R4 - Corporate Taxation Flashcards
C-Corp Formation: Corp Tax Consequences
No Gain/Loss to the corporation issuing stock in exchange for property at: (not taxable)
-Formation: issuance of CS
-Re-acquisition: purchase of
TS
-Resale: sale of TS
C-Corp Formation: NOTE
If the aggregate adjusted basis of property contributed to a corporation by each transferor is greater than the aggregate FMV of property transferred, the corporations basis is = FMV.
-This prevents “built-in losses” from being transferred
C-Corp Formation: Basis for Transferor
Property and cash
contributed
- Debt he is relieved of
= Basis in corporation
Tax Free Incorporation: NOTE
80% ownership is considered “control”
Formation of C-Corp: Corp Basis of Property Transferred
Greater of:
- Adjusted basis of
transferor plus any gain
recognized - Debt assumed by corp
(transferor may recognize
gain to prevent negative
basis)
C-Corp Formation: Shareholder Tax Consequences
No Gain/Loss if the following 2 conditions are met (IRS 351):
- 80% control immediately
after transaction - No receipt of boot
-The following would be
boot and require
recognition of gain:
-Cash withdrawn
-Receipt of debt
securities
-If this isn’t met, Gains/losses can be recognized
Gains to be recognized:
Lesser of “Gain realized” and “Boot received”
One owner is allowed:
- Sole Proprietorship
- LLC
Not partnerships
Acquiring Land from Transferor: Basis
Corp will record land at the Transferor’s basis + any cash used to acquire the land
Accrual Basis for Tax Purposes is necessary when:
- Purchases and sales of inventory
- Tax Shelters
- Certain Farming corporations
- C-Corps: provided the business has greater than $5 million average annual gross receipts for the 3 year period ending with the tax year.
Basis of CS: Shareholder
Basis of CS received will be the total of:
- Cash contributed
- Property adjusted basis
(NBV)
-Reduced by debt owed
-Gain recognized by the
shareholder (when debt >
adjusted basis) is added
to bring the stock basis
to zero - Services FMV (taxable)
-must recognize FMV as
ordinary income
Section 351: NOTE
Only applicable if immediately after the transactions the shareholder’s have 80% control. Services rendered don’t count (ordinary income)
-If note gains/losses can be recognized in income.
Basis of CS for Shareholder: CALCULATION
Adjusted basis of transferred property (including cash)
\+FMV of services rendered \+Gain Recognized by SH -Cash Received -Liabilities assumed by corp -FMV of non-money boot
=Basis of common stock
Pass-through Entity: INCLUDE
- General Partnerships
- Limited Partnerships
- Joint Venture
- S-corp
Liabilities in Excess of Basis:
Excess has to be recognized as a “gain”
Transfers: NOTE
Transferor >80%
-Not taxable and corp has
same basis in property
Transferor <80%
-Taxable and corp basis is
FMV of property
Capital Gains: Corporations
Taxed at ordinary (corporate rates)
Entities required to use Accrual Method:
- C-corps
- Manufacturers
- Tax shelters
Qualified Personal Service Corporations can use Cash.
Taxable Income: Goodwill
Amortize over 15 years and subtract any impairment.
Subtract this from Book Income (not taxable)
Taxable Income: ADD BACK TO BOOK INCOME
+Federal Income Tax
Taxable Income: SUBTRACT FROM BOOK INCOME
-Goodwill amortization (net of impairment)
Taxable Income: Cash Received in advance of Accrual Income
Taxable and includes:
- Interest income
- Rental income
- Royalty income
Taxable Income: Charitable Contributions
C-Corporations can deduct charitable contributions up to 10% of taxable income “after” adding back their DRD.
- Excess can be carried forward to the next 5 years
- Any accrual must be paid within 2.5 or 3.5 months of taxable YE to be deductible
Taxable Income: Organizational and Start-Up Costs
- Tax rule: $5,000 immediately deductible in first year if total amount doesn’t exceed $50,000 and 180 month amortization of remainder
- Don’t forget to multiply by o/s year
-GAAP rule: expense
Taxable Income: DRD Investor Ownership %’s
0-20% Ownership = 70%
20-80% Ownership = 80%
> 80% Ownership = 100%
Note:
- Add back dividend income
to gross income before
subtracting out DRD
Taxable Income: DRD Example
Taxable Income = $70,000
Dividend from “unrelated taxable domestic corp” = $10,000
-This means that less than 20% is owned so you would get the 70% DRD
= $63,000 taxable income
C-Corporations: Capital Losses
Not deductible in the current year:
- Carry-back: 3 years
- Carry-forward: 5 years
So don’t subtract when asked to calculate taxable income
DRD: Modified Income
Limited to DRD Modified Taxable Income:
= Taxable income before
-NOL carry-over/carry-back
-Capital loss carry-back
-Domestic production
deduction
So deduction % is limited to “lesser” of:
- DRD Modified Income
- Dividends Received
Business Gifts:
Deductible up to $25 per recipient per year.
When calculating:
of gifts * (lesser of gift value or $25)
Add up total = deductible amount
C-Corp choosing of accounting method for tax purposes:
Must be made on initial tax return by using the chosen method
C-Corp: Capital losses in excess of gains:
Corporations cannot deduct any losses in excess of gains
S-Corps: Capital Losses/Charitable Contributions
Reported as separately stated items and don’t affect current taxable income.
Uniform Capitalization: IRC Section 263A
Certain “normally expensed” items must be capitalized as part of inventory for tax purposes. (can’t be deducted)
-Quality control
Life insurance:
- Premiums paid for Officer’s life insurance where Corporation is beneficiary are not deductible
- Group life insurance premiums for employees where dependents are beneficiary (fringe benefit) are deductible
DRD: Minimum Holding Period
45 days
Corporations that are “not” financials institutions: RULE
Must use direct charge off method in regards to deduction for bad debts rather than the reserve method
Book/Tax Differences: Bad Debt Expense
Non-deductible so you would add back to book income to get to taxable income.
-Can only deduct amount that is written off. So if a company writes off $5,000 one year and accrued an additional $15,000 in Bad Debt Expense, add $10,000 to book income to get to taxable income.
Book/Tax Difference: Federal Income Tax Expense
Always add back before taking out deductions
Book/Tax Difference: Meals and Entertainment
Add back 50% of Meals and Entertainment to Book Income to get to taxable income
-It has reduced book income by total amount and tax only allows 50% so you have to add it back
Book/Tax Differences: Reconciling Book to Tax (M1)
Net Income (per books): \+Fed Tax \+Excess capital loss over gains \+Income subject to tax not on books this year \+Installment sale income \+Rent received in advance \+Expenses on books not on tax return \+Book Dep \+50% meals and entertainment \+Increase in AFDA \+Warranty Accrual \+Goodwill impairment \+Pension expense \+Penalties \+Political expenses \+Interest to carry municipal bonds
-Income recorded on books not on tax return -Tax Exempt interest -Life insurance proceeds -Tax Dep -Contribution carry-over -Section 179 deduction -Bad debt write off -Actual warranty costs -Amort of org costs -Goodwill amort per return -Pensions paid
=Taxable income
-this is before “NOL and DRD” deductions
Book/Tax Differences: Treated the same for Book/Tax
- Interest incurred on loan to carry US obligations
- Provision for state corporation income tax
-Interest earned on US
treasury bonds
Book/Tax Differences: Amortization
-Don’t forget to amortize for book purposes and then compare to amortization for tax purposes. Then consider how that will affect taxable income.
Reserve and Expense: Cost Incurred (to Deduct from book income) Calculation
Beg reserve
+ Estimated Warranty Costs
- Ending Warranty Reserve
= Actual costs
PHC: Personal Holding Companies Definition
Any time during the last half of the taxable year >50% is owned by 5 or less people and have 60% of AGI consisting of:
- Net rent (if <50% of ordinary gross income)
- Interest (that is taxable)
- Royalties (not mineral, oil, gas or copyright)
- Dividends (from unrelated domestic corp)
- Investment Income
PHC: NOTE
- Additional tax (penalty) is assessed by the PHC
- Not subject to Accumulated Earnings Tax
- No penalties if Net Earnings are distributed (penalty only applies to income that has not been distributed)
Illegal Business Deductions:
Can only deduct “cost of merchandise”
PHC: Calculating Accumulated Earnings Tax (Personal Holding Company Undistributed Income)
Taxable Income (before DRD, NOL, Charity, Capital Loss Carryover)
- All charity
- All capital losses
- Taxes
- Dividends paid (during tax year, within 3.5 months, consent dividend)
=Accumulated Taxable Inc
-Remaining credit
=Current Accum. Taxable Inc
*20%
=Accumulated Earnings Tax
Lifetime Credit: (Remaining Credit Calc for PHC)
$250,000 for Reg Corp
$150,000 for Service Corp
-Beg Excess
=Remaining Credit
Note:
Beg Excess =
Beg E&P
-Corp Needs
Accumulated Earnings Tax: DEFINITION
Penalty imposed on C-Corp whose accumulated RE is >$250,000 if improperly retained and not distributed.
Don’t effect:
- PHC
- Tax Exempt Corps
- Passive foreign invest corps
Penalty is a flat 20%.
Assessed by the IRS
Accumulated Earnings Tax: Helping Reduce the Tax
- Demonstrate specific, definite and feasible plan for the accumulation
- Need to redeem the corp stock included in a deceased stockholder’s gross estate
- Paying a dividend by the due date (3 and 1/2 months)
Earned Income Credit:
Can only be used by individuals not corps
General Business Credit:
Combines many credits to provide rules for their absorption against a taxpayers liability (carry-back and carryover rules)
Lifetime Credit: Calculating Max Amount of Accumulated Taxable Earnings that can be subject to AET
Taxable income
-Federal Income tax
-Earnings credit ($250,000)
=Amount subject to tax (20%)
Personal Service Corporations: Include
Accounting Law Consulting Engineering Architecture Health Actuarial
PHC: Dividends Paid Deduction Includes
- Dividends paid
- Consent dividends
Estimated Payments of Corporate Tax:
Required on 15th quarterly.
1/4th of tax is due with each payment.
Unequal payments may be made with annualized method but penalty will be imposed if these payments aren’t made and amount owed on return is >$500.
Corporate AMT: Taxable Income Before NOL/Exemptions
Regular Taxable Income
\+/- Adjustments:
-Gain/Losses
-LT contracts
-% of completion used for
AMT so difference from
CC is added back
-Installment sales (dealers)
-Depreciation difference:
-AMT real property is
depreciated ADS over 40
years
-AMT personal property
uses 150% declining
balance where normal tax
is 200%
\+Preferences: -Percentage depletion -Private activity (tax exempt interest (post 1986) -Pre 1987 ACRS excess depr
=Unadjusted AMT-TI
Corporate AMT: Calculating AMT After Adjustments/Preferences
Unadjusted AMT-TI subtract:
(Adjusted current earnings (increase/decrease) (negative is limited to past positive))
-Municipal Interest
-Org Expense Amort
-Life insurance proceeds
-Difference between AMT and
ACE depr
-DRD (under 20%)
-NOL =AMTI -AMT Exemption ($40,000 less 25% of MTI >$150,000) =AMT Base *20% =Gross AMT -Foreign Tax Credit =Tentative Min Tax -Regular Tax Liability =AMT
Corps Exempt from AMT:
- $7.5 million or less in gross receipts from last 3 periods
- $5 million for first 3 periods of corp’s existence
AMT: Adjustments and Preferences NOTE
Adjustments: - Come from timing differences and will either be added/subtracted from normal taxable income
Preferences: - Come from items that are not typically taxed but are for AMT purposes. These are always added back.
AMT: Tax Rate
Flat 20%
AMT: Credits
-Foreign Tax Credit
-only credit allowed against
tentative minimum tax
-Minimum Tax Credit
- Corp that pays AMT one
year may use the AMT in
future years as a credit
against regular income tax
liability
-Carry-forward is indefinite
but no carry-back
AMT: Exemption
$40,000 less 25% of AMTI in excess of $150,000
AMT: AMT vs Taxable Income and Total Tax Liability
When computing total tax liability, you will pay AMT tax to the extent is exceeds your regular tax liability.
AMT: Real and Personal Property, what convention is used?
Real property: Mid-month
Personal property: Half-year/mid-quarter
Filling Consolidated Tax Return: NOTE
Group eliminates dividend income from other group members.
Consolidated Tax Return: Initial Requirement
- Be members of an affiliated group some time during the year.
- Each member must file a consent on Form 1122
-Election must be made by
parents extension tax
return date
Consolidated Tax Returns: Who is allowed/not allowed?
Allowed:
-Common parent must own 80% of the voting power/CS of at least one of the affiliated corporations (c-corps) and other corps not controlled must be controlled under 80% ownership test by an includible corporation
Not Allowed: -S-corps -Foreign Corps -Most real estate investment trusts -Some insurance companies -Most exempt orgs
Consolidated Tax Return: DRD
Limited to 30% of consolidated taxable income.
Consolidated Returns: Gains/Losses Among Members
-Group members losses may offset gains of other members
Consolidated Returns: Dividends Paid
Dividends paid to the parent corporations (owns 80% or more) are 100% tax free
Corporation NOLs: Carry-back/Carry-forward
Always treat as ST-Capital Loss
Corporations NOLs: Offset what?
Capital gains up to the amount of the carry-back/carry-forward
Corporations NOLs: DRD/NOL
- Excess of deductions over gross income.
- DRD is allowed to be deducted BEFORE calculating NOL
-DRD Note: normal deduction rules ( lesser of 70/80/100% of taxable income (before DRD/NOL) or dividends received.
- Don’t forget to add back
dividends income before
taking out DRD!!
Corporate NOL: Carry-back/Forward
Back: 2 years
Forward: 20 years
Different from Corporate Capital Loss!!!
Back: 3 years
Forward: 5 years
And individual Capital loss:
Max: $3,000
Back: n/a
Forward: Forever
1244 Worthless Stock: DEFINITION/RULES
-When stock becomes worthless the original stockholder can be treated as having ordinary loss (fully tax deductible) instead of capital loss, up to $50,000 and any excess over $50,000 would be considered capital loss offsetting any gains and then a max of $3,000 per year would be deductible.
1244 Worthless Stock: Qualifications
- Cash/property paid to corp in exchange for first $1,000,000 of capital stock
- Stock must have been issued to an individual stockholder/partnership for $ or other property but not stock/securities or services
1244 Worthless Stock: NOTE
Only ORIGINAL owner of stock can take ordinary loss deduction not someone who inherited it.. that would be a capital loss for them.
Corporations: Accumulated E&P and Current E&P w/Distributions
- Distributions considered to be “dividend income to shareholders” is limited to Accumulated E&P and Current Year E&P. These are taxable
- Limited to “earnings” not deficits
Liquidation: Distributions to Shareholders Gain (Calculation)
FMV of property transferred
+Boot (cash received)
-Stock Basis
=Capital Gain from liquidation
Property Dividends: RULE
Taxable to the extent of the FMV but not in excess of Accumulated E&P, Current E&P and any Gain from distribution (FMV-Basis)
Reorganization: RULE
Acquisition of a controlling interest (80%) by one corporation in the stock of another solely for the stock is non-taxable.
Reorganizations: Types
"Non-Taxable Event" A: M&A B: Acquisition of stock for the stock C: Acquisition of assets for assets D: Dividing the corp into separate operating corps E: Recapitalization F: Change in identity
Parent/Sub Liquidation:
Nobody recognizes Gain/loss when sub is liquidated.
- Parent assumes basis of sub’s assets and any unused NOLs
- Liquidation fees are fully deductible.
Multiple Cash Distributions during the year:
First:
-Current E&P is allocated to
each distribution on pro
rata basis.
Then:
-Accumulated E&P is
allocated in chronological
order starting with first
Stock Dividend: Basis
Stock Dividends increase total number of shares by % dividend. New basis per share is created.
Dividend Distribution: CS/PS
PS: always dividend income and reduces amount available to CS
CS: remaining amount is dividend income and return of capital.
Payment of Dividends: Shareholder vs Corp
Shareholder: - Taxable amount is the amount of cash received and FMV of property received Corp: - Only taxable dividend payment comes from a appreciated property dividend. Corp would recognize a gain if land is sold at FMV
Multiple Distributions: Total > Sum of Accum E&P and Current E&P
When total distributions are greater than the sum of Accum E&P and Current E&P, taxable distributions are limited to the Sum of Accum E&P and Current E&P.
Liquidation: Sub Liquidated by Parent
No gain/loss is recognized, parents assumes original basis of Sub’s property
1244 Stock: NOTE
MFJ:
- Can deduct up to
$100,000, any excess is a
capital loss and a max of
$3,000 of capital losses
can be used against
ordinary income.Non-Liquidating Distribution to Shareholders:
- Corp is considered to be selling the assets for FMV and must recognize and pay tax on any Gain.
- Losses on things like buildings are not deductible
Distributions: Shareholder NOTE
Ordinary Income:
- distributions to the extent of the C-Corps current & accumulated E&P
Excess distribution:
- non-taxable return of capital to the extent of shareholder’s basis
Distribution in excess of both earnings and profits and a shareholder’s basis:
-capital gain
-NEVER see Capital Losses
