benefit rule NOLs Capital loss carryover Charitable contribution carryover Life insurance PROCEEDS Increase in CSV of life insurance Non taxable cancellation of debt DivRD
Name 4 general dividend categories
Current E&P - taxable dividend
Accumulated E&P - taxable dividend
Return of capital (no E&P) - reduction of basis
Capital gain distribution (no E&P and no basis)
What are dividend categories for preferred shareholders?
None. It’s always a taxable dividend no matter what
If you have dividends from both current and accumulated E&P, how are they allocated?
Current - pro rata
Accumulated - chronological order
Give examples (4) if constructive dividends
Excessive salaries to shareholders
Excessive rents and royalties
Loans to shareholder with no intent to repay
Sale of assets below FMV
Are stock dividends taxable?
Generally not, unless given a choice of cash or property
In which case it’s FMV at distribution date
What happens if the corporation distributes appreciated property as a dividend?
It recognizes gain as if the property has been sold (FMV - adjusted basis)
The corporation cannot recognize a loss though
How is stock redemption accounted for by the shareholder?
If proportional - taxable income
If disproportional - capital gain. Basically a sale of stock initiated by the shareholder. Other shareholders didn’t sell
Less than 50% after redemption and new ownership is less than 80% of old ownership
Name reorganization types by letter
A - merger/consolidation
B - stock for stock
C - stock for assets
D - division into separate operating corporations
E - recapitalization
F - mere change in identity, form or place
Are reorganizations taxable?
If shareholder recognizes gain from boot - yes
Otherwise generally non taxable
What are the requirements for nontaxability of reorganizations?
Continuity of business - acquiring corporation must continue the business of the old entity or use a significant portion of its assets
Control requirement - 80% of voting and other classes of stock
What happens if a corporation’s stock becomes worthless (from the shareholder’s perspective)? Qualifications?
Must be an ORIGINAL shareholder of up to $1 million worth
Purchased for cash or property, NOT services rendered!
Ordinary loss up to 50,000 (100,000 MFJ), everything over is capital
Shareholder can be an individual or a partnership
What makes small corporation stock qualified for gain exclusion?
C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business
Name eligible shareholders of S corporation
Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK
How to become an S corp?
ALL shareholders consent, whether voting or non voting
If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year
What are three corporate-level tax that an S corp is subject to?
LIFO recapture
Built-in gains
Tax on passive investment income
How is LIFO recapture calculated and when is it applicable?
Changing from C to S
Excess of inventory under FIFO over LIFO
C corp pays the 1st installment with the final return
S corp pays the other 3
How can an S corp avoid built-in gains tax?
If it was never a C corp
Or doesn’t sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years
How is built in tax calculated?
35% on the lesser of:
UNREALIZED built-in gain. FMV - adjusted basis
Taxable income if it were a C Corp
When and how is an S corp taxed on passive investment income?
35% on the lesser of:
Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts
PII does not include gain on sale of securities
What makes small corporation stock qualified for gain exclusion?
C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business
Name eligible shareholders of S corporation
Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK
How to become an S corp?
ALL shareholders consent, whether voting or non voting
If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year
What are three corporate-level tax that an S corp is subject to?
LIFO recapture
Built-in gains
Tax on passive investment income
How is LIFO recapture calculated and when is it applicable?
Changing from C to S
Excess of inventory under FIFO over LIFO
C corp pays the 1st installment with the final return
S corp pays the other 3
How can an S corp avoid built-in gains tax?
If it was never a C corp
Or doesn’t sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years
What makes small corporation stock qualified for gain exclusion?
C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business
Name eligible shareholders of S corporation
Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK
How to become an S corp?
ALL shareholders consent, whether voting or non voting
If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year
What are three corporate-level tax that an S corp is subject to?
LIFO recapture
Built-in gains
Tax on passive investment income
How is LIFO recapture calculated and when is it applicable?
Changing from C to S
Excess of inventory under FIFO over LIFO
C corp pays the 1st installment with the final return
S corp pays the other 3
How can an S corp avoid built-in gains tax?
If it was never a C corp
Or doesn’t sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years
When and how is an S corp taxed on passive investment income?
35% on the lesser of:
Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts
PII does not include gain on sale of securities
What is the basis limitation for an S corp shareholder?
Adjusted basis of stock
Add: direct loans TO corporation
Subtract: distributions
+/- current income or loss
Does tax exempt interest increase S corp shareholder basis?
Yes!
Are fringe benefits deductible?
Employees - yes
More than 2% shareholders - no, UNLESS included in W-2
What increases and decreases AAA?
Increase:
Income and gains - EXCEPT tax-exempt income and life insurance proceeds
Decrease:
Expenses and losses
Non-deductible expenses - EXCEPT life insurance premiums
Distributions - not below $0
How are distributions treated if an S corp has former C corp E&P?
- First to the extent of AAA - non taxable
- Second to the extent of E&P - dividend
- Third to the extent of stock basis - reduction
- Over basis - capital gain
How can an S corp status be terminated?
Majority vote
Getting a corporate and/or foreign shareholder
Have more than 25% of gross receipt come from passive investment income while the corporation had C corp E&P all along
A re-election only in 5 years
What is a 501(c)(1)?
US Instrumentality –> does NOT need an application
Federal credit union
What is a 591(c)(2)?
A corporation organized solely to hold title to property, collect income from it and turn it over to an exempt organization.
Issues capital stock
Files Form 1024
What is a 501(c)(3)?
Are there any prohibited transactions?
Plain vanilla nonprofit
Cannot:
Influence legislation
Political campaigns
What is a section 509?
What isn’t a section 509?
Private foundation
NOT a PF:
1. Most charitable donees
2. Publicly supported organizations
More than third from members and public
Less than third from investment and UBI
3. Supporting organizations
4. Public safety testing organizations
What if a 509 voluntarily terminates?
Subject to a termination tax payback of the lesser of:
Aggregate tax benefits
Net assets
OR distribute all assets to a 50% charity
OR operate as a charity for at least 5 years
What it UBI?
Activity from trade or business
Regularly conducted
Not substantially related to exempt purposes
What are the ownership rules in regard to UBI?
The foundation may own up to 20% of business enterprise
If there are third parties - may go up to 35%
What is generally excluded from UBI?
Interest, dividends, royalties, annuities from noncontrolled organizations
Rents, if the property is OWNED (not debt-financed)
Gains and losses
Income from research
Allowed by state law - bingo!
How to qualify for 990-EZ?
Total receipts less than 200K
Total assets less than 500K
Who is not required to file 990?
CHRIST 5000! Or CRIMC 5,000 or less gross receipts Church High school - religious Religious orders Internal support auxiliaries Societies that are missionary related Tax exempt by Congress
When and how is an S corp taxed on passive investment income?
35% on the lesser of:
Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts
PII does not include gain on sale of securities
