R3.1 – C Corporation Flashcards
Forms
Form 1120 – C Corporation Income Tax Return
Schedule C – Dividends and Special Deductions
– Page 2 of Form 1120
Schedule J – Tax Computation and Payment
– Page 3 of Form 1120
Schedule L – Balance Sheets per Books
– Page 5 of Form 1120
Schedule M-1 = Reconciliation of Income (Loss) per Books with Income per Return
– Per 5 of Form 1120
Schedule M-3 = Net Income (Loss) Reconciiiation for Corporations with Total Assets of $10 million or more
– Distinguishes between temporary and permanent differences
Formation of a Corporation – Shareholder
No gain or loss is recognized if the property is exchanged for 80 percent control (voting power and number of shares) or if no boot involved
If boot received, gain recognized is lesser of
1) Realized gain
2) FMV of boot received
If liabilities assumed by corporation > adjusted basis
Gain recognized
= Liabilities assumed – Basis of Property Transferred
Formation of a Corporation – Shareholder: Adjusted Basis in Stock
Shareholder’s Adjusted Basis in stock = Adjusted basis (NBV) of property transferred to corporation \+ Gain recognized by the shareholder – Boot received by shareholder – Liabilities assumed by corporation
Formation of a Corporation – Shareholder: Holding Period
Capital or Section 1231 asset transferred
= add property holding period to stock holding period
Other property
= do not add property holding period to stock holding period
Formation of a Corporation – Corporation
No gain or loss recognized
Formation of a Corporation – Corporation: Property with built-in loss
Property with built-in loss
= property’s basis > property’s FMV)
Corporation reduces its basis in property to the FMV
or
Alternative: Shareholder’s basis in stock is reduced.
Formation of a Corporation – Corporation: Basis in Property Received
Corporation’s basis in property received is the greater of
1) Shareholder’s basis in the property
2) Liability assumed by corporation
Formation of a Corporation – Corporation: Holding Period
Shareholder’s holding period in property transfers to corporation.
Book Income
INCOME
– Expenses
= NET INCOME BEFORE TAXES
– Tax
= NET INCOME AFTER TAXES
± Income/loss from discontinued operations, net of tax
± Extraordinary gain/loss, net of tax
± Accounting adjustments and changes, net of tax
= NET INCOME
Taxable Income
Gross Income – Deductions = Income Before Special Deductions – Charity – Dividends Received Deduction = Taxable Income
Reconciliation of Book Income to Taxable Income
Book income reconciled to taxable income on Schedule M-1 (page 4 of Form 1120) or Schedule M-3
Schedule M-3 used if assets > $10 million
– M-3 more detailed: shows which items are permanent differences between book and tax and which are temporary
Corporate Tax Formula
GROSS INCOME
– Deductions
= TAXABLE INCOME BEFORE SPECIAL DEDUCTIONS
– Charity
– Dividends Received Deduction
= TAXABLE INCOME BEFORE CARRYBACKS/FORWARDS
– NOL & Net Capital Carryback/forwards
= TAXABLE INCOME
x Tax Rate
= TAX LIABILITY
– Tax Credits
\+ Other Taxes
= TAXES DUEDeductions
Expenses are generally deductible as business deductions if reasonable, ordinary, and necessary.
There are special deductions that are subject to special limitations
Deductible capital losses are offset against recognized capital gains
– Excess losses are carried back 3 years and forward 5 years
All corporation deductions are business deductions
– Interest expenses is not classified as personal expenses if incurred by corporations and is thus deductible
Deductions – Domestic Production Deduction
Deduction = 9% of the lesser:
1) Qualified production activities income (QPAI)
2) Taxable income before deduction
QPAI = domestic production gross receipts less cost goods sold and other applicable overhead costs
Domestic production gross receipts are essentially sales of any property produced in the US including property that is manufactured produced, grown, extracted or constructed.
Deductions – Compensation
Executive compensation for a publicly held company is not deductible over $1,000,000 paid to CEO or the four most highly paid officers.
Bonuses paid by an accrual basis taxpayer must be paid by 2 1/2 months after year-end in order to be deductible
Deductions – Bad Debts
Must use specific charge-off method for accrual basis taxpayers if the debt has become worthless
Since a cash basis taxpayer has not included the amount in gross income, a bad debt is not deductible, except in the case of an uncollectible check.
Deductions – Business Interest Expense
General business interest expense is deductible
Investment interest expense is limited to net taxable investment income - the same rule as individuals
Prepaid interest expense must be allocated to the period to which it is related.
Deductions – Business and Casualty Loss
Deductible (after insurance reimbursement)
No $100 per event limitation
No 10% AGI limitation
Partially destroyed - the loss is limited to the lesser of
1) Decline in value
2) Adjusted basis immediately before the casualty
Deductions – Organizational Expenditures
$5,000 deducted immediately
Amortize excess over 180 months
Deductions reduced by amount of expenditures incurred that exceed $50,000
Doesn’t include – Costs of issuing and selling stock – Commissions – Underwriter’s fees – Costs incurred in the transfer of assets to a corporation.
Deductions – Start Up Costs
$5,000 deducted immediately
Amortize excess over 180 months
Deductions reduced by amount of expenditures incurred that exceed $50,000
Deductions – Goodwill, Intangibles
Amortize over 15 years
Deductions – Life Insurance
Premiums on key employees when the corporation is the beneficiary not deductible
Deductible if fringe benefit for employees
Deductions – Business Gifts, Meals and Entertainment, Penalties, Illegal Activities and Fines, Political and Lobbying Expenses
Business gifts deductible up to $25/recipient/yr
Meals and Entertainment 50% deductible
Penalties, illegal activities, and fines not deductible
Political and lobbying expenses generally not deductible except direct-type lobbying of local government
Deductions – Taxes
All (federal, state, and local) PAYROLL taxes deductible
Foreign income taxes not deductible
– Can be used as a credit
Capital Gains and Losses Have Different Tax Treatment Between Corporations and Individuals
$3,000 deduction for losses available to individuals. Not available to corporations
Capital gains tax rates for corporations are the same as the ordinary corporate rate. No special capital gains rate
Net capital losses have 3 year carry back and 5 year carry forward
Special Deductions – Charitable Contributions
10% of adjustable taxable income
Adjustable taxable income = taxable income before
1) Charitable contribution deduction
2) Dividends received deduction
3) Any net operating loss carry back
4) Any capital loss carry back
5) US production activities deduction.
Special Deductions – Dividends Received Deduction
Prevents triple taxation of earnings
DRD is lesser of
1) 70% (or 80%) dividends received
2) 70% (or 80%) taxable income before DRD
70% of dividends is for 0 to < 20% ownership
80% of dividends is for 20 to < 80% ownership
Exception: No limitation if taking to account full DRD will result in net operating loss.
100% dividends received deduction for dividends from affiliated corporations (80%+ ownership) that file consolidated returns
100% dividends received deduction for dividends received by a small business investment company.
Net Operating Losses Carrybacks/forwards
Net operating losses are 2 year carry back, 20 year carry forward
When determining NOL don’t take the charitable contribution deduction, but use the dividends received deduction
Net Capital Loss Carrybacks/forwards
Net capital losses have 3 year carry back and 5 year carry forward
Taxation of a Corporation – Filing Requirements
Filing is due on 15th day of the 3rd month
– March 15th for calendar year taxpayers
6 month extension available
Taxation of a Corporation - Accrual vs. Cash Basis Accounting
Cash basis used for tax purposes by
– most individuals
– qualified personal service corporations
– taxpayers whose average annual gross receipts < $1,000,000
Accrual accounting must be used for:
- Accounting for purchases and sales of inventory
- Tax shelters
- Certain farming corporations
- C corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partners provided the business has greater than $5 million average annual gross receipts for the 3-year period ending with the tax year.
Taxation of a Corporation – Statute of Limitations
Statute of limitation on assessments of additional tax
– 3 years from later of tax return due date or date return is filed
– 6 years for a 25% misstatement
Taxation of a Corporation – Estimated Payments of Corporate Tax
Pay estimated taxes on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year
Underpayment penalty if payments not made, and $500+ owed on return.
If corporation is not large, pay lesser of:
1) 100% tax shown on return for current year
or
2) 100% of tax shown on return for preceding year.
Large corporations use 100% of current year
Taxation of a Corporation – Consolidated Tax Returns: Affiliated Group
Affiliated group = common parent directly owns 80%+ of voting power of all outstanding stock and 80%+ of the value of all outstanding stock of each corporation
Affiliated group can elect to be taxed as a single unit, thereby eliminating inter company gains and losses
Brother-sister corporations can’t file consolidated returns
Consolidated tax returns due on the 15th day of the 3rd month after close of consolidated tax group’s tax year
- March 15th for calendar year group
Each member jointly and severally liable for entire consolidated tax liability, tax penalties, and interest.
Taxation of a Corporation – Advantages of Filing Consolidated Return
Capital losses of one corporation offset capital gains of another
Operating losses of one corporation offset operating gains of another
Dividends received 100% eliminated
Tax deductions may be better used if subject to the limitations of the overall consolidated group
NOL carryover of one corporation can be applied against income of consolidated group
Income from certain intercompany sales may be deferred
Taxation of a Corporation – Disadvantages of Filing Consolidated Return
Additional regulation
Double counting of inventory can occur in initial consolidated tax year
Losses from certain intercompany sales may be deferred
Each member must have same tax year as parent
Tax credits may be limited by operating losses of other members
Election to file consolidated returns is binding for future years and may only be terminated by disbanding the group or with IRS permission
Many states don’t allow consolidated tax return filing.
Taxation of a Corporation – Corporate Alternative Minimum Tax
REGULAR TAXABLE INCOME
± Adjustment
\+ Preferences
= UNADJUSTED ALTERNATIVE MINIMUM TAXABLE INCOME
± ACE Adjustment
– AMT NOL Deduction
= ALTERNATIVE MINIMUM TAXABLE INCOME
– AMT Exception
= AMT BASED
x 20%
= GROSS AMT
– Foreign Tax Credit
= TENTATIVE MINIMUM TAX
– Regular Tax Liability
= ALTERNATIVE MINIMUM TAXTaxation of a Corporation – Exempt from AMT
Smaller C Corporations = average gross receipts < $7.5 million for previous 3 periods
Young C Corps = no AMT in first year, then < $5 million average gross receipts for next two years.
Taxation of a Corporation – Corporate Alternative Minimum Tax: Adjustments
May be positive or negative number
Adjustments = LID
L = Long-term contracts
– Must use % of completion method for AMT
– Adjustment = difference between % of completion method and completed-contract method
I = Installments Sales
– Installment sales mouthed not allowed for AMT
– Adjustments = differences between full accrual method and installment sales method
D = Depreciation on post-1986 acquisitions
– 1986 to 1998 property depreciated over 40 years for AMT (fewer years for regular tax)
– After 1998 property: depreciated using 150% for AMT vs. 200% for regular tax
Taxation of a Corporation – Corporate Alternative Minimum Tax: Preferences
Always added back
PPP
P = Percentage depletion – excess over adjusted basis
P = Private Activity Bonds – interest for bonds after 1986 added back (exclude interest for bonds issued in 2009 or 2010)
P = Pre-1987 ACRS depreciation – excess over straight-line
Taxation of a Corporation – Corporate Alternative Minimum Tax: Adjusted Current Earnings
Can be positive or negative
ACE Adjustment
= 0.75 x (ACE - Alternative Minimum Taxable Income)
Adjusted Current Earnings (ACE)
= Unadjusted alternative minimum taxable income
+ Municipal bond interest
+ Deduction taken for organizational expense amortization
+ Life insurance proceeds on key employees
+ (AMT depreciation – ACE depreciation)
+ Deductions for 70% dividends received deduction
Taxation of a Corporation – Corporate Alternative Minimum Tax: AMT Exemption . AMT Tax Rate, Foreign Tax Credits Permitted
AMT Exemption
= $40,000 – 25% (Alternative Minimum Taxable Income - $150,000)
AMT Exemption Completely phased out at AMTI > $310,000
AMT Tax Rate = 20%
Foreign Tax Credits Permitted for Corporate Tax
Taxation of a Corporation – Corporate Alternative Minimum Tax: AMT Credit
Created whenever AMT paid
Carries forward indefinitely
Can reduce regular tax in future
– Can reduce regular tax to 0. Can’t generate a refund.
Taxation of a Corporation – Accumulated Earnings Tax
Imposed on C corporations whose retained earnings are in excess of $250,000 (lifetime) if this funds are improperly retained
– $150,000 for personal service corporations
Doesn’t apply to
– Personal holding companies
– Tax-exempt corporations
– Passive foreign investment corporations
Taxation of a Corporation – Accumulated Earnings Tax: Formula
TAXABLE INCOME
– Charity
– Capital Losses
– Taxes
– Dividends paid or deemed paid
= ACCUMULATED EARNING CREDIT
– Remaining credit
= CURRENT ACCUMULATED TAXABLE INCOME
x 20%
= Accumulated Earnings TaxTaxation of a Corporation – Personal Holding Company Tax
Personal holding companies
– 50%+ owned by 5 or fewer individuals
and
– 60%+ of adjusted gross income from:
1) net rent
2) Interest that is taxable
3) Royalties (but not from mineral, oil, gas, or copyright royalties)
4) Dividends from an unrelated domestic corporation
Personal holding companies not subject to accumulated earnings tax so are instead subject to PHC Tax
PHC Tax triggered by high levels of investment income = 20% on undistributed PHC income
Corporate Earnings and Profits – Current Earnings and Profits: Formula
Corporate taxable Income – Negative adjustments \+ Positive adjustments ± Positive/Negative adjustments = Current Earnings and Profits (E&P)
Corporate Earnings and Profits – Current Earnings and Profits: Negative Adjustments
Federal income tax expense
Nondeductible penalties, fines, political contributions
Officer life insurance premiums (corporation is the beneficiary)
Expenses for production of tax-exempt income
Nondeductible charitable contributions
Nondeductible capital losses
Corporate Earnings and Profits – Current Earnings and Profits: Positive Adjustments
Refunds of federal income tax paid
Tax-exempt income
Refunds of items that were nto subject to regular tax under the tax benefit rule
NOL deductions
Life insurance proceeds where corporation is the beneficiary
Dividends received deduction used to calculate regular taxable income
Carryovers of capital losses that impacted taxable income
Carryovers of charitable contributions that impacted taxable income
Nontaxable cancellation of debt not used to reduce basis of property
Corporate Earnings and Profits – Current Earnings and Profits: Adjustments That Could be Positive or Negative
Losses and gains that have different effects on taxable income versus E&P
Changes in the cash surrender value of certain life insurance policies
Excess depreciation for E&P over that for regular income tax
Differences in allowable deductions for organizational and start-up expenses
Installment income method adjustments
Completed contract income vs. percentage-of-completion income
adjustments
Amortization of intangible drilling costs adjustments
Section 179 expense per regular tax versus ratable depreciation on the same property using a 5-yr life
Corporate Earnings and Profits – Accumulated Earnings and Profits: Formula
Accumulated E&P beginning of year
± Current E&P less distributions from current E&P
– Distributions from accumulated E&P
= Accumulated E&P end of year
Corporate Earnings and Profits – Order of Corporate Distributions
- From current E&P = dividend
- From accumulated E&P = dividend
- Return of capital
- Beyond capital = excess distributions = capital gain distribution
Corporate Distributions – Cash Dividends
Cash dividends from a C corporation are taxable to the shareholder who receives the dividend
Distributions come out of current E&P first = dividends
Then out of accumulated E&P = dividends
Then out of stock basis = return of capital (Tax free)
Beyond stock basis = taxed as capital gains
Don’t net current and accumulated E&P unless current E&P is negative
Corporate Distributions – Stock Redemptions
Stock redemption = corporation repurchases stock from shareholders
Generally, treated as sale or exchange: gain or loss is recognized by the shareholder
– Disproportional
– Partial liquidation of corporation
– Complete buyout of shareholder
– Redemption not essentially equivalent to a dividend
– Redemption to pay estate taxes and expenses
Proportional stock redemption treated as dividend to the extent of the corporation’s E&P.
Liquidations – Corporation Sells Assets and Distributes Cash to Shareholders
Corporation recognizes gain or loss on the sale of the assets as normal
Sale price
– Basis
= Taxable gain/loss
Shareholders recognize gain or loss to the extent cash exceeds adjusted basis of stock
Proceeds
– Stock basis
= Taxable gain/loss
Liquidations – Corporation Distributes Assets to Shareholders
Corporation recognizes gain or loss as if it sold the assets for the FMV
FMV
– Basis
= Taxable gain/loss
Shareholders recognize gain or loss to the extent FMV of assets received exceeds the adjusted basis of stock
Sale price
– Stock basis
= Taxable gain/loss
Liquidations – Reorganizations
Reorganizations on nontaxable event if they fulfill the following requirements
– Continuity of business = Acquiring corporation continues to target historical business or uses a significant portion of the targets assets and is continuing business.
– Control test = 80% + of total voting power of all classes of stock and 80%+ of all of the classes of stock.
Liquidations – Types of Reorganizations
Type A – managers or consolidations
Type B – the acquisition by one corporation of another corporation/s stock, stock for stock
Type C – the acquisition by one corporation of another corporation’s assets, stock for assets
Type D – dividing of the corporation into separate operating corporations
Type E – recapitalizations
Type F – admit change in identity, form, or place or of organization
Liquidations – Worthless Stock
Applies to original stockholder only
Can deduct up to $50,000 ($100,000 MFJ) as ordinary loss instead of treatment as capital loss
Excess beyond $50,000, treated as capital loss
– Remember will be able deduct up to $3,000 net capital loss before carrying the rest forward
LIquidatiosn – Small Business Stock
Noncorporate shareholder holding qualified small-business talk for more than five years can exclude 50% of the gain on the sale of exchange of stock.
Exclusion is 50% of the greater of
1) 10 times the taxpayers basis in the stock
2) $10 million ($5 million MFS)
Includible portion of gain taxed at 28%
Qualified small business stock
– Stock issued after August 10, 1990
– Acquired at the original issuance
– C corporation only
– Less than $50 million of capital on stock issuance date
– 80%+ value of the corporate assets used in active conduct or qualified trade or businesses
