REG: Chapter 12 Flashcards
Gross Income of a C Corporation
What is included as taxable income for a C Corp?
- All cash received from ordinary course of business
- Royalty income in advance
- Rental income in advance
- Interest income in advance
- Any gains or interest from sinking funds
- Capital Gains from Investments
- Net gain or loss from sale of business property
- Life insurance income
- Discharge of debt
Gain or losses from the sale of the C Corps own treasury is not included in taxable income
Deductions of a C Corporation
How are dividend reduction deduction calculated for C Corps?
The DRD is the lesser of
* % Allocation applied to Dividend income
* % Allocation applied to taxable income with the dividend deduction
% Allocation to determine DRD:
* < 20%: 50% of the dividend
* >20% < 80% ownership: 65% of the dividend
* > 80% and Affiliiated: 100%
If the % of ownership is not provided, assume it to be less than 20%
If the total expenses are more than the gross revenues, then the DRD is the % of the dividend
Gross Income of a C Corporation
In addition to operational business expenses, what expenses are deductible for a C Corporation?
- Interest on business borrowings
- Casualty Losses
- Dividend Received Deductions
- Charitable Contributions
- State Income Taxes
- Capital Loss Carryback
- Foreign Income Taxes Paid
Gross Income of a C Corporation
What items are not deductible when computing taxable income for C Corporations?
- Insurance premiums for key members
- Federal income tax
- Net long-term capital loss
Gross Income of a C Corporation
How are the deductions calculated when determining net income?
Taxable income needs to be computed before calculating any deductions that are going to be taken
Gross Income of a C Corporation
How are charitable contributions calculated for C Corporation deductions?
- 10% of the taxable income
- The charitable deduction is calculated before any dividend received deduction
Gross Income of a C Corporation
What value is given when a tangible asset is contributed?
The value is the FMV of the asset
Losses of a C Corporation
When are capital losses deductible?
- Capital losses can only be deducted to the extent of the capital gains being reported
- If there are no capital gains being report, then the capital loss is not deductible in the year incurred
- The capital loss can carry back 3 years and carry forward 5 years
- Capital losses are treated as short term, no matter what they originally started out as
Capital losses cannot be used to offset ordinary income
Losses of a C Corporation
Is the DRD included when there is a NOL in the current tax year?
- Yes
- The DRD is computed without regard to the taxable limitation
- The DRD is calculated based on the dividends received
Regular Income Tax and Foreign Tax Credits
What is the Foreign Tax Credit Calculation?
The Foreign Tax Credit is the lesser of:
- Foreign Tax Limitation: [(Foreign Source Income / Worldwide Income) x US Tax on Worldwide Income]
- Actual foreign taxes paid
Regular Income Tax and Foreign Tax Credits
What is the corporate tax rate?
21%
Estimated Tax
How is the estimated tax calculated for a large corporation?
- A large corporation has $1,000,000 or more in taxable income
- The estimated tax is 100% of the current year’s tax liability
Regular Income Tax and Foreign Tax Credits
What is the calculation to determine estimated tax payments for a corporation when taxable income is less than $1,000,000?
25% of the Lesser of:
- 100% of the previous year’s tax
- 100% of the current year’s tax
Regular Income Tax and Foreign Tax Credits
How are the quarterly estimated taxes calculated when taxable income is over $1,000,000?
1st Quarter: 25% of the Lesser of:
* 100% of the previous year’s tax
* 100% of the current year’s tax
2nd - 4th Quarters:
* 25% of the current year’s tax
Accumulated Earnings Tax (AET)
What is the formula to determine Accumulated Earnings Tax?
[Current E&P
(Dividends Paid)
(Accumulated Earnings Credit)]
x 20%
Net operating losses deductions and capital loss carrybacks/carryfowards are not allowed
Accumulated Earnings Tax (AET)
What is the minimum accumulated earnings credit base in order to determine AET?
- The minimum credit base is $250,000
- When undistributed E&P does not exceed $150,000, then the ATI will be zero
Accumulated Earnings Tax (AET)
How is the Allowable Accumulated Earnings Credit determined?
It is the greater of:
* Base amount of $250,000 - Prior year’s accumulated earnings and profit
* Current earnings and profits - Dividends Paid - Long-term capital gain adjustments for the current year
Accumulated Earnings Tax (AET)
What is the calculation to determine Accumulated Taxable Income (ATI)?
Taxable Income
+/- Adjustments (i.e. Federal Income Tax)
-Dividends Paid
-$250,000 minimum Accumulated Earnings Credit (if not calculated) or Maximum of AEC
Personal Holding Company (PHC) Tax
When is a corporation a personal holding company?
- At least 60% of its AGI for the year is Personal Holding Company Income
- More than 50% of the value of the outstanding stock is owned by 5 or less individuals
- Personal holding company income includes income received from stock and securities
Personal Holding Company (PHC) Tax
What is Personal Holding Company income?
- Includes taxable interest and dividends from unrelated domestic corporations
- Amounts received under personal holding contracts involves a shareholder that owns more than 25%
- The contract specifically designates that only the shareholder will provide a service
- It does not include tax-exempt interest
Personal Holding Company (PHC) Tax
What is the tax rate for personal holding company income?
- The tax rate is 20% of the undistributed personal holding company income
- A company cannot have a PHC tax and an Accumulated Earnings Tax in the same year
Personal Holding Company (PHC) Tax
What entities are exempt from Personal Holding Company Income Tax?
- S corporations
- Tax-exempt organizations
- Banks
- Domestic building and loan associations
- Certain lending or finance companies
- Life insurance and surety companies
- Businesses operating under the Small Business Act
- Corporations under Chapter 11 protection
- Foreign corporations
State and Local Tax Issues
What is a tax jurisdiction?
- A tax jurisdiction is a geographic area that has its set of tax rules and regulations
- Examples of tax jurisdictions are state, local, municipality and county
State and Local Tax Issues
What are the requirements of Nexus?
Solicitation of orders are:
* Approved in state and delivery is made out of state
* Approved out of state and delivery is made in state
* Approved in state and delivery is made in state
State and Local Tax Issues
What is UDITPA?
- UDITPA is the Uniform Division of Income for Tax Purposes Act
- Provides a uniform method of allocating and apportioning business income
- Specific rules apply to nonbusiness income from rents, royalties, capital gains, interest and dividends, patents and copyrights
- Interest and dividends are taxed based on the company’s home state, or commercial domicile
State and Local Tax Issues
What is calculation to determine the apportionment of UDITPA?
(Property Factor + Payroll Factor + Sales Factor)/3
State and Local Tax Issues
What is the calculation to determine the Property Factor?
(Average Acquisition Cost + Rental Value) / Average value of all property
- Property rented by the taxpayer is valued at eight times the net annual rent expense
- Property owned by the taxpayer is based on the original cost, so no depreciation is included
State and Local Tax Issues
What is the calculation to determine the Payroll Factor?
In-State Compensation Paid / Total Compensation Paid
The calculation does not include
* Payroll for management
* Maintenance are otherwise allocable to nonbusiness property
State and Local Tax Issues
What is the calculation to determine the Sales Factor?
In-State Sales / Total Sales
- Sales is based on net sales
- Capital gains and nonbusiness income are allocated, but are not apportioned
