R4 - Corp. Flashcards
How many owners are required to start a corporation?
1 owner
How many owners are required to start an LLC?
1 or more owners
How many owners are required to start a partnership?
2
What kind of entity is suitable for an IPO?
Corp only
When are earnings taxed for a corporation?
Taxed on earnings at corp level, then owners are taxed on dividends (unless return of capital)
If property is contributed to a corporation by an owner, what is the basis to the corporation and what are the tax implications
Nontaxable = NBV
Corp would take basis that owner had, and event would be nontaxable. The basis of the property contributed would add to the owner basis in the corp
If an owner contributes an asset to a corp that also carries debt (mortgage), what is the basis of the property to the corp?
Greater of:
- ) NBV - owners adjusted basis
- ) Debt assumed
If an owner contributes property to a corp that has a basis larger than its FMV, what is the basis of the property to the corp?
Basis is limited to FMV to eliminate any potential built in losses.
What are the criteria in the IRC that allow owners to recognize no gain/loss by contributing property in exchange for corp stock?
- ) 80% control
2. ) No boot received (excess debt contributed, or cash distributed)
If an owner contributes property to a corporation for $100k NBV and mortgage of $120k, what is the basis to the corp, and what is the basis in the corp that the owner now has? Also, are there any taxable events here?
Basis to corp = $120k
Basis to owner = $0 (gain recognized of $20k - taxable)
If an owner contributes property to a corp with a NBV of $100k and a mortgage of $80k, what is the owners added basis in the corp?
$20k added by contributing property with mortgage
If an owner provides legal services to a corp for a basis of $100k in the corp, what are the tax implications to the owner?
Owner = must record the $100k in basis as a recognized taxable gain
*as if he is getting paid $100k and giving it back to the corp for basis, but that $100k earned by him has to be taxed as ordinary income
What is the domestic production deduction?
Allows a business to deduct part of their qualified production activities income if the activities were in the USA.
Limited to a deduction of 50% of the W-2 wages paid during the year
How is the deduction for domestic production calculated?
9% of the lesser of:
- ) Taxable income
- ) Qualified production activities income (QPAI)
How is qualified production activities income calculated?
Domestic production gross receipts
(COGS)
(Other allocated direct costs)
=QPAI
*if this is less than taxable income, use 9% of this as the domestic production deduction (limited to 50% of W-2’s)
What is the maximum fixed compensation an executive is able to have in a corp?
$1M
If a company accrues for an expense at year end, are they able to deduct that expense for tax purposes (even if it was unpaid as of 12/31)?
You can deduct as long as paid by 4/15 (Corp due date)
If a corp prepays an expense, is it deductible?
Only deductible when incurred & paid. If prepaid, cannot deduct until incurred
If a corp has investment interest expense, is it deductible?
Deductible only up to the amount of investment income
Interest must be _________ & __________ to be able to take as a deduction for a corp
Incurred & paid
What are the rules for a corp regarding charitable contributions?
Deduction is limited to 10% of ATI.
To calculate taxable income for charitable contributions, its calculated w/o:
- ) charitable deduction
- ) dividends received deduction
- ) NOL carryback (2 back, 20 forward)
- ) Cap. loss carry back (3 back, 5 forward)
- ) US production activities deduction
What are the rules for a corp regarding business losses or casualty losses?
100% deductible (must not be compensated by insurance)
*to calculate, has to be net of any insurance proceeds
If something has been partially destroyed, how is the loss calculated?
Using the lesser of the NBV or FMV (less any insurance proceeds)
If something has been fully destroyed, how is the loss calculated?
Using the NBV (even if the FMV is lower)
Can organizational and startup costs be expensed for tax purposes?
Can expense first $5k for each startup & organizational costs, excess must be amortized over 180 months (15 years)
Are costs of raising capital able to be considered org. costs by a corp?
No.
Included Costs = drafting corp charter, bylaws, minutes, accounting services, fees paid to state to incorporate
Excluded Costs = issuing / selling stock, commissions, underwriter fees, etc
What are the IRS rules regarding goodwill?
Must be amortized over 15 year period (GAAP just need to test for impairment)
Are life insurance premiums paid deductible by a corp?
Yes = insured employee named as beneficiary (fringe benefit)
No = corp named as beneficiary (key person)
What is the limit for a corp regarding business gifts?
$25 per year per person
What are the corp rules regarding capital losses? Can they be deducted?
Capital losses can only be used to offset capital gains (differs from individuals rules where they can take $3k of capital losses every year)
What is the dividends received deduction?
Allows corps to deduct a portion of their dividends received from their taxable income depending on the relation to the companies they received the dividends from (more relation = more deduction)
The idea is that dividends are being paid through multiple levels of entities and being taxed multiple times, this allows corps to flow dividends through multiple entities w/o them being taxed too much.
- think about it, if a corp is being paid a dividend, it just got taxed, was already taxed when earned by the paying corp, and is going to be taxed again when ultimately flows to an individual…thats triple taxation!!!
- only allowed for domestic corps
What are the various levels of the dividends received deduction?
70% = owns less than 20% (“unrelated”) (corp paid owns corp received)
80% = own 20% - 80%
100% = own over 80%
Are there any limitations regarding the DRD (dividends received deduction)?
Limited to lesser of:
- ) 70%-80% dividends received
- ) 70%-80% of taxable income computed w/o the DRD, NOL, Cap. loss carryback, domestic production deduction
Are there any exceptions to the limitation of the DRD?
No limitation if when you get the DRD you are in a loss, then you take 70-80% of divs regardless if TI is lesser (losers don’t play by the rules)
What types of entities are not elidgible for the DRD?
DON’T TAKE IT PERSONALLY
- ) S. corps
- ) Personal service corps
- ) Personal holding companies
What is the main difference between schedule M-1 & schedule M-3 of a corp?
Schedule M-1 does not break out the book to tax differences between temporary and permanent. schedule M-3 does.
What makes a corp required to fill out schedule M-3?
Total assets greater than $10M
What is the tax deadline of a corporation?
April 15th
What is the extension form called for a corp?
7004
What are the safe harbor rules for corps regarding estimated tax pmts?
Required to pay 100% of this year / last years tax (lesser of)
*if “large” corp ($1m tax income) use 100% of current tax
What are the various taxes a corporation is subject to?
- ) Regular corp tax
- ) Accumulated earnings OR Personal holding tax
- ) AMT
What is the general business credit?
Combination multiple credit for a corp:
- investment credit
- work opp. credit
- r&d credit
- low-income housing credit
- small employer pension plan credit
- etc
How is the general business tax credit calculated? (broad strokes)
Total qualified amounts
(limitation)*
= General business credit
*Limitation = greater of 25% of regular tax liability greater than $25k or tentative min tax
Net income tax ($25k) = $ *25% = $
What are the carryback / carryforward rules for the unused portion of the general business credit?
Carryback = 1 year Carryforward = 20 years
How do you calculate foreign tax credit for a corp?
Lesser of:
Foreign income / Total income = %
US tax paid * % above
*if foreign taxes lesser than that amount, then use foreign taxes paid as the credit
What is the accumulated earnings tax of a corp?
If a corp holds too much $ in retained earnings, they will be subject to the accumulated earnings tax to penalize them
*IRS wants you to distribute the earnings so they can tax them again at shareholder level
What amount is a corp allowed to hold in retained earnings w/o being subject to the accumulated earnings tax?
$250k is the limit
What is the additional tax rate for accumulated earnings?
20% flat tax
What is the personal holding company tax?
Personal holding companies are used as tax shelters for owners. Hoping they can report income at the holding company instead of at their ordinary tax rate.
Additional 20% flat tax assessed on personal holding net income not distrbuted (bc if distrubted, IRS can get their piece by taxing shareholder, if it stays in the holding company they cant touch it yet)
What is the definition of a personal holding company according to IRS?
- ) 50% owned by 5 or fewer individuals
2. ) 60% of adjusted gross income consisting of passive income (rent, interest, royalty, divs)
Are any corps exempt from AMT?
Yes, if annual gross receipts from previous 3 years are $7.5M or less you are exempt from AMT.
(or $5m for first 3 years of biz)
What is the exemption amount for corp AMT before phase out?
$40k (less 25% of AMTI in excess of $150k)
Are any credits allowed against tentative minimum tax for corps?
Foreign tax credit is the only one
What is the ownership requirement to file a consolidated return?
80% owned by a parent (can’t be an individual who owns 80% of two companies)
List the steps in determining consolidated taxable income:
- ) Calculate stand-alone taxable income
- ) Remove related party transactions
- ) Remove G/L’s & deductions taken at stand-alone in order to later determine at consolidated level
- ) Combine each taxable income
- ) Adjust combined taxable income for G/L’s & deductions
What deductions are not allowed to be taken to calculate an NOL? In other words, if you have an NOL, what deductions will be phased out to make you not sit at a loss?
- ) Charitable contributions deduction (10% ATI)
- ) Domestic productions activities deduction
- ) Capital loss carryback
If a dividend is paid to a shareholder of a corp that is paid directly from current E&P, what are the tax implications for the shareholder?
Taxable dividend
If a dividend is paid to a shareholder of a corp that is paid from accumulated E&P because there is no current E&P, what are the tax implications for the shareholder?
Taxable dividend
If a dividend is paid to a shareholder and there is no current or accumulated E&P and the shareholder has a basis in the corp that is larger than the div paid, what are the tax implications to the shareholder?
Tax free return of capital, reduces basis in common stock
If a dividend is paid to a shareholder and there is no current or accumulated E&P and the shareholder has a basis in the corp that is less than the dividend paid, what are the tax implications to the shareholder?
Portion in excess of basis = Capital Gain
Portion of basis = Nontaxable return of capital
How are dividends paid to shareholders of a corp allocated out of current E&P?
On a pro rata basis to each distribution (each div gets a portion of current E&P, then accumulated, then return of cap, then captial gain)
How are dividends paid to shareholders of a corp allocated out of accumulated E&P?
Chronological order
What is a constructive dividend?
Hidden/disguised dividend.
Trying to get a tax deduction when giving money to a shareholder:
- excessive salary
- excessive rent/royalty
- loans with no intent to be paid back
- sale of assets below FMV
Are stock dividends taxable?
Only taxable if the shareholder had the option to be paid in cash
If a shareholder is paid a property dividend from a corp, what are the tax implications to the shareholder? What about to the corp?
Shareholder = Taxed @ FMV of property
Corp = FMV - Basis = Taxable capital gain
If a corporation is liquidated, what are the tax implications?
If corp dies & nothing survives, all pay outs are taxed.
If reorganization, nontaxable.
*must determine if there is a continuity of business
What are the tax implications to an individual if their stock in a corp goes to zero?
Able to take as ordinary loss instead of capital loss (up to $50,000)
*must be the original investor to take this
There is an exclusion amount for individuals who hold small business stock for their gains, what are the rules?
If held more than 5 years, able to exclude 100% of the gain on sale
Max exclusion = greater of:
- ) 10 times basis in stock
- ) $10M if MFJ, $5M if single
