R4 Flashcards
Formation of C Corporation
Nontaxable event
- Earnings are subject to double taxation
- No gain or loss recognized when issuing stock for formation, reacquisition, resale
- Basis is greater of:
a. Adjusted basis (NBV) + any gain recognized by transferor
b. Debt assumed by corporation
Shareholder Tax Consequence
No gain or loss recognized if:
a. shareholder owns at least 80% control of the voting and nonvoting stock and
b. receives no boot
Boot may be triggered by:
- cash withdrawn, receipt of debt securities (bonds)
- Excess of liabilities exceeding the adjusted basis is not boot but generates gain
NBV-Liabilities = Excess of Liability - Gain
Basis of Common Stock (to Shareholder)
Cash Amount contributed
Property: Adjusted Basis (NBV) Nontaxable event
Services: FMV (Taxable event)
Adjusted Basis of Transferred Property (cash included) \+ FMV of services rendered \+ Gain recognized by shareholder - Cash received - Liabilities assumed by corporation - FMV of non money boot received = Basis of Common Stock
Corporate Taxable Income
Cash received in advance in accrual GAAP is taxed (i.e interest income, rental income, royalty income)
Exception:
- Interest income in Municipal and state obligations/bonds
- Life insurance proceeds on the life of an officer, corporation is the beneficiary
Trade or Business Deductions
All of ordinary and necessary expense paid or incurred during a taxable year in carrying on a business are deductible
Companies involved in Domestic Production
Manufactured Produced Grown Extracted Constructed Engineering Services Architectural Services
-Must be located in US or part of U.S
- May deduct qualified production activities income limited to 50% of W-2 wages paid by corps for the year
- 9% of the lesser of:
Qualified Production Act. Income or
Taxable Income(disregarding the QPAI deduction)
Domestic Production Gross Receipts - COGS - Other Direct Allocable Expenses or Losses - Proper Share of Other Deductions = Qualified Production Activities Income
Bad Debt for Accrual Basis and Cash Basis
Accrual Basis: Not Allowed as a tax deduction
Cash Basis: Not deductible, unless there is an uncollectible check deposited & recorded as income.
Business Interest Expense
Interest paid or accrued are deductible.
Prepaid interest expense must be allocated in the proper period it is related.
Charitable Contributions
Maximum Deduction is 10% of taxable income,
Disallowed excess of charitable contribution is carried forward for 5 years
Business Losses & Casualty Losses related to Business
Any loss not compensated by an insurance is deductible. May be treated as ordinary loss or capital loss. Difference between business casualty loss and individual casualty loss are:
a. No $100 reduction
b. No 10% of AGI
Partially Destroyed Property Vs. Fully Destroyed (NBV)
Partial Loss is limited to the lesser of:
a. Decline in value of property
b. NBV of property before casualty
Fully destroyed property will recognize the NBV of property as the loss
Organizational Expenditures & Start-Up Costs
Deduct $5000 of organizational expenditures & $5000 for start-up costs. Each amount is reduced when costs exceed $50,000.
Excluded cost include all costs related to the issuance of stock
Business Taxes
State and Local taxes, and federal payroll taxes are deductible when incurred on property or business expenses. Foreign Income may be used as credit
Federal Income Taxes are NOT DEDUCTIBLE
Lobbying and Political Expenditures
Expenses to attempt to influence state or federal legislation is NOT DEDUCTIBLE.
Direct-type of lobbying expenses in at a local level ARE DEDUCTIBLE.
Uniform Capitalization Rules
Certain cost that would normally be expensed be capitalized for inventory tax purposes.
Dividend-Received Deduction
Domestic corps are allowed to receive a dividends-received deduction. Amount of DRD is dependent of the investee ownership in corporation. Must own stock at least 46 days during a 91 day period.
Ownership % Dividend-Received Deduction
0% to < 20% 70%
20% to < 80% 80%
80% or more 100%
Dividend-Received Deduction Taxable Income Limitation
The lesser of:
a. 70% (or 80%) dividends received; or
b. 70% (or 80%) taxable income excluding DRD, any NOL deduction, Capital Loss Carryback, or Domestic Production Deduction
** Taxable income limitation doesn’t apply if taking full DRD will result in a net operating loss (NOL)
Does not apply to: Personal Services Corps, Personal Holding Comp. or S Corps, certain banks & savings inst, public utilities, tax exempt corps, cooperatives.
Schedule M-1 Differences b/w Book & Taxable Income
Financial Statements
Income-Expenses=Net Income b4 Tax - Tax Exp= Net Income after Tax PLUS Discontinued Operations Income-Expenses -Tax) to arrive at the final Net Income
Tax Return
Gross Income - Deductions = Results - Charity Deduction=Results - Dividend Received Deduction = Taxable Income
Temporary Differences
Items of Income or Expense recognized in period for books, and a different period for tax.
Royalty Income per Tax (when Received)
- Royalty Income per Book (when Earned)
= Difference
Straight-line Depreciation Expense
- MACRS Depreciation Expense
= Difference
Permanent Differences
Municipal Bonds Interest (recognized for tax)
- Municipal Bonds Interest (recognized for book)
= Difference
Differences Schedules M-1 & M-3
IRS requires a company reconcile M1 & M3 schedules if :
- Total assets of the company exceeds $10 million
M-1 doesn’t distinguish between temporary difference and permanent differences
M-3 breaks out items of book income/expense in more detail.
Corporations Tax Credits
General Business Credit consist of a combination of any of the following:
- Investment credit
- Work opportunity extended to December 31st, 2019
- Low-Income housing
Formula: Can’t exceed net income tax less the greater of:
a. 25% of regular tax liability above $25000, or
b. Tentative minimum tax for the year.
Unused Corporations General Business Credit
Carried back 1 year, Forward 20 years
Research & Development Tax Credit
Part of General Business Credit
GR: 20% of the increase in qualified research expenditures over a defined base amount
Foreign Tax Credit
May be used as credit or deduction
Step 1: Determine qualified foreign income taxes paid or accrued
Step 2: Compute tax credit limitation. Multiply pre-credit U.S tax paid by the ratio of foreign source taxable income earned to income from both foreign and domestic sources.
Step 3: Determine the lesser of qualified foreign taxes in Step 1 or Foreign tax credit limitation in Step 2.
Any unused foreign tax credit can be carried back 1 year/ 10 year forward.
Accumulated Earnings Tax (Retained Earnings)
Penalty imposed on C corporations on retained earnings in excess of $250,000.
Regular corporations are entitled a lifetime of $250,000 accumulated earnings
Personal Service are entitled to $150,000
Additional tax rate of 20%
Avoid Unreasonable Accumulation of Earnings
a. Demonstrate a definite plan for use of retained earnings
b. A need to redeem the corporate stock
Calculation of Accumulated Earnings Tax
Taxable Income - All Charity - All Capital Losses - Taxes - Dividends Paid = Accumulated Taxable Income - Remaining Credit = Current Accm. Taxable Income x 20% = Accumulated Earnings Tax
Personal Holding Company Tax (PHCs)
Taxed at an additional 20% on PHCs undistributed net income
Corps. set up by high tax brackets to channel their investments into a small corporation and shelter the income by paying low tax (15-25%) of the corporation
PHCs are corporations that owns more than 50% owned by 5 or fewer individuals (directly or indirectly) during the the last 1/2 of the year and having 60% adjustment of ordinary gross income from investment-type income:
a. Net rent ( if less than 50%)
b. Interest that is taxable (nontaxable is excluded)
c. Royalties (not natural resources or copyright royalties)
d. Dividends from an unrelated domestic corporation
Personal Service Corporations
Are taxed at a flat 35% tax rate
Corporate AMT
Corps are subject to a minimum 20% on alternative taxable income
Corporations Exempt from AMT
KNOW The AMT CALCULATION
If annual average gross profit from the previous 3 years are $7.5 million or less;
$5 million for C Corporations (first 3 years of existence)
C corps are exempt of AMT in its first year.
A corporation must have been treated as a small corporation exempt for all prior years (after 1997)
Adjusted Current Earnings (ACE)
Ensures that corporations don’t report a profit for financial statements but pay little or no income tax
Calculation
Step 1. Determine adjusted current earnings = unadjusted AMTI
+ Municipal bond interest
+ any deduction related to organizational exp. and amortization
+ Life insurance proceeds on key employees
+/- Difference between AMT depreciation and ACE depreciation (given)
+ 70% Dividend-Received Deduction
Step 2. Adjusted Current Earnings (ACE) = 75% of the difference of between ACE & AMTI “BEFORE” this adjustment and the alternative tax NOL deduction
Negative Adjusted Current Earnings (-ACE)
The negative adjustment can’t exceed the cumulative net positive ACE adjustments (prior positive adjustments less prior positive adjustments)
Alternative Tax Net Operating Loss Deduction (ATNOLD)
AMT allows a deduction for net operating loss (excess of deductions allowed for AMTI over income allowed in computing AMTI)
Limited to 90% of AMTI
AMT Exemption
Exemption subtracted from taxpayer’s AMTI
Exemption is 40,000 less 25% of AMTI in excess of $150,000.
The exemption is completely eliminated if AMTI exceeds $310,000.
Corporation Minimum Tax Rate
Alternative minimum taxable income at 20%
AMT Foreign Tax Credit
Only credit allowed against tentative minimum tax
Minimum Tax Credit (MTC)
A corporation that pays AMT one year may use AMT as credit in future years.
Unused MTC may be carried forwards indefinitely, but not carried back.
Consolidated Tax Returns - Advantages
- Capital Losses of one corporation offset capital gain of another
- Operating losses of one corp offset operating gains of another
- Dividends received are 100% eliminated in consolidation
- Certain tax deductions work better as a consolidated group rather than an individul
- Corporation’s NOL carryover may applied against income of the consolidated group
- Income from certain intercompany sales may be deferred
Consolidated Tax Returns - Disadvantages
- Mandatory compliance with complex regulations
- First consolidated F/S may double count inventory
- Losses from intercompany transactions may be deferred
- Use the same tax year as the parent, and file short year tax return when it merges.
- Tax credits may be limited to operation losses of other members
- Election to file consolidated is binding unless disbanding
- Many states don’t allow consolidated filing, thus companies file consolidated for federal income tax purposes, and a separate tax return for state purposes incurring more time and additional expense.
Consolidated Taxable Income Calculation
Step 1. Calculate the taxable income for each member of the group
Step2. Adjustments are made to taxable income
- Gains and losses deferred on intracompany sales
- Inventory adjustments may be required for intracompany sales
- Dividends received by one member from another are excluded
Step 3. Gains, losses and deductions are removed
- Capital gains and losses
- Section 1231 gains and losses
- Net Operating Loss
- Charitable contribution deduction
- Dividends-Received deduction
- Domestic production deduction (Section 199)
Step 4. Each member’s resulting taxable income is then combined to create the group’s taxable income.
Step 5. Group’s combined taxable income is adjusted for items determined at the consolidated level.
Net Operating Loss
Carryback 2 years/ carry forward 20 years.
A corporation may forego the carryback period and only carry NOL forward.
- no charitable contribution is allowed when calculating NOL
- domestic production deduction Section 199 is not allowed
- NOL deduction for an NOL carrybark or carryover from another year is not allowed in determining current year
- a corporation may deduct a capital loss carryover from a current year capital gain, but can’t deduct a capital loss carryover.
