R3-M1 C-Corp Overview Flashcards
C-Corp Business interest expense deduction
- Limited to the sum of
-business interest income
-30% of the adjustable taxable income (ATI)
-Floor plan financing interest expense
ATI: Adjusted Taxable Income for the year EXCLUDING all interest income and interest expense.
Floor Plan financing: debt used to acquire motor vehicles held for sale or lease where the debt is secured by the acquired inventory: won’t see this on the exam.
- Disallowed business interest expense can be carried forward indefinitely.
- Limitation does not apply if average gross receipts are $30 millions or less (2024) for the prior three taxable years
Problem-Solving Steps:
1. calculate the average gross receipts for the prior three taxable years to see if the limitations apply.
2. If limitations do not apply, then the full CY business expense interest expenses are deductible and so are the PY carryovers
3. If limitations apply, follow the limitation calculation.
C-Corp Charitable Contributions Deduction
- Donations to a qualifying organization are allowed to a max. deduction of 10% of their taxable income
- Taxable income is calculated without regard to:
-any charitable contribution deduction
-the dividends-received deduction (DRD)
-any capital loss carryback
-NOL carryback - Any capital loss and NOL carryovers are still deducted when calculating the charitable contributions taxable income limitation.
- Any disallowed charitable contribution may be carried forward for 5 years
- Any accrual must be paid within 3.5 months of the taxable year-end to be deductible
- When taxable income before charitable contributions and DRD is negative, the charitable contributions deduction is zero.
Individual Charitable Contribution Deduction
(R1-M5)
- Charitable contribution may be in the form of cash or property.
- The amount of the deduction for contribution depends on whether the property is ordinary income or LT capital gain property.
The amount of the deduction for ordinary income property is the lesser of:
–the property’s adjusted basis
–FMV at the time it is contributed
The amount of the deduction for the LTCG property is its FMV at the time of contribution.
- AGI limitation on Amounts of Deduction.
-Cash contribution deduction:
60% of AGI for contribution made to both public charities and private operating foundations;
30% of AGI to private nonoperating foundations.
-Ordinary income property contribution deduction:
50% for both public charities and private operating foundations
30% of AGI for private nonoperating foundations
-LTCG property contribution:
30% of AGI to both public charities and private operating foundations.
20% of AGI to Private Nonoperating Foundations
- carryforward for 5 years
Dividends-Received Deduction (DRD)
the Corp DRD is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period of more than 45 days.
Percentage decision:
1. ownership 0% to <20%, DRD is 50% (Considered “Unrelated”)
2. Ownership 20% to 80%: DRD is 65%
3. Ownership 80% or more: DRD is 100% (“Consolidated”).
The DRD equals the lesser of:
1. 50% (or 65%) dividends received
2. 50% (or 65%) of taxable income computed without regard to: the DRD, any NOL carryforward, or any capital loss carryback
Until creating a loss, then pick the greater one.
Any capital loss carryovers are still deducted when calculating the DRD taxable income limitation
Selection of an accounting method for tax purposes by a newly incorporated C Corporation
- The selection of an accounting method for tax purposes by a newly incorporated C Corporation is made on the initial tax return by using the chosen method.
- It does not have to be disclosed in the company’s organizing documents
- It is not made by filing a request for a private letter ruling from the IRS. A private letter ruling is a request for the IRS to rule in advance on a special set of facts.
- It does not have to be first approved by the company’s BOD.
Accrual Method of Accounting for C Corp
- must use accrual method of accounting when the business has more than $30 million in average sales for the three-year period ending with the prior tax year.
- must be used by tax shelters, and manufacturers.
- compensation expense for an accrual basis taxpayer is taken on the return for the year in which the expense accrued because it was paid within 2.5 months of year-end
Cash basis of Accounting use
- used by a qualified personal service corporation
- The IRS has the authority to require that a taxpayer use a method of accounting to accurately reflect the proper income and expenses.
Proceeds from insurance on the death of an officer where the corporation is the owner and beneficiary
- the proceeds are not includable in the taxable income of a corporation
- Because of the info in 1, any expense related to the premiums would not have been tax deductible for the corporation
Treatment of expenses owed by an accrual-basis corporation to a cash-basis shareholder who owns at least 50% of the corporation’s stock
not deducted by the corporation until the expense is actually paid in cash to the shareholder
Compensation expense treatment
- Corporations are allowed to deduct reasonable compensation paid to shareholder-employees.
- If the IRS determines that part of a shareholder’s salary is unreasonable, it may reclassify part of the salary as a dividend.
- This decreases the corporation’s deductible salary expense and increases the corporation’s nondeductible dividends.
- The reclassification portion of the shareholder’s salary is taxed to the shareholder as a dividend, which is taxed at preferential tax rates, rather than as salary, which is taxed at ordinary tax rates.
Organizational cost & Start-up cost deduction and amortization
- Organization cost: Legal fee, fees paid for accounting service, and fees paid to the state of incorporations.
Organizational costs of a corporation may be amortized over a period of not less than 180 months.
- The taxpayer may elect to deduct up to $5K in Year 1, subject to a $50K total expenditure limitation. excess of $50K is dollar-for-dollar deduction from 5K. then the remaining will be amortized over 180 months
- therefore Year 1 deductible organizational expense is the immediate deduction and the excess amortization
Illegal activities
- A gain from an illegal activity is includible in income.
- To determine the gain, a deduction is permitted for cost of merchandise.
- Business expenses for operating a illegal business, other than the cost of merchandise, are not permitted as deduction.
Business gift deduction
- Business gifts are deductible up to a maximum deduction of $25 per recipient per year.
0Inventory Evaluation
- The LIFO method can be used for tax purpose ONLY if the LIFO method is used for financial statement purposes.
- The taxpayer is NOT required to receive permission each year from the IRS to continue the use of the LIFO method.
Capital Gain/Loss deduction
to C Corp:
1. $0 net capital loss deduction in the current year.
2. net capital loss have a 3-year carryback and 5-year carryforward to offset only capital gain.
- Capital gain tax rate is the same as ordinary income tax rate
For Individuals:
1. $3k net capital loss deduction for individuals
