R4 Flashcards
What is the impact of a payment of dividend in cash vs payment of property on the Corp TI and Shareholder TI?
payment in cash –> corp TI = no impact, Shareholder TI = nothing
Payment of property –> Corp TI = gain (as if prop was sold @ FV), Shareholder TI = nothing
How do you calc the gain for a liquidating distribution at shareholder level? (EX) Shareholder basis before liquidation = $6,500,
Liquidation = $2k cash and land (basis of 5k and FMV of $10.5K)
Gain is recognized to the extent that FMV of assets distributed to shareholder exceeds the Shareholders basis in corporation stock
Basis of 6.5 - 2k cash - 10.5 FMV = 6 capital gain
What is Sec 1244 stock loss? Who is it apply to and how much is deductible?
Section 1244 stock = qualified small business stock
Loss resulting from sale/exhange/worthlenessnes = ord losses up to $50k to ORIGINAL OWNERS ONLY
any excess is capital loss
In a corp liquidation, at what value does the corporation recognize a gain or loss?
Corporation must recognize gain or loss as if it sold the assets for the fair market value
if in a corp distribution of prop –> the prop FMV < amt of liab assumed, how is the gain calculated?
Distribution:
Land (basis of 20, FMV of 60)
Nonrecourse liab = 70
The propertys FMV is assumed to be the amount of liab assumed –> FMV - basis = gain
Since FMV of prop (60) < Liab (70) –> New FMV = 70
70 - 20 (basis) = $50 gain
When a parent (owning over 80%) liquidates its subsidiary –> how do you calc the G/L rec by parent and sub?
NO G/L rec by either
Parent assumes basis of sub assets
When a C corp distributes assets in a NONliquidating distribution - how are G/L calc?
The corp treats as if sold for FMV –> Gain = FMV - basis
LOSSES are NOT deductible
How is a C corporation formed?
Filing articles of incorporation with state and rec as legal sep entity from owners(shareholders)
How is LLC formed?
Filing articles of organization with state and recognized as legal sep entity from owners. Can be taxed as corp/pship or sole proprietorship
How is LP formed?
Organized by writing agreement and MUST file certificate of limited pship to state
How is GP form?
Written agreement known as pship b/n two or more partners or may be formed by oral agreement - no requirement to formally org under state law with corp
What is the basis of prop recognized by corp from shareholder?
GREATER OF:
- Shareholder basis of property
OR
- Debt assumed by corp
If a shareholder contributes property to corp for common stock - when will the shareholder not rec g/l?
Both must be met:
1. 80% test = immediately after –> control group must own at least 80% of stock (nonvoting and voting)
- No Receipt of boot = transfer solely in exchange for stock
What is the formula for shareholders basis in corp CS if 80% rule is met
Adjusted basis of prop transferred
+FMV services rendered
+ Gain rec by shareholder
- Cash Rec
- Liab assumed by the corp (GR: Corp take 100%)
+Cash contributed
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Basis in stock
What GAAP income items are NOT included in Gross income for tax? (2)
Interest income from state/muni bonds
Proceeds from life insurance on the life of Key person officer
What is the difference between bad debts of Accrual basis and cash basis method?
Accrual basis - Uses specific charge off method (direct write-off) NOT allowance method for tax
Cash basis - bad debt is not deductible
What is the deduction for organizational and start up costs? What are the eligible costs included?
Can deduct up to $5K of org costs and $5k of start up costs up to $50k of expenses
Anything in excess of $5k expenses are amortized over 180 months
Included costs = fees paid for legal services in drafting corporate charter, bylaws, mins, fees for accounting, fees for state of incorporation
How is goodwill/intangibles treated?
Amortized on SL basis over 15 years
What is the Dividend REceived deduction and what is requirement and the thresholds?
Corporate sharehold must own investee stock for 26 days in 91 day pd
Percentage to deduction amount
0-20% (unrelated) –> 50% DRD
20-80% –> 65% DRD
80% + –> 100% DRD
What is the exception of the DRD?
if the DRD will create NOL –> can only take up to 50/65% of TI –> take up to full amount
What entites are not eligible for the DRD?
Personal Service Corporations
Personal Holding companies
Personally Taxed S corps
What is the max amount of Charitable contributions eligible for deduction for corporations?
10% of Gross income
What is the Formula for Corporate Tax income?
Gross income (including dividend income)
- deductions (NOT: CC deduction, DRD, Captial loss CBCK)
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(A) GI before special deductions
- CC deduction (Max = 10% * A, 5 yr cfwd)
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(B) TI before DRD
- DRD (limited to DRD% of B)
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Tax income or loss ( CBCK 5 yrs, CFWD indefinitely (2018 - 2020)… 2021 and onwards –> NO CBCK and unlimited CFWD (offsetting 80% TI)
What are the 4 types of dividend distributions from Corporations are are they taxable?
- From Current E&P (by y/e) –> taxable dividen
- From Accumulated E&P (distribution date) –> Taxable dividend
- ROC to extent of stock basis (no E&P) –> nontaxable, reduces basis of CS
- Capital Gain distribution (no E&P/no basis) –> Taxable Capital gain
How are Current E&P dividends allocated compared to Accumulated E&P?
Current is allocated on pro rata basis to each distribution - regardless of actual date of distribution
Accum applied in chronological order (beg with earliest distribution)
What amount of Stock dividends are taxable?
GR: NOT Taxable
EXCEPTION: unless shareholder has choice of receiving cash or other property –> FMV on distribution date
How do you calc basis of stock dividend?
Total amount value before stock divided
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New number of shares
What are the two forms of a corporation liquidation?
- Corporation sells assets and distributes cash to shareholders
- Corporation distributes assets to shareholders
When corporation sells assets and distributes cash to shareholders - what is the G/L taxable to
- Corporation
- Shareholder
- Corporation = SP- basis = G/L
- Shareholders = Proceeds - Stock basis = G/L
When corp distributes assets to shareholders - what is the G/L taxable to
- Corporation
- Shareholder
- Corporation= FMV - Basis = G/L
- FMV - Stock Basis = G/L
What are the requirements for a Personal Holding company?
Corporation more than 50% owned by 5 or fewer individuals and having 60% adj ord gross income consisting of
Net rent
Interest that is taxable ONLY
Royalties (not mineral, oil, gas, copyright)
Dividends from unrelated domestic corporation
If a C corp distributes a nonliquidating appreciating property (FMV > Basis) how is the gain impact E&P?
The FMV - Basis is a gain that is added to the current E&P
If there is a NOL before the DRD - what is the amount calc as the DRD?
DRD = X%(depending on ownership) * Dividends received and increases NOL
If services are contributed in formation of a corporation - what is shareholder/corp basis? are there g/l rec?
Shareholder recognizes ord income in the amt of services provided.
Shareholder basis in corp = FMV services
Corp no basis in services
What is the result of assets contributed with mortgage to a corporation on shareholder basis and corp basis in prop?
Shareholder basis in corp stock =
Basis in prop
LESS: Liab assumed by corp (debt relief)
(if liab > basis in prop –> excess = gain, basis = 0)
Corp basis in prop = GREATOR OF:
- Debt assumed OR
- shareholders OG basis in prop
When do you take the deduction for a bad debts expense? what is the reconciliation from book to tax income?
only take the deduction if written off NOT allowance
Add expense back to Book income and deduct actual amount written off
When will life insurance premiums be deductible? what is the reconciliation from book to tax income?
Only if the company is NOT the beneficiary (i.e employee is beneficiary)
IF company beneficiary –> not deductible –> Add back from BI to TI
IF company NOT beneficiary –> deductible –> no reconciliation bc it was already taken as an expense on BI
When are warranties deductible for tax? what is the reconciliation from book to tax income?
Warranties are deducted for actual Costs not expense
Add back expense for warranty costs and deduct actual costs incurred to Book income
What is the M-1 Reconciliation and what return is this recorded?
This is a reconciliation from book income to tax income
Filed in the corporate tax return
How do corporations treat capital loss/gains?
Capital Gains and losses are netted to single G/L –>
If net gain –> Taxed @ ord income –> included in taxable income
IF loss –> No deduction in the current year (CBSCK 3 years and 5 yr CFWD)
When are Federal and state income taxes deducted for taxable income? What is the reconciliation from book to tax?
Federal income taxes are NOT deductible –> add back to Book income
State income tax are deductible –> no change to book or tax
How are muni bond interest income and interest paid on debt for muni bond treated for tax purposes? What is the reconciliation from book to tax?
NEITHER are included as tax income/expense
Subtract any muni bond income recorded
Add back any interest paid on them
How much entertainment expense are allowable for tax?
NONE –> add back to Book
What is the difference in book depreciation and taxable depreciation?
GAAP is only on Book
MACRS is for tax
When are taxable dividends paid out by a corp?(2)
- If they have Net income in current year
- Accum E&P at BOY
If there are negative current E&P and Positive Accum E&P –> what is the netting process?
Net them and that is that amount that is a taxable dividend
When assets are distributed by a corporation –> what is the value?
Assets distributed come out at FMV
Gain on distribution to corp for FMV - basis
If gain –> gain will increase corp E&P
What are examples of organizational costs of a biz?
- Legal services to draft corporate charters, by-laws, and articles of incorporation,
- Accounting and consulting services incurred
- expenses of initial meetings of directors and shareholders
What is the deduction for organizational and start up costs?
up to $5k of org costs in the year that the business begins
Reduced by every dollar over $50k —> remaining amort of 15 years
If first year is over $55k –> no $5k immediate and only Total/180 *date of ops began
What are examples of non deductible org costs?
- Stock issuance costs
- Printing of stock certificates
- underwriter fees
- commissions to the broker
How would you calc the DRD for this:
20% ownership
Income 160, dividend income 100, deductions 170
Income (100)
+ dividend income (160)
- deductions (170)
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Tax income before DRD 90k
90*65% =$58.5k
What is a stock redemption and what is the goal of it?
Redemption of stock = sale of stock back to the issuing corporation
Goal is that the shareholder wants the sale to produce a long term capital gain (if held over 1 year)
What are the 2 special rules around redemptions and what happens if the rules are not met?
Rules:
- After the redemption, the shareholder must own less than 50% of the stock
- % drop in total ownership must be more than 20% (Drop in ownership Divided by the beginning ownership has to be more than 20%)
If the rules are not met –> entire proceeds received upon redemption are treated as dividend to shareholder
If the redemption of stock by shareholder qualifies as a partial liquidation, how is the the redemption classified?
As an exchange qualifying as a capital gain or loss
What is a complete liquidation? Who gets taxed?
Shareholders receive corporate assets in exchange for canceling shares of stock
Double taxation - 1. Corp tax is paid on appreciated assets being distributed
2. shareholders are taxed @ FV of assets being distributed compared to basis of stock
How is the G/L calc on corporate liquidation? How are losses classified?
If hot assets –> ord income
If no hot assets –> Capital
FV of prop distributed on date of distribution
- basis
Capital loss
If a liquidating distribution of a corporation is through assets with a mortgage - what is the gain?
The FMV of prop cannot be less than the mortgage
Use greater of FMV or Mortgage in calc below
FMV(or mortgage) - Basis = Gain to corp
If an asset is subject to a liability how does the shareholder become taxed on it?
What is the shareholder basis?
Reduces Fair value of asset by amount of liab before being taxed
Basis = greater of basis in asset OR mortgage assumed
What is the definition of a tax return preparer?
Any person who prepares for compensation or who employs one or more persons to prepare for compensation (any tax return required under IRC
If the 80% rule is met on the formation of a C Corp - Gain Realized and Gain Recognized for shareholders contributing prop?
Gain realized = FMV of prop - Basis of prop
Gain rec = Realized gain up to boot (cash rec from corp)
If an partner in a pship owns more than 50% of the pship sells stock to the pship for less than basis - what amount of the loss is capital loss?
NONE - the partner owns over 50% –> Related party –> RP loss is not deductible
What entities are denied the privilege of filing a consolidated return? (5)
- S Corp
- foreign corp
- REIT
- Insurance comp
- exempt orgs
What entities are able to file a consolidated return?
given to affiliated groups of corps (ownership through common parent that owns at least 80% of one of the corps and 80% value in other)
in order to have a tax-free reorganization, what is the control % that is needed?
80%
When a corporation is completed liquidated/ dissolved –> how are the filing fees/other fees incorp with liquidation handled?
Can deduct all liquidation expenses in final tax return
Who needs to approve a voluntarily dissolution of corporation?
Board members and stockholders
