REG 4 - Corporate Taxation Flashcards
Basis of property corporation receives
Greater of:
1) the transferors adjusted basis (NBV) of the property (plus any recognized gains) or
2) The debt assumed by a corporation
*If the aggregate adjusted basis of property contributed to a corporation by each transferor in a tax-free incorporation exceeds the aggregate FMV, the basis is limited to the FMV
Shareholder tax consequences when exchanging property for corporation common stock
No gain or loss if:
1) 80% control by total shareholders
2) No receipt of boot
Liabilities assumed in excess of basis
Generates gain.
NBV assets
(liabilities)
=Gain
Computation of basis to shareholder (of common stock received from corporation)
Adjusted basis of transferred property \+FMV of services rendered \+Gain recognized by shareholder -Cash received -Liabilities assumed by the corporation -FMV of nonmoney boot received
Deductible executive compensation max
$1,000,000 for CEO, CFO, +3
Interest Expense deductions (corporations)
1) Business interest = incurred and paid = Tax deductible up to 30% of business income
2) Investment interest = deductible up to taxable investment income
3) Prepaid interest = Deduct next year when incurred
Charitable contributions deduction (corporations)
10% of adjusted taxable income before dividend-received deduction or any capital loss carryback
*Must be accrued and paid by April 15th
Business losses or Casualty losses (corporations)
100% deductible
*Partially destroyed property is limited to the lesser of the change in FMV or NBV
Organizational and Start up costs deductions (corporations)
$5,000 + Excess divided over 180 months
*Phase out if over 50,000
Organizational and start-up costs included and excluded
INCLUDED: -legal services -accounting services -fees paid to the state EXCLUDED: -cost of raising capital (selling stock, transferring assets to corporation, etc) -commissions to underwriter
Business gifts deduction (coporations)
$25 per person, per year
Life insurance expense deduction (corporations)
DEDUCTIBLE:
-Insured employee named as beneficiary, employee owns the policy
NOT DEDUCTIBLE:
-Corporation named as beneficiary, corporation owns the policy
*proceeds from the death of an officer are not includable in taxable income however
Dividend Received Deduction %s
0% to 20% = 50% deduction (“unrelated”)
20% to 80% = 65% deduction
80% or more = 100% deduction
DRD taxable income limitation
DRD equals the lesser of:
1) 50/65% of dividends received or
2) 50/65% of taxable income
* minimum holding period of more than 45 days
Exception to DRD taxable income limitation
The limitation does not apply if the full DRD results in a net operating loss
Corporate Taxable income steps
Gross income (deductions) =A (Charitable contributions deduction) =B (Dividends received deduction) = Taxable income or loss
Schedule M-1 and M-3
Reconcile net income to taxable income. M-1 does not distinguish between temporary and permanent differences while M-3 does
Estimated payments of corporate tax
Corporations are required to pay 1/4th of their estimated tax on the 15th day of the 4th, 6th, 9th and 12th months of the year
Small corporation estimated payments
Required to pay the lesser of:
1) 100% of the tax shown on the return for the current year or
2) 100% of the tax shown on the return for the preceding year
* Cannot be used if the corporation owed no tax in the preceding year
Large corporation estimated payments
Any corporation with $1million or more income must pay 100% of the tax shown on the current year return
General Business tax credit
Total credit (25,000) (remaining credit allowed *25%) =general business credit allowed *Carry back 1 year and forward 20
Foreign tax credit
Step 1: Determine the qualified foreign income taxes paid
Step 2: Compute the foreign tax credit limitation by multiplying the pre-credit US tax paid by the ratio of foreign source taxable income to income from both foreign and domestic sources
Step 3: Take the lesser of the two
*Carry back 1 year and forward 10
Foreign tax credit example
Worldwide taxable income: $20 million
Income from foreign sources: $5 million
Qualified foreign taxes: $2.5 million
Tax rate: 21%
Step 1: $2.5 million Step 2: 20 mill x 21% = 4.2 mill 5 mil / 20 mil = 25% 4.2 x 25% = 1,050,000 Step 3: 1,050,000 is the foreign tax credit. the difference between steps 1 and 2 can be carried back 1 year and forward 10
Accumulated Earnings Tax
Paid in addition to regular tax. 20% flat tax on improperly retained earnings if in excess of $250,000
Personal Holding Company Tax
Paid in addition to regular tax. 20% tax on income not distributed. Personal holding companies are defined as corporations more than 50% owned by 5 or fewer individuals and having 60% adjusted ordinary gross income consisting of:
- Net rent
- Interest that is taxable
- Royalties
- Dividends from an unrelated domestic corporation
Consolidated tax return %
80%-100% of voting power or value of all outstanding stock (aka affiliated group)
Brother-Sister Corporation
An individual owns 80%+ of the stock of two or more corporations. May NOT file a consolidated return
Advantages of filing a consolidated return
- Capital losses can be offset against capital gains of another corporation
- Dividends received are 100% eliminated because they are IC dividends
NOL pre 2018
Carryback 2 years, carryforward 20
NOL 2018-2020
Carryback 5 years, carryforward indefinitely
NOL 2021+
No carryback, carryforward indefinitely (NOLs being carried forward can only offset 80% of taxable income)
Corporate net capital loss
Carryback 3 years, carryforward 5
Individual net capital loss
$3,000 max, carryforward indefinitely
Order of distribution allocation
Current E&P before accumulated E&P. Any excess distribution over the both combined is a nontaxable reduction of the stock basis. Anything over that is considered a capital gain
Multiple distributions throughout the year (current vs. accumulated E&P)
Current E&P is allocated on a pro rata basis
Accumulated E&P is applied in chronological order
Property dividends
Unlike most dividends, if property appreciates then you recognize gain and tax it to the extent of E&P from gain
Corporate liquidation
Liquidation results in double taxation. The corporation and shareholders generally have to recognize gain or loss
Reorganizations
Tax-Free as long as the company survives
Worthless stock: section 1244 stock
can be treated as an ordinary loss instead of a capital loss, up to 50,000 (100,000 for MFJ)
Qualified small business stock
An individual who owns QSBS for more than 5 years may exclude 100% of the gain limited to the greater of:
1) 10 times the taxpayers basis or
2) $10 million
Stock redemption / surrender
If proportional: taxable dividend income If disproportional: taxable capital gain/loss *disproportional when: 1) Must now own less than 50% 2) ownership reduction was at least 20%
