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REG > R4 - Corporate Taxation > Flashcards

R4 - Corporate Taxation Flashcards

1
Q

C-Corp Formation: Corp Tax Consequences

A

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

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2
Q

C-Corp Formation: NOTE

A

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

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3
Q

C-Corp Formation: Basis for Transferor

A

Property and cash
contributed

  • Debt he is relieved of

= Basis in corporation

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4
Q

Tax Free Incorporation: NOTE

A

80% ownership is considered “control”

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5
Q

Formation of C-Corp: Corp Basis of Property Transferred

A

Greater of:

  • Adjusted basis of
    transferor plus any gain
    recognized
  • Debt assumed by corp
    (transferor may recognize
    gain to prevent negative
    basis)
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6
Q

C-Corp Formation: Shareholder Tax Consequences

A

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    -Cash withdrawn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

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7
Q

Gains to be recognized:

A

Lesser of “Gain realized” and “Boot received”

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8
Q

One owner is allowed:

A
  • Sole Proprietorship
  • LLC

Not partnerships

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9
Q

Acquiring Land from Transferor: Basis

A

Corp will record land at the Transferor’s basis + any cash used to acquire the land

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10
Q

Accrual Basis for Tax Purposes is necessary when:

A
  • 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.
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11
Q

Basis of CS: Shareholder

A

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
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12
Q

Section 351: NOTE

A

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.

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13
Q

Basis of CS for Shareholder: CALCULATION

A

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

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14
Q

Pass-through Entity: INCLUDE

A
  • General Partnerships
  • Limited Partnerships
  • Joint Venture
  • S-corp
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15
Q

Liabilities in Excess of Basis:

A

Excess has to be recognized as a “gain”

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16
Q

Transfers: NOTE

A

Transferor >80%

-Not taxable and corp has
same basis in property

Transferor <80%

-Taxable and corp basis is
FMV of property

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17
Q

Capital Gains: Corporations

A

Taxed at ordinary (corporate rates)

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18
Q

Entities required to use Accrual Method:

A
  • C-corps
  • Manufacturers
  • Tax shelters

Qualified Personal Service Corporations can use Cash.

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19
Q

Taxable Income: Goodwill

A

Amortize over 15 years and subtract any impairment.

Subtract this from Book Income (not taxable)

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20
Q

Taxable Income: ADD BACK TO BOOK INCOME

A

+Federal Income Tax

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21
Q

Taxable Income: SUBTRACT FROM BOOK INCOME

A

-Goodwill amortization (net of impairment)

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22
Q

Taxable Income: Cash Received in advance of Accrual Income

A

Taxable and includes:

  • Interest income
  • Rental income
  • Royalty income
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23
Q

Taxable Income: Charitable Contributions

A

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
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24
Q

Taxable Income: Organizational and Start-Up Costs

A
  • 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

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25
Q

Taxable Income: DRD Investor Ownership %’s

A

0-20% Ownership = 70%

20-80% Ownership = 80%

> 80% Ownership = 100%

Note:
- Add back dividend income
to gross income before
subtracting out DRD

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26
Q

Taxable Income: DRD Example

A

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

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27
Q

C-Corporations: Capital Losses

A

Not deductible in the current year:

  • Carry-back: 3 years
  • Carry-forward: 5 years

So don’t subtract when asked to calculate taxable income

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28
Q

DRD: Modified Income

A

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
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29
Q

Business Gifts:

A

Deductible up to $25 per recipient per year.

When calculating:

of gifts * (lesser of gift value or $25)

Add up total = deductible amount

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30
Q

C-Corp choosing of accounting method for tax purposes:

A

Must be made on initial tax return by using the chosen method

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31
Q

C-Corp: Capital losses in excess of gains:

A

Corporations cannot deduct any losses in excess of gains

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32
Q

S-Corps: Capital Losses/Charitable Contributions

A

Reported as separately stated items and don’t affect current taxable income.

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33
Q

Uniform Capitalization: IRC Section 263A

A

Certain “normally expensed” items must be capitalized as part of inventory for tax purposes. (can’t be deducted)

-Quality control

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34
Q

Life insurance:

A
  • 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
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35
Q

DRD: Minimum Holding Period

A

45 days

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36
Q

Corporations that are “not” financials institutions: RULE

A

Must use direct charge off method in regards to deduction for bad debts rather than the reserve method

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37
Q

Book/Tax Differences: Bad Debt Expense

A

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.

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38
Q

Book/Tax Difference: Federal Income Tax Expense

A

Always add back before taking out deductions

39
Q

Book/Tax Difference: Meals and Entertainment

A

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

40
Q

Book/Tax Differences: Reconciling Book to Tax (M1)

A 
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

41
Q

Book/Tax Differences: Treated the same for Book/Tax

A
  • Interest incurred on loan to carry US obligations
  • Provision for state corporation income tax

-Interest earned on US
treasury bonds

42
Q

Book/Tax Differences: Amortization

A

-Don’t forget to amortize for book purposes and then compare to amortization for tax purposes. Then consider how that will affect taxable income.

43
Q

Reserve and Expense: Cost Incurred (to Deduct from book income) Calculation

A

Beg reserve
+ Estimated Warranty Costs
- Ending Warranty Reserve
= Actual costs

44
Q

PHC: Personal Holding Companies Definition

A

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
45
Q

PHC: NOTE

A
  • 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)
46
Q

Illegal Business Deductions:

A

Can only deduct “cost of merchandise”

47
Q

PHC: Calculating Accumulated Earnings Tax (Personal Holding Company Undistributed Income)

A

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

48
Q

Lifetime Credit: (Remaining Credit Calc for PHC)

A

$250,000 for Reg Corp
$150,000 for Service Corp

-Beg Excess

=Remaining Credit

Note:

Beg Excess =
Beg E&P
-Corp Needs

49
Q

Accumulated Earnings Tax: DEFINITION

A

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

50
Q

Accumulated Earnings Tax: Helping Reduce the Tax

A
  • 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)
51
Q

Earned Income Credit:

A

Can only be used by individuals not corps

52
Q

General Business Credit:

A

Combines many credits to provide rules for their absorption against a taxpayers liability (carry-back and carryover rules)

53
Q

Lifetime Credit: Calculating Max Amount of Accumulated Taxable Earnings that can be subject to AET

A

Taxable income
-Federal Income tax
-Earnings credit ($250,000)
=Amount subject to tax (20%)

54
Q

Personal Service Corporations: Include

A 
Accounting
Law
Consulting
Engineering 
Architecture
Health
Actuarial
55
Q

PHC: Dividends Paid Deduction Includes

A
  • Dividends paid

- Consent dividends

56
Q

Estimated Payments of Corporate Tax:

A

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.

57
Q

Corporate AMT: Taxable Income Before NOL/Exemptions

A

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

58
Q

Corporate AMT: Calculating AMT After Adjustments/Preferences

A

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
59
Q

Corps Exempt from AMT:

A
  • $7.5 million or less in gross receipts from last 3 periods

- $5 million for first 3 periods of corp’s existence

60
Q

AMT: Adjustments and Preferences NOTE

A 
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.
61
Q

AMT: Tax Rate

A

Flat 20%

62
Q

AMT: Credits

A

-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

63
Q

AMT: Exemption

A

$40,000 less 25% of AMTI in excess of $150,000

64
Q

AMT: AMT vs Taxable Income and Total Tax Liability

A

When computing total tax liability, you will pay AMT tax to the extent is exceeds your regular tax liability.

65
Q

AMT: Real and Personal Property, what convention is used?

A

Real property: Mid-month

Personal property: Half-year/mid-quarter

66
Q

Filling Consolidated Tax Return: NOTE

A

Group eliminates dividend income from other group members.

67
Q

Consolidated Tax Return: Initial Requirement

A
  • 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

68
Q

Consolidated Tax Returns: Who is allowed/not allowed?

A

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
69
Q

Consolidated Tax Return: DRD

A

Limited to 30% of consolidated taxable income.

70
Q

Consolidated Returns: Gains/Losses Among Members

A

-Group members losses may offset gains of other members

71
Q

Consolidated Returns: Dividends Paid

A

Dividends paid to the parent corporations (owns 80% or more) are 100% tax free

72
Q

Corporation NOLs: Carry-back/Carry-forward

A

Always treat as ST-Capital Loss

73
Q

Corporations NOLs: Offset what?

A

Capital gains up to the amount of the carry-back/carry-forward

74
Q

Corporations NOLs: DRD/NOL

A
  • 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!!
75
Q

Corporate NOL: Carry-back/Forward

A

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

76
Q

1244 Worthless Stock: DEFINITION/RULES

A

-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.

77
Q

1244 Worthless Stock: Qualifications

A
  • 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
78
Q

1244 Worthless Stock: NOTE

A

Only ORIGINAL owner of stock can take ordinary loss deduction not someone who inherited it.. that would be a capital loss for them.

79
Q

Corporations: Accumulated E&P and Current E&P w/Distributions

A
  • 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
80
Q

Liquidation: Distributions to Shareholders Gain (Calculation)

A

FMV of property transferred
+Boot (cash received)
-Stock Basis
=Capital Gain from liquidation

81
Q

Property Dividends: RULE

A

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)

82
Q

Reorganization: RULE

A

Acquisition of a controlling interest (80%) by one corporation in the stock of another solely for the stock is non-taxable.

83
Q

Reorganizations: Types

A 
"Non-Taxable Event"
A: M&amp;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
84
Q

Parent/Sub Liquidation:

A

Nobody recognizes Gain/loss when sub is liquidated.

  • Parent assumes basis of sub’s assets and any unused NOLs
  • Liquidation fees are fully deductible.
85
Q

Multiple Cash Distributions during the year:

A

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

86
Q

Stock Dividend: Basis

A

Stock Dividends increase total number of shares by % dividend. New basis per share is created.

87
Q

Dividend Distribution: CS/PS

A

PS: always dividend income and reduces amount available to CS

CS: remaining amount is dividend income and return of capital.

88
Q

Payment of Dividends: Shareholder vs Corp

A 
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
89
Q

Multiple Distributions: Total > Sum of Accum E&P and Current E&P

A

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.

90
Q

Liquidation: Sub Liquidated by Parent

A

No gain/loss is recognized, parents assumes original basis of Sub’s property

91
Q

1244 Stock: NOTE

A 
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.
92
Q

Non-Liquidating Distribution to Shareholders:

A
  • 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
93
Q

Distributions: Shareholder NOTE

A

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

REG (8 decks)

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