R4 Flashcards
Corporation basis of property received=
Greater of:
Adjusted basis of transferor (plus [gain] cash received by transferor)
OR
Debt assumed by corp
No G/L on property contributed to corp if shareholder:
Transferors own at least 80% of stock after transaction
(shareholder who only contributes services is not included)
AND
No Boot received
Basis of common stock received by shareholder:
Cash= amt contributed
Property contributed= adj basis (NBV)
Services=FV (taxable as ordinary income)
*Less any gain recognized by the shareholder
Amount of gain recognized on property contributed=
Lesser of:
Boot received (cash or excess [over adj basis] debt put in)
AND
Realized gain (property received- adj basis)
((shareholders basis-boot))
Business entities that can have 1 owner
Sole proprietorship, corporation, limited liability corporation
*Partnership must have 2
Entity with the most flexibility in choosing an accounting period:
C- corporation: same choice of accounting periods as individuals
Accrual basis of accounting is required for:
-Corporations with inventory
-tax shelters
-farming corporations
-C-corporations (when >$5 mill avg annual gross receipts for 3 yr period)
Manufacturer
May use the cash method of accounting:
-Personal service corporations
Book income –> taxable income
Book income
Plus: Federal income tax expense
Less: Excess of tax amortization over book impairment of goodwill
Taxable income
Charitable contribution for corporations
Max deduction of 10% of taxable income before:
- charitable contribution
- dividends received deduction
- NOL carryback
- capital loss carryback
- U.S. domestic production activities deduction
- *Add these back to income
- 5 yr carryforward
Accrual basis corp can deduct when:
- Authorized before year end
- Paid by the 15th day of the 4th month after the yr of accrual
Eligible organizational/ Start-up cost deductions:
- Legal services, accounting services and fees paid to the state of incorporation
- NOT included: costs to issue and sell stock & incurred in transfer of assets
Dividends received deduction:
70%: Unrelated entity (0%-<20%)
80%: (20%-<80%)
100%: Affiliated companies (>80%)
*Deduction=lesser of dividends received or taxable income
-Include dividends in income then take deduction
-Must own stock for at least 45 days
Organizational/ Start-up cost deduction calculation:
- $5,000 for each
- Excess amortized over 180 months (15 yr)
- Deduction in yr 1= $5000 + amt to amortize
Income before special deductions=
Excludes dividends received deduction
full amt of dividends are added as income
Treatment for Net Long-term loss for corps:
*Not deductible in current yr, only to offset gains
-carried back 3 yrs, carried forward 5 yrs
($3000 deductions for individuals does not apply!)
Deduction of advertising expenses:
deduct currently as ordinary and necessary business expenses
No amortization
LIFO method:
- Inventory on hand at the end of the yr is treated as being composed of the earliest acquired goods
- Must be elected in first yr used
- Must use same method for FS
Insurance on an officer’s life where corp is the owner and beneficiary:
- Premiums are non deductible
- Proceeds from insurance are not includable in income
Group term life insurance with employees as owners and beneficiaries:
-Premiums paid are deductible
=fringe benefit
Deducting bad debts:
-Must use charge- off method if not a financial institution
Taxable income when bad debt is not written off:
Add back bad debt expense
Nondeductible business expenses:
Add back to find reportable taxable income
- Bad debts (allowance method)
- Business meals & entertainment (50%)
- Political contributions
- Executive contributions >$1 mill per yr for CEO
- Federal income taxes
- Penalties
- Estimated liabilities for contingencies (warranties)
Subtract to find reportable taxable income:
- Amortizable amount of organizational expenditures (amt after 5,000)
- Interest from municipal bonds (add back interest exp to carry bonds)
- Dividends received deduction
- Depreciation greater than amt on FS
Actual warranty cost incurred=
Beginning warranty reserve
Add: estimated warranty expense
Less: ending warranty reserve
Treatment of income and expenses from illegal activity
- Gain included in income
- Cost of merchandise is only deductible exp
Personal holding company
-corps with >50% of stock owned by 5 or fewer individuals
AND
-at least 60% of income is personal holding income
(net rent,taxable interest,royalties,dividends)
*taxed an additional 20% on net income not distributed
(stock ownership test=50%, income test=60%)
*Shareholder considered to own stock of family
–not in-laws, aunts, nephews, cousins or former spouses
Accumulated earnings tax
Penalty tax on C corps when:
- accumulated earnings> $250,000 (=credit)
- Additional tax rate = 20%
Personal service corp:
-Primarily involved in providing a service to customers
(Accounting,law consulting,engineering)
-penalty when accumulated earnings > $150,000
-Flat tax rate of 35%
How to eliminate/ reduce accumulated earnings tax:
- demonstrate “reasonable needs” (a plan)
- pay out dividends by April 15th (may be consent dividends)
General business credit
- combines several nonrefundable tax credits
- provides uniform rules for current and carryback yrs
Which entities must include 100% of dividends from unrelated taxable domestic corps:
-dividends are fully includable in gross income for all corps
No penalty tax for corp if liability is under:
$500
1,000 is for individuals
Corps must pay the LESSER of for no penalty tax:
100% preceding yr (unless no tax was owed)
OR
100% current yr
Corporate AMT rate and exemption amt:
Rate= 20%
Exemption= $40,000 minus (25% of AMTI over $150,000)
Exemption completely eliminated at AMTI of $310,000
Corporate AMT preferences:
- percentage depletion
- private activity bonds
- Pre-1987 ACRS excess depreciation
Corporate AMT adjustments:
- Adjustments for G/L
- Long-term contracts
- Installment sales
- Excess depreciation
AMT=
Excess of TMT over regular tax liability
-payable in addition to regular tax
Effect of unfavorable adjustments on AMTI
Increase AMTI (add back to increase income like preferences)
Tentative minimum carryforward=
Excess of TMT over regular liability
-can only be used to offset a corporation’s regular tax liability (when not subject to AMT in that yr)
Requirements to file a consolidated return:
All corporations in group must:
- have been members of an affiliated group at some time during the tax yr
- each member must file a consent (consolidated return)
Affiliated group=
Common parent directly owns:
-80% or more of VOTING power of all outstanding stock
AND
-80% or more of the VALUE of all outstanding stock
*only group that may file consolidated corp return
Advantages of filing a consolidated return:
- capital and operating losses of one corp can offset gains of another
- elimination of tax on intercompany transactions
- intercompany dividends are 100% eliminated
Treatment of corporate capital gains:
-taxed the same as ordinary corp income (no special rates like for individuals)
Treatment of corporate capital losses:
- may not deduct capital losses from ordinary income
- deductible to extent of capital gains
- may be carried back 3 years and forward 5 as SHORT TERM losses
Net operating loss carryback/forward rules:
Back 2, forward 20
“Hindsight is 20/20”
-same as individuals
Order of allocation for cash distributions from a corp:
1-current E&P (taxable)
2-accumulated E&P (taxable)
*1 & 2 considered dividends
3-return of capital (tax free&reduces basis)
4-capital gain distribution (taxable as capital gain)
Calculation for accumulated earnings and profits at yr end:
Beginning deficit in accumulated E&P
Plus: current yr E&P
Less: amt distributed
End of yr accumulated E&P
Losses from worthless section 1244 (small business) stock:
- treated as an ordinary loss up to $50,000 ($100,000 MFJ)
- excess loss is capital
- *only applies to OG owner of stock
- 53,000/103,000 loss deductible as ordinary income per yr
G/L recognized by shareholders when corp distributes assets in liquidation:
-recognized G/L to extent FMV of assets received exceeds adjusted basis of stock
G/L recognized by corp when corp distributes assets in liquidation:
- recognizes G/L as if they sold asset @ FMV (use basis)
- loss not recognized/deducted, only gains
- inventory not included
Shareholder recognition of property dividend:
-includes FMV of property in income as a dividend to the extent of E&P (plus any gain on distribution itself)
Corp recognition of property dividend:
- as if property has been sold (FMV-basis)
- corp gain= increase of E&P (taxable)
- taxable when appreciated property
Stock dividends
-generally not taxable (unless shareholder has decision to receive other property)
Type of G/L recognized by a shareholder in complete liquidation:
- Capital G/L (amt excess of E&P)
- treated as full pymt for their stock
Type A reorganization=
Mergers/ Consolidation
- taax-free to shareholders and corps
- No G/L unless other consideration is received
E&P is first allocated to:
- preferred dividends
- chronologically by pymts in yr
Basis of land received from a subsidiary=
carryover basis
Recognized gain when liability assumed is greater than the property’s FMV:
Gain=amt of liability-basis
-liability amt becomes the FMV
