REG-Corparate taxation Flashcards
How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
Transferor’s basis
+ Gain recognized by shareholder
= Basis
OR
FMV of Corporate Interest
- Adjusted basis of property
= Gain
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS, NOT FMV of property.
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
Taxpayer must be original stock owner, and either an individual or partnership
$50k (single) or $100k (MFJ) limit - remainder is a capital loss
Must have been issued in exchange for money or property (not exchanged for services)
Shareholder equity must not be in excess of $1 million
Both common and preferred stock is allowed
What are the basic rules for filing a form 1120?
Return is due regardless of income level
Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year
An automatic six-month extension is available
When are Corporate federal tax estimated payments required, and how are they calculated?
Required if more than $500 in tax liability expected, or
100% current year liability
100% previous year liability
Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.
Describe the AMT calculation for C-Corporations
Taxable Income \+Tax Preference Items \+/- Adjustments = Pre-ACE \+/- ACE Adjustments = AMTI - 40,000 Exemption = Tax Base x 20% = Tentative Minimum Tax - Regular Tax Liability = AMT
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years
Personal Property - use 150% MACRS, not 200%
Construction must use % completion method
What are the ACE adjustments in the C-Corporation AMT tax calculation?
Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized
Note: AMT paid gets carried forward indefinitely, but never carried back
When are C-Corporations exempt from AMT?
In year one
In year two, if year one gross receipts were less than $5 Million
In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million
In year four and beyond, if the average from the previous 3 years is less than $7.5 Million
How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.
If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.
How are Corporate organization costs handled?
Amortization of costs begin the month the Corporation commences business activity
If the Corporation doesn’t amortize organization costs in year one, they can never be amortized
Costs associated with offerings are neither deductible nor amortized
How are a C-Corporation’s deductible charitable contributions calculated?
Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
When can a board of directors authorize charitable contributions for a tax year?
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year
How is the dividends received deduction (DRD) calculated, and what are the limitations?
80% Interest = 100% DRD
20-79% = 80% DRD
less than 20% = 70% DRD
Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
Only take DRD % x Taxable Income
Note: If DRD brings a loss situation, then you can take the full DRD
If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed
How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
How are capital losses handled in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates
How are Corporate losses carried back/forward?
Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss
How are bad debt losses handled in a Corporation?
Bad debt losses are classified as ordinary
What is the casualty loss floor for a C-Corporation?
No floor on Corporate casualty loss like there is with an individual taxpayer
If destroyed, the loss is the property’s basis (minus proceeds)
Calculation: Adjusted basis - Proceeds from Insurance = Loss
If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)
How are net operating losses handled in a C-Corporation?
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward
Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year
Any leftover NOL = This year’s NOL
How is investment interest expense handled in a C-Corporation?
Unlike individual taxation, investment interest expense is not limited to investment income.
Investment interest on tax-free investments are NOT deductible.
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction
Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Reconciles beginning to ending retained earnings
Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward
Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.
One AMT exemption
One accumulated earnings tax allowed
Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)
Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain
Distribution amount = FMV of Property + Cash - Liability Assumed
Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)
What is the order of treatment in a Corporation’s distribution to a shareholder?
- Distribution is a dividend to the extent of current and accumulated earnings and profits
- Shareholder basis is then exhausted
- Remainder, if any, is a Capital Gain
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits
What is the treatment of a gain in a complete Corporate liquidation?
If Capital Property, then Capital Gain
If Non-Capital Property, then Ordinary Income
Gain characterization is the same for both the Corporation and the shareholder
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: capital loss only
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid
Treat as if distributed by the end of the year
Describe the requirements for a personal holding company.
No banks or financial institutions can be PHCs
5 or fewer individuals own more than 50% of the stock
60% of the PHC’s income must be from passive means
PHC tax is self-assessing - 20% tax rate on undistributed PHC Income
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
How is the accumulated earnings credit calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
What are the requirements for holding S-Corporation status?
Only individuals, estates and trusts can be shareholders
Domestic only, no international S-corps or foreign shareholders
Up to 100 shareholders allowed, and only one class of stock allowed
Calendar tax year only
How is an S-Corporation election made?
Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year
To make election, 100% of the shareholders must consent
How is an S-Corporation terminated?
To terminate election, 50% of the shareholders must consent
No S Corp election allowed for 5 years after termination
S Corp termination effective immediately following an act that terminates status
What items are not included in calculating an S-Corporation’s ordinary income?
These items are included on Schedule K, not in ordinary income:
Foreign Taxes paid deduction No Investment Interest expense Section 179 Deduction 1231 Gain or Loss Charitable Contributions Portfolio Income (dividends or interest)
How is S-Corporation shareholder basis calculated?
Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate
Non taxable stock dividend
Stock dividend are generally not taxable unless the shareholder has a choice of receiving cash or other property. The basis of a nontaxable stock dividend, where old or new share are identical, is determined by dividing the basis of the old stock by the number of the new shares.
Cash basis accounting
Used for tax purposes by most individuals, qualified personal corp(which are treated as individuals for purposes of there rules), and taxpayers whose average annual gross receipts do not exceed 1,000,000.
Accrual basis of accounting
- The accounting purchase and sales of inventory
- Tax shelters
- Certain farming corp
- C corp, trust with unrelated trade or business income, and partnership having a c corp as a partner provided the business has greater than 5 million of average annual gross receipts for the three year period ending with the prior tax year.
The taxable amount of a dividend to a shareholder from a corps earnings and profits is the amount received in cash or the fair market value of the property received. If the property is assumed a debt, the basis of the property is the FMV, but the taxable amount=FMV-debt
The general rule is the payment of a dividend does not create a taxable event, unless the distribution is appreciated property. When the distribution is of appreciated property, the corp recognizes gain as if the property were sold at the fair market value
Generally There is no gain or loss to the corp issuing stock in exchange for property for the issuance of stock.
a transferor recognizes gain when at least 80% of the voting stock is not owned by the transferor immediately after the transaction and there is no boot (cash is withdrawn or cancellation of debt exist) on the transaction.
A transferor who contributes only services is not counted as part of the control group.
The basis of the property received from the transferor is the greater of: (1)adjusted net book value plus any gain recognized by the transferor or (2) debt assumed by the corp.
denied the privilege of filing a consolidated return
S corp, foreign corp, most real estate investment trust, some insurance companies, brother-sister corp where an individual (not a corp) owns 80% or more of the stock of two or more corps, and most exempt org.
Distributions
Any distributions in excess of earnings and profits is treated as a nontaxable return of capital that reduces the shareholder’s basis in the stock. Distributions In excess of basis are capital gain distributions taxable as capital gains
Distribution in complete liquidation
Subject to two level of taxation:
- The corp recognize gain and loss as if it sold the asset for FMV.
- Shareholder recognize gain or loo determined by the difference between FMV and adjusted basis Of stock
No gain or loss is generally recognized in connection with the complete liquidation of a controlled subsidiary into its parent corporation.
Intangible amortization between gaap and tax
Goodwill, license, franchises, trademarks and covenants not to compete may be amortized using the straight line basis over a period of 15 years, starting with the month of acquisition.
Gaap: intangible assets with indefinite lives are subject only to an impairment test, and intangible assets with finite lives are amortized over those lives and also subject to an impairment test.
Business gift deduction
Up to a maximum deduction of 25 per recipient per year
Distribution to shareholders in S corp with no C corp earnings and profits
- To the extent of basis in stock - tax free; treated as return of capital
- Any distributions in excess of the shareholders basis- taxable; capital gain
Fringe benefits deduction in S corp
Fringe benefits paid by an S corp are deductible by the S corp only for non-shareholder employees and those employee-shareholder owning 2% or less of the S corp.
Other fringe benefits paid are deductible by the S corp if included as part of gross income from the S corp for individual receiving the benefits
S corp status revocation
S corp status can be revoked if the shareholder owning more than 50% of the total number of issued and outstanding shares consent. The specific percentage of voting and nonvoting shareholders is not considered, just the total.
S corp election terminate
S corps that are former C corps with undistributed C corp earnings and profits are restricted in the amount of passive investment income they can realize without terminating their S election.
The restriction is 25% of total gross receipts from passive investment income. The S election is terminated if the S corp has passive investment income greater than 25% of gross receipt for three consecutive years
S corp net business income
An S corp reports both separately stated and non-separately stated (net business) items of income. The dividend income is a desperately stated item and is not included in the calculation of the net business income.
Built-in gain
A distribution or a sale of an S corp’s asset may result in a tax on any built-in gain at the corporate level. An unrealized built-in gain results when the following two conditions occur: 1) a C corp elects S corp status, and 2) the FMV of the corporate assets exceeds the adjusted basis of corporate assets on the election date.
The net unrealized built-in gain is the excess of the FMV over adjusted basis at the beginning of the year in which the S corp status is elected. (Taxable to corp)
If the asset is sold. The gain to the corp is sell price-basis. An S corp generally does not pay tax at the corp level, but the related C corp tax of built-in gain must be paid upon the sake of the asset.
rule for determining a shareholder’s basis in S corp stock
Initial basis(or beginning of year)
+ income items(separately and non-separately stated items)
+ additional shareholder investments in corp stock
- distribution to shareholders
- loss or expense items
limited liability company
Hybrid business entity that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership. With a partnership, there is no double taxation of profit.
An S corp and C corp recognize a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value.
But in general, a partnership can distribute appreciated property tax-free to its partners (in general, a non liquidating distribution to a partner is nontaxable). A limited liability company is taxed like a partnership.
S corp income
Seperately stated income are pass through to the shareholders (in a manner similar to partnerships) and retain their tax attribute to the shareholders.
Nonseperately stated income are lumped together and constitute the S corp’s ordinary income.
Operation loss of an S corp
An S corp shareholder’s basis is reduced by distributions to the shareholders as well as loss or expense items. However, loss deductions are limited to a shareholder’s adjusted basis in a S corp stock plus direct shareholder loans to the corp. any losses disallowed may be carried forward indefinitely and deductible as the shareholders basis is increased.
Exempt org
- An exempt org is not taxed on unrelated business income of less than 1000.
Unrelated business taxable income is the gross income from any unrelated trade or business regularly carried on, minus business deductions directly connected therewith. If expenses exceed income, a net operating loss occurs, which is subject to the carryback and carryover provisions of net operating losses.
The tax on unrelated business income is not imposed if the unrelated business activity is intermittent and is carried on once a year. Unrelated business taxable income must be derived from an activity that constitutes a trade or business that is regularly carried on and is not substantially related on the organizations tax-exempt purpose.
Unrelated business income
1) derived from an activity that constitutes a trade or business
2) is regularly carried on
3) is not substantially related to the org’s tax-exempt purpose
An unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers. Thus, using unpaid volunteers makes that business or activity related.
Organizations qualify as tax-exempt if:
1) it is both organized and operated exclusively for religious, charitable, literary, or educational purpose; for public safety testing; for prevention of cruelty to children or animals; or to foster national or international amateur sports competition
2) no part of its net earnings goes to any private shareholder or individual
3) no substantial part of its activities consist of carrying on propaganda or otherwise attempting to influence legislation (direct participation in a political campaign is prohibited)
interest expense on bank loans to purchase us treasury bonds are deductible since the interest income earned on us treasury bonds is taxable
Interest expense to carry municipal bonds is not deductible
Gain realized
The realized gain is calculated as the fair market value of the property contributed for value in the corporation less the shareholder’s basis of that property.
Gain recognized
The recognized gain is the gain that is reported (recognized) on the tax return of the taxpayer. If there is realized gain and boot (eg. Cash) received, gain may be recognized, but only to the extent of the boot. If there is no boot received, no gain is recognized for tax purposes.
Tax basis in shares
The shareholder’s tax basis in the shares is generally equal to the shareholder’s net book value of the property immediately before the contribution plus any cash contributed. Minus debt assumed by the corp
Tax basis in corp
The corp’s tax basis in the asset is generally equal to the tax basis of the shareholder upon transfer to the corp plus any cash the corp had to pay to complete the transfer of the asset.
Penalty for underpayment of estimated taxes
If the corp is not a larger corp, they may use 100% of prior year method for paying estimated taxes as long as the prior year was not zero.
Failure-to-file penalty
If the extension is filed timely and the return is filed during the extension period, there is no failure-to-file penalty
Failure-to-pay penalty
If the additional payment is not paid before the initial due date of the return, it is subject to the failure-to-pay penalty. Extension filed are for the period to file and not to pay.
Exception: if 90% of the tax is paid on time and the remaining amount is paid by the extended due date.
The penalty is 0.5% for each month or fraction of a month up to a maximum 25%.
Interest
All amounts paid after the initial due date are subject to interest.
Dividends received deduction
Unless the exception applies, the dividends received deduction is the lesser of:
1) the applicable percentagedomestic dividends received
2) the applicable percentagetaxable income(need include the dividends received) before any DRD, any NOL deduction, any capital loss carryback, and domestic activities production deduction.
Exception: if after taking into account the full DRD, the result is a net operating loss. Then DRD=the applicable percentage*dividend received
Charitable contribution deduction
Lesser of:
1) amount of the charitable contribution
2) 10% of taxable income before charitable defection, DRD, any net operating loss carryback(NOL carry-forwards are deducted), any capital loss carryback, and us production activities deduction.
