REG 2 - Corporate Tax Flashcards
C Corporation (3)
C Corporation has three characteristics:
- Taxpaying Entity (Form 1120)
- Created formally - Articles of Incorporation
- Owned by shareholders who has Limited Liability
- 90% is GAAP which uses Accrual - Rest are exceptions
- Tax return due 3/15 (2 1/2 months after year-end)
- Calendar year or Fiscal year
Formation of C Corps (4)
Formation - is Formal (Articles of Incorporation)
- Tax-Free if contributions of cash & property gain 80% or more - Control.
- Section 351 Tax Free Exchange - Tax-free exchange if the contributorS of cash & property gain 80% or more of the stock control.
-
Cash or Property 80% more (Control)
- Tax free exchange for stock
- Carryover Basis
- If property is subject to debt, CV 40-10 debt = 30 basis in stock
- Carryover holding period
-
Services <80% of stock
- Taxable income at FMV of stock for individual
- Wage expense for corporation
-
If NO control
- Stock received is taxable to all parties
-
Reorganizations of corporation also tax-free
- Carryover basis
Corporate Income Tax Return (1120)
+Gross Income (Worldwide)
-Ordinary Deductions
=Income before “Special Deductions”
- Charitable Contribution (10% of ATI)
- DRD, NOLs
=Taxable Income
xTax Rate
=Gross Tax Liability
-Foreign Tax Credit
=NET Regular Tax Liability
+Personal Holding Company Tax (PHC)
+Accumulated Earnings Tax
+Alternative Minimum Tax (AMT)
=Total Tax Liability
Basis of Property Exchanged for Corporate Stock
Shareholder’s Basis
Tax-free exchange under Section 351 if TransferorS have atleast 80% control after the exchange.
Shareholder’s basis in stock received equals:
+Adjusted basis of property transferred
+Recognized gain
+Cash paid
+Liabilities Assumed
+Transaction costs & fees
- Cash Received
- FMV of property received
- Liabilities Transferred
Basis of Property Exchanged for Corporate Stock
Corporation’s Basis
Tax-free exchange under Section 351 if TransferorS have atleast 80% control after the exchange.
Corporation’s basis in property received equals:
+Adjusted basis of the property in the hands of the transferor
+Gain recognized by the transferor
Revenues
Revenues are generally the same as individual tax with some exceptions:
- Revenue recognized at the earlier of when earned or collected.
- Life Insurance Proceeds on key emplyee
- If corp is the beneficiary, NOT deductible
- If employee is beficiary, expense IS deductible
Deductions
(Accrued Items 4)
Deductions - all reasonable expenses may be deducted.
- Certain accrued items expected to be paid within a short period of time after accrual, however. These may only be deducted when accrued if they are paid within 2.5 months of the corporation’s tax year:
- Wages
- Bonuses
- Vacation Pay
- Charitable Contributions
Organizational Expenses
(amount & threshold)
State incorporation fees (including legal & accounting) may be deducted.
-
$5K of organizational expenditures & start-up costs may be deducted.
- Threshold: Dollar per dollar after $50K
- Any costs NOT currently deducted may be amortized over 180 months or 15 years.
- MUST elect to amortize in the period of organization
Salaries & Wages
&
Bonuses, Vacation Pay
Salaries & Wages, Payroll Taxes & Fringe Benefis:
- Can only deduct up to $1M of compensation expense for each of the highest paid executive officers
Bonuses & Vacation Pay:
- Deductable IF paid w/in 2.5 months after year end (3/15)
Estimated Losses
&
Interest Expenses
Estimated Losses are NOT deductible.
- Bad debts NOT claimed until actual Direct Write-Offs
- Warranty costs NOT claimed until actual repairs.
Interest Expenses are NOT deductible if:
- Loan proceeds/expenses are used for tax-exempt investments.
Reimbursed Employee Expenses
Reimbursed Employee Expenses that are Deductible:
- 50% of Meals & Entertainment
- 100% of Travel Costs
- Hotel
- Airfares
- Car Rentals
Casualty Losses
Casualty Losses - Business property-adjusted basis immediately before casualty.
Goodwill, Franchise & Trademarks
&
Reasearch & Development
Goodwill, Franchise & Trademarks expenses are amortized over 15 years.
R&D - Immediately deductible OR over amortized over a minimum of 60 monts.
What are the three “Special Deductions”?
- Charitable Contributions
- Dividend Received Deduction
- Net Operating Losses
Dividends Received Deduction
(DRD)
A deduction for a corporation equal to a percentage of dividends received based on the level of ownership:
- 70% if ownership is less than 20%
- 80% if ownership is between 20% - 80%
- 100% if ownership is greater than 80%
NOTE: Correct! In order for a corporation to claim the dividends received deduction, the corporation must own the investee stock for at least 46 days during the 91-day period beginning on the date 45 days before the ex-dividend date.
Investor doesn’t qualify for DRD if? (4)
- From a foreign corporation (IRS didn’t tax investee)
- Borrowed money to buy the investment (interest exp)
- Received from a tax exempt organization
- Owned for less than 46 days (minimum holding period)
Charitable Contributions
(Tested)
Donations made by a corporation to a charitable organization.
- Limited to 10% of ATI
-
Adjusted Taxable Income = Net Income adjusted for:
- +Capital Loss Carryback
- +NOL Carryback
- +DRD
- +Charity
- Unused amount is carried forward 5yrs
- Pledge may be accrued if paid within 2.5 months after year end
Capital Gains & Losses
When a corp sells assets that are held for investments, the difference between the tax bases & proceeds from sale are recognized as capital gains/losses.
Capital Losses are NOT deductible to a corporation.
-
Capital Losses may only offset Capital Gains
- Unused are carred back 3yrs & forward 5yrs
- All loss carrybacks/forwards are considered short-term.
NOTE: Excess capital losses are deductible for book purposes, but are not deductible for income tax purposes. The losses must be added back to book income.
Net Operating Losses
(NOL)
Net Operating Losses are deductible:
- May be carried back 2yrs & forward 20 yrs
- Individuals, same rules
Non-Deductible Items (6)
- Federal Income Taxes
- Government Fines, Fees, Penalties
- Costs of Issuing Stock
- Lobbying Costs - for politics
- Compensation over $1M to top executives
- Club Dues - considered as personal
Non-Deductible Items unitl Paid (5)
- Bad Debt (Allowance for bad debt expenses)
- Warranties liabilities
- Lawsuits
- Marketable Securities - changes in market value are not reported on the tax return.
- Inventory - Inventory declines are not reported on the tax return.
Foreign Tax Credit (2)
(TESTED)
Foreign Tax Credit is the lower of:
- Taxes paid in the foreign country or
- Credit = US Tax Liability x (Foreign Income/Total Income)
What are the three important Penalty Taxes for Corporations?
- Accumulated Earnings Tax (AET)
- Personal Holding Company Tax (PHC)
- Alternative Minumum Tax (AMT)
Penalty Taxes
Accumulated Earnings Tax (AET)
AET - A 20% penalty tax is imposed on a corporation for accumulating excessive retained earnings, to encourage the distribution of dividends.
-
Safe Harbor allows certain amounts retained:
-
Manufacturing Corps = $250K
- PLUS Additional sums retained for Federal Income Taxes
-
Personal Service Corps = $150K
- PLUS Additional sums retained for Federal Income Taxes
-
Manufacturing Corps = $250K
Penalty Taxes
Personal Holding Company Tax (PHC)
PHC - Corporations created by individuals to avioid higher tax rate. May be subjected to the 20% tax if BOTH:
- 5 or fewer individuals owns more than 50% of stock
- 60% or more of revenues are from passive sources
NOTE:As a result, the tax only applies to undistributed income of the corporation. After deducting corporate taxes & net long-term capital gains to arrive at UPHCI.
Quarterly Estimated Tax Payments (1120ES)
A corporation is required to make quarterly estimated tax payments during the year & is subjected to a penalty if not paid. Estmated tax payments are due on the 15 of the 4th, 6th, 9th, & 12th months of its taxable year.
- Penalty may be exempt if the following occurs:
- Small Balance - less than $500
- Annualized Income
- Current Year - estimated tax payments equal to atleast 100% of the current year tax liability
- Previous Year - estimated tax payments equal to atleast 100% of the previous year
Due Dates
Corp Tax, Amended, Statue of Limitations
Corporate Tax - is on or before the 15th day of the 3rd month following the close of the year.
- Must file a return even if has no taxable income
- Extensions:
- IRS grants an automatic 6 month extension
Amended Returns (1120X) due by later of:
- 3 Years after the original return was due
- 2 Years after payment of the tax was
Statue of Limitations for IRS:
- 3 years after later of due date or filing date
- 6 years if total income is understated by 25% or more
- Unlimited for tax fraud or non-filing of return
Penalties may be excluded if? (4)
Penalty may be exempt if the following occurs:
- Small Balance - less than $500
- Annualized Income
- Current Year - estimated tax payments equal to atleast 100% of the current year tax liability
- Previous Year - estimated tax payments equal to atleast 100% of the previous year
Corporate Distributions
CEP & AEP
(4 Scenarios)
(TESTED)
CEP - Current Earnings & Profits - Similar to Net Income
AEP - Accumulated E & P - Similar to Retained Earnings
There are 4 scenarios regarding CEP & AEP, whether the distribution is taxable or a return of capital:
- +CEP & -AEP = Taxable up to the CEP amount
- -CEP & +AEP = Taxable up to the NET of CEP & AEP
- +CEP & +AEP = Taxable up to the NET of CEP & AEP
- -CEP & -AEP = Non are taxable, a return of capital
NOTE: If property with an appreciated property is distributed, the FMV less basis is considered part of CEP.
Corporate Distribution
Property Distribution
When a corp distributes property to a shareholder (dividend-in-kind).
-
Shareholder recognizes property received at FMV.
- If there is a liability w/ property distributed, the basis is still at FMV and the liability IS recorded separately.
-
Corporation must recognize a gain if the FMV exceeds the tax basis.
- If FMV is lower, corporation is NOT allowed a loss deduction.
- If Liability is higher than the FMV of the asset, the gain realized by the corp is the Liability less the asset’s basis.
NOTE: Correct! When a corporation distributes property to a shareholder, the corporation must recognize a gain or loss in the same manner as it would if the property had been sold at its FMV on the date of distribution. However, if a shareholder assumes a liability associated with the asset, and the liability is greater than the FMV of the asset, the FMV of the asset is deemed to be equal to the amount of the liability. Thus, the FMV of the asset is deemed to be $40,000. Aztec must recognize a $15,000 gain ($40,000 - $25,000).
Corporate Distribution
Non-Liquidating
vs.
Liquidating
Corporation
- Non-Liquidating:
- Gain = Taxed (Capital Gain)
- Loss = NOT Deductible
- Liquidating:
- Ordinary Gain
- Ordinary Loss
Shareholder
- Non-Liquidating:
- Ordinary Income (Up to E&P)
- Liquidating:
- Capital Gain
- Capital Loss
Section 1244 Stock
- If appreciates, gain is considered Capital Gain (Sched D)
-
If value declines, Loss is considered an Ordinary Loss
- Up to $50,000 Ordinary Loss
- Remainder is $3000 per year
- Only applies to the first $1M of stock
- Must be sold by oridginal purchaser
- Issued by a US Corporation for money or property, not services
Alternative Minimum Tax
(Calculations)
Regular Taxable Income
+/- Adjustments & Preferences (PILE)
= AMTI before ACE adjustments
+/- Adjusted Current Earnings (ACE) Adjustments (SLIM)
=AMTI before Exemptions
- Exemptions [$40K - 25%( AMTI b4 Exempts - $150K)]
=AMTI
x Tax Rate (20%)
=Tentative Minimum Tax
-Regular Tax (usually given)
=AMT
AMT Adjustments & Tax Preferences
(PILE)
Amounts added back to regular taxable income to compute ATMI. The adjustments & preferences for a corporation include: PILE
- Private Activity Bonds interest income
- Installment Sales of Inventory
- Long Term Contract Income - must be calculated using percentage of completion method which increases taxable income.
- Excess Depreciation on Personal Property over 150%, double declining is not allowed. This reduces expenses & therefore increases taxable income.
AMT Adjusted Current Earnings (ACE) Adjustment
(SLIM)
Additional items added to taxable income in computing ATMI, consisting of SLIM:
-
Seventy Five Percent - 75% of the 70% DRD are added
- DRD from stock which have a less than 20% ownership
- Life Insurance proceeds on the death of a key employee
- Municipal bonds other than Private Activity Bonds
Cash Basis vs. Accrual Basis
Correct! Service businesses with gross receipts of $10M or below may use the cash basis. This includes most individuals, S corporations and individually owned partnerships.
How are passive losses allocated?
What amount of suspended loss should Dietz allocate to Activity X?
Dietz is a passive investor in three activities which have been profitable in previous years. The profit and losses for the current year are as follows:
Gain/(Loss)
Activity X($30,000)
Activity Y($50,000)
Activity Z$20,000
Total($60,000)
What amount of suspended loss should Dietz allocate to Activity X?
Incorrect. A suspended loss is the difference between the total loss incurred in passive activities and the amount that may be deducted by offset against income from passive activities. The suspended loss is allocated to those passive activities incurring a loss in proportion to the amounts of losses. The total of the losses is $80,000, offset by a gain of $20,000, resulting in a suspended loss of $60,000. The portion to be allocated to X will be $30,000/$80,000 X $60,000 = $22,500.
