REG R4 Corporate Taxation Flashcards
When does a shareholder contributing property in exchange for corporate common stock have no gain or loss recognized?
The following two conditions must be met:
- Transferors/shareholders own at least 80% of the voting and nonvoting stock immediately after the transaction; and - Boot (cash or receipt of debt securities) or cancellation of debt is not involved.
Generally, what is the basis of common stock received by the shareholder?
Basis of common stock received:
-Cash – amount contributed
-Property contributed – adjusted basis (NBV)
-Services – fair value
Plus any gain recognized by the shareholder
For corporations, are bad debts deductible?
For taxpayers in general (including corporations), bad debts are deductible to the extent that the bad debts were previously included in income. The charge-off method (not allowance method) must be used for tax purposes.
For cash-basis taxpayers, a bad debt is not deductible because the amount leading to the debt would not have been included in income unless it were related to an uncollectible check connected with an amount included in income.
How are charitable contributions treated by corporations?
The maximum deduction is up to 10% (25% in 2021) of taxable income before the following deductions: the charitable contribution, the dividends-received deduction, and any capital loss carryback.
What are life insurance premiums deductible?
Policies on key employees are not deductible when the corporation is directly or indirectly the beneficiary.
If insured employees came the beneficiaries, premiums are deductible as an employee benefit.
Note: If life insurance coverage exceeds $50,000, payment of premiums by employers may represent income to the employees.
Identify the three levels of the dividends-received deduction.
- 50% Less than 20% ownership; 50% of dividends received are deducted from taxable income up to a limit of 50% of taxable income.
- 65% 20% to <80% ownership; can claim 65% dividends received are deducted from taxable income up to a limit of 65% of taxable income.
- 100% Affiliated companies (80% or more common ownership).
Name some nondeductible trade or business expenses.
Bad debts, allowance method (only specific write-off method is deductible)
Business entertainment
Business meals (limited)
Political contributions
Executive compensation in excess of $1 million per year for the CEO, CFO, and three other highest compensated
officers
Federal income taxes
Penalties
Estimated liabilities for contingencies (e.g., warranties)
What is the accumulated earnings tax?
The accumulated earnings tax is a tax on accumulated earnings beyond the reasonable needs of the business.
Corporations can accumulate up to $250,000, or an amount reasonable to the needs of the business, without penalty. For personal service corporations, the amount is up to $150,000.
The tax is a flat 20% of the unreasonable accumulated earnings.
Define a personal holding company.
A personal holding company must meet both of the following:
- At any time during the last half of the taxable year, more than 50% of the value of the corporation’s outstanding stock is owned by five or fewer individuals; and
- At least 60% of the corporation’s adjusted ordinary gross income consists of personal holding company income (dividends, rents, royalties, annuities, interest, adjusted rental income, and certain other investment income sources). [NIRD]
The penalty tax is 20% of the undistributed personal holding company income.
What are the requirements to file a consolidated return?
All corporations in group:
- Must have been members of an affiliated group at some time during the tax year.
- Each member must file a consent (act of filing a consolidated return is considered consent).
Affiliated group:
Common parent 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.
Identify the advantages of filing a consolidated return.
-Capital losses of one corporation offset capital gains of another corporation.
-Operating losses of one corporation offset profits of another corporation.
-Elimination of tax on intercompany transactions.
Income from certain intercompany sales may be deferred.
-Certain tax deductions and tax credits may be better utilized when subject to the limitations of the overall
consolidated group rather than individual members.
-Dividends received are 100% eliminated in consolidation, because they are intercompany dividends.
Identify the corporate tax treatment of capital gains/losses.
- Capital gains are taxed the same as ordinary corporate income.
- Corporations may not deduct any capital losses from ordinary income.
- Capital losses are deductible to the extent of capital gains.
- Net capital losses may be carried back three years and forward five years as a short-term capital loss.
State the general NOL carryforward/carryback rules.
- Net operating losses (NOLs) arising before 2018 can be carried back two years and carried forward 20 years.
- NOLs arising in 2018, 2019, and 2020 can be carried back five years and carried forward indefinitely.
- NOLs arising in 2021 and after cannot be carried back but can be carried forward indefinitely.
- NOLs arising after 2017 that are carried forward to post-2020 tax years can only offset 80 percent of taxable income after deducting any pre-2018 NOL carryforwards.
What are the ordering rules for allocation of cash distributions from a corporation?
Distributions are deemed to come from current E&P first and then from accumulated E&P. Any distribution in excess of both current and accumulated E&P is treated as a nontaxable return of capital that reduces the shareholder’s basis in the stock.
Provide examples of constructive dividends.
- Excessive salaries paid to shareholder employees
- Excessive rents and royalties
- “Loans” to shareholders where there is no intent to repay
- Sale of assets below fair market value
