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
