REG Chapter 3 Flashcards
What entities are subject to double taxation?
Only C Corporations (Form 1120)
Tax due on 04/15
Corporation - Formation Tax Consequences
General rule is that there is no Gain or Loss recognized when issuing stock in exchange of property during:
Formation
Reacquisition
Resale
Corporation Basis of property when it is formed
The basis of the property received from transferor/shareholder is the greater of:
- Adjusted Basis
or - Debt assumed by corporation
Shareholder Tax Consequences when forming corporation
If contributing property (not services) in exchange for common stock will not have a gain or loss if meeting the two conditions:
- 80% control
- Boot not involved
Shareholder who contributed only services is not counted as part of 80% control. This SH recognized FMV as ordinary income
If boot is involved, then SH recognizes gain to the lesser of cash received or realized gain
Shareholder forming corporation and receiving cancellation of debt - what happens?
If the cancellation of debt exceeds adjusted basis of assets then
- transferred is considered boot
If the cancellation of debt is < than adjusted basis of asset then
- no gain recognized
Shareholder basis when forming corporation
Cash
+ Property adj. basis reduced by debt assumed by corporation
+ gain recog. by shareholder (when debt exceeds asset adj basis)
A shareholder contributes his services to forming a corporation- what happens?
Shareholder recognized ordinary income at FMV
Schedule M-1 and Schedule M-3
CONFUSED ABOUT THESE
Schedule M-1 reconciles permanent and temporary differences. M-1 does not distinguish between temporary and permanent differences. Schedule M-3 does.
Temporary differences: interest, rental, and royalty income received in advance - taxed when received
Permanent differences: interest income from municipal or state bond, proceeds from life insurance, federal income taxes
Interest exp. to carry municipal bond, + to acg income
Interest - to acg income
Bad debt exp., + to acg income (only write off allowed)
Municipal bond income, - to acg income
M-3: Corporation with assets greater than $10M
Trade or business deductions of a corporation - are they deductible?
Ordinary and necessary expenses paid or incurred during the year are deductible!
Example: reasonable salaries, office rentals, office supplies, traveling expenses
Domestic production deduction of a corporation
Made and sold in america gets deduction
Can a corporation deduct bonus accrual?
Yes - for non shareholder employees and paid by 04/15
Corporation charitable contribution
Maximum of 10% of adjusted taxable income
Carry forward the excess for 5 years - accrued and paid by 04/15.
(individual has a limit of 50% cash and 30% FMV of property)
Use taxable income BEFORE DRD
Corporation business losses or casualty losses
100% deductible
No $100 deduction like individual
No 10% AGI reduction like individual
Corporation organizational expenditures and start up costs
5K of organizational expenditures and 5K of start-up costs
Excess is amortized over 15 years
Example: legal services, drafting corporate charter, bylaws, minutes of meetings, accounting services, fees to the state of incorporation
Treatment of goodwill
Tax: amortize over 15 years
GAAP: not amortized, just test for impairment
Life insurance premiums - are they deductible by the corporation?
If Corp is beneficiary NO
If employee is beneficiary then YES
Corporation business gift
25 per person
Corporation business meals and entertainement
50% deductible
Corporation capital gains and losses
Capital losses not allowed, they only offset capital gain (for individuals it is $3K deduction and forever)
Capital loss carryover back 3 years, forward 5 as SHORT term
Capital gain are taxed as ordinary income - same tax rate
NOL- same as individual - 2 back and 20 forward
Corporation - General Business Credit
Credit may no exceed net income tax minus
25% of tax liability above $25K
or
Tentative minimum tax for the year
Corporation Dividend Received Deduction
0 % - < 20 % 70% deduction - take lesser of 70% taxable income before DRD or 70% of dividend)
20% - < 80% 80% deduction
80% or more 100% deduction
does not apply to personal service corporations
personal holding companies
personally taxed S corporations
When is a C corporation required to use accrual of accounting?
Purchases and sales of inventory
Tax shelters
Certain farming corporations
C corporations with average annual gross receipts of $5M or more for the last 3 years
Estimated payments of corporate tax for a C corporation?
Small Corporation: 100% of the taxed for the CY or 100% of the tax for the PY
Large Corporation: taxable income of $1M or more in any of the 3 proceeding years - must pay 100% of tax shown on CY return
C Corporation consolidated tax returns
as such, S corporations cannot consolidate, same goes for foreign corporations, insurance companies, others
Take 100% DRD
Consolidate return when the affiliated party owns 80% or more of the voting power of all outstanding stock and 80% or more of the value of all outstanding stock of each corporation
If one individual owns more than 80% then they cant file together
Corporations - accumulated earnings tax
Imposed for retaining earnings instead of distributing dividends. Imposed if earnings in excess of $250,000, taxed at 20%
To avoid the corporation may show that the $ is needed to conduct their regular course of business or the corporation may also pay dividends by 03/15 of the following year
Corporations - Personal holding company
When more than 50% is owned by 5 or fewer individuals AND having 60% of adjusted ordinary gross income that consists of:
N - net rent
I - interest that is taxable
R - royalties
D - dividends
These corps are taxed at 20% more on personal holding income not distributed. This tax is paid in addition to AMT.
Liquidation
Corporation sells assets and distributes cash to shareholders
Corporation distributes assets to shareholders
(Double taxation for both!!)
ALSO CHECK PRINTED QUESTION
Corporation recognizes a gain/loss
Sales Price - Basis
Shareholder recognizes a capital gain/loss
Proceeds - Basis
Corporation distributes assets recognize gain/loss
FMV - Basis
Shareholder receives asset recognize capital gain/loss
Sales Price - Stock Basis
Worthless Stock Section 1244
small business
If the stock is sold or becomes worthless, the original stockholder can claim an ordinary loss (fully tax deductible) instead of a capital loss up to $50K if single, or $100K if MFJ.
The loss in excess of this amount is a capital loss which offsets capital gains and then a maximum of $1,500, or $3,00 if MFJ, will be deductible per year
Treatment of state income taxes, city income taxes, federal payroll taxes
All of these taxes are deductible when incurred on property or income relating to the business
FEDERAL income taxes are not deductible
FOREIGN income taxes may be used as a credit
Distributions to shareholders from current earnings vs accumulated earnings and in excess of these two
Distribution first comes from current earnings and then from accumulated. Both of these are considered dividends.
Once these two are used up, the remainder that is distributed is considered return of capital
If the corporation makes multiple distributions during the year, current E&P is allocated on pro rata basis. Then accumulated E&P is applied in chronological order.
Non-liquidating distribution of property to a SH
INCOMPLETE - NEED HELP FROM ROMAN
Bc there is also a gain of 50k
You take current accumulated plus the gain of 50k
Comes out to 230k but you can only tax up to 200 bc 30 is a capital gain to shareholder
Taxable to individual at FMV but not exceeding current and accumulated earnings
If the corporation distributes property, the corporation pretends it sold the property to the SH, so it will recognize a gain calculated by FMV - Adusted Basis
S Corporation Election
Pass through entity where eligible shareholders are:
- individual
- state
- certain types of trusts
- can’t be a corporation or partnership
100 SH limit and only one class of stock, so preferred stock is not permitted
Election is effective as of 01/01 if made by 03/15 and all SH must consent to the election
12/31 is required year end
Benefit over C corp: S corp’s capital losses can be claimed by SH as they flow through (net ST & LT)
Computing SH Basis in S Corporation
BASE
Initial Basis \+ income - includes tax free income \+ additional SH investment in corporation stock - distribution to SH - loss or expense items
SH can deduct a pro rata share of S corporation loss limited to:
Basis + direct SH loans - distributions
@ year end, SH basis is increased by SH’s share of taxable income
Taxability of Distributions to SH
S corp WITH NO C corporation E&P
- distribution decreases SH basis and is not taxable to the extent there is basis
- if there is no basis then tax as capital gain distribution
S corp WITH C Corporation E&P
Allocation of income is based on per-share per-day basis
How and when is an S corporation terminated?
- Majority of SH decided (voting and non-voting are treated equally)
- Corp fails to meet eligibility requirement (corp or foreign owner)
- +25% passive investments in 3 consecutive years (3 strikes you are out)
If S election is terminated/revoked a new election can’t make for 5 years unless IRS gives you permission
Unrelated Business Income (UBI)
- comes from activity that constitutes trade of business
- regularly carried on
- not substantially related to tax-exempt purpose (if done by handicap people it is tax exempt)
Entity must make estimated tax payments on UBI
Only UBI exceeding $1K is taxable
Organizations Exempt from Tax
and
Unrelated Business Income (UBI)
- comes from activity that constitutes trade of business
- regularly carried on
- not substantially related to tax-exempt purpose (if done by handicap people it is tax exempt)
Entity must make estimated tax payments on UBI
Only UBI exceeding $1K is taxable
Tax due May 15 - no need to file if $50,000 or less gross receipt C - churches H - high school religious R - religious orders I - internal support auxiliaries S - societies - missionary related T - Tax exempt - organized by congress
