REG Study Unit 8 Flashcards
Corporate Income Tax
Imposed using graduated bracket rate system.
Two built in surtaxes that phase out of benefits of lower bracketed tax rates.
Flat Rate
Taxable income over $18,333,333 is taxed at a flat rate of 35%
Long-Term Capital Gains of Corporations
Taxed at ordinary tax rates
Personal Service Corporations Tax Rate
Taxed at a flat rate of 35%
Foreign Tax Credit (FTC) election options
May elect to take a credit or deduction for foreign taxes paid or accrued.
FTC Application
Applied against tax liability after AMT but before other credits
May offset AMT liability
Not creditable against accumulated earnings tax or personal holding company tax.
FTC for Non-US Taxpaper
FTC is allowed only for foreign taxes paid on effectively connected income against US Tax
FTC Limit
Lesser of US tax attributable to foreign source taxable income or foreign taxes paid.
FTC Carryover
Foreign tax paid in excess of limit may be carried back 1 year and forward 10 years.
FTC Limit Computation
FTC=US Income Tax X (Foreign source taxable income/Worldwide taxable income
FTC for Pass-through Entities
Apportion the foreign taxes among the partners, shareholders (of an S Corporation, or beneficiaries (of an estate).elect and compute a credit or deduction on individual returns.
Excluded from Includible Corporations (for consolidated returns)
- Tax exempt corporations
- S Corporations
- Foreign sales corporations
- Insurance corporations
- Real Estate Investments Trusts (REITs)
- Regulated investment companies
- Domestic International Sales Corporations (DISCs)
Affiliated Groups (for Consolidated returns) Requirements
- Other group members must own 80% by vote and value
- Parent must directly own 80% of at least one includible corporation
Consolidation Election
- election to file is made by filing return.
- Consent of each included corporation required
- Consent of IRS required to terminate election
Consolidated Taxable Income
Must remove separately consolidated and specially treated items.
Net taxable income consolidated, then adjusted for items removed after separate consolidation.
Separately stated items on consolidated taxable income
- charitable contributions
- dividends received and paid deductions
- percentage depletion of mineral properties
- NOL deductions
- Section 1231 gains and losses
- Capital gains and losses
Consolidated Losses
Losses of one corporation may offset income of another.
Any NOL generated must be used in a consolidated tax year.
Intercompany transactions
Gain/loss on transaction is deferred.
Buyer assumes same basis and holding period as selling member.
Controlled Groups
Corporations with a specified relationship by stock ownership.
Parent-Subsidiary Controlled Group
Parent owning stock that represents 80% by voting power or value of another corporation
Brother-Sister Controlled Group
stock of each owned by the same 5 or fewer persons and that ownership:
Owns 80% by vote or value, and special 50% rule of 50% voting power or value of all classes.
Constructive Ownership of Controlled Groups
Family member: spouse, child, grandchild, parent, or grandparent or
Entity: corporation, partnership, estate, or trust with a 5% or more interest or proportion to that interest.
Limit on Tax Benefits of Controlled Groups
Benefits most be shared. May choose any method to allocate the amounts among the group.
- Low tax brackets
- Section 179 expensing max of $500k
- AMT exemption bas of $40k
- General business credit $25k offset.
- AET deduction base of $250k
Intergroup Transactions of Controlled Groups
Anti-avoidance rules:
- Loss not recognized on related party sale
- Expenditure to group member not deductible until included in other member’s income.
- Gain on sale/exchange to member in whose hands the property is depreciable is ordinary income
IRS may redetermine price for property transferred between group members called arm’s-length price. The methods include comparable uncontrolled prices, resale prices, and cost plus return.
Estimates Difference Due
Paid by the return due date without extension
Due dates for estimates
Quarterly payments due on
15th day of 4th, 6th, 9th, and 12th month of the tax year.
Estimated payments of Large Cororations
Annualize income. If income in later quarters is greater than in prior quarters, the estimate must be increased so that 100% of the shortfall is covered. $1 million or more during any of the 3 preceding years.
Estimated payments
Includes the regular income tax and the AMT, net of credits and payments.
Each estimate is 25% of lesser of 100% of prior year’s tax or current year’s tax.
Large corporations can not use this prior year tax estimates.
Estimated Tax Penalty
Amount by which any required installment exceeds estimated tax paid multiplied by the federal short-term rate plus 5%.
Accrues from installment due date.
Not allowed as interest deduction
Exceptions to estimated tax penalty
- Tax liability for year is less than $500
- IRS waives penalty
- Erroneous IRS notice to large corporation is withdrawn.
Accumulated Earnings Tax (AET)
Imposed on corporations allowing E&P to accumulate instead of distributing
Presumed to have tax avoidance purpose for accumulation beyond reasonable needs.
Computing AET
20% of accumulated taxable income. No offsetting credit or deduction is allowed. Excess undistributed earnings of preceding tax years are excluded.
Determination of AET liability
generally determined by IRS on audit. corporation does not file form with return.
AET exempt Entities
- S Corporations
- Tax-exempt corporations
- Personal holding companies
- Foreign personal holding companies
- Passive foreign investment companies
Accumulated Taxable Income (ATI)
AET base
Measure of corporation’s ability to distribute dividends from current-year earnings.
Accumulated Earnings Credit (AEC)
Deduction for ATI
Greater of:
-General credit (current E&P for reasonable needs of the business less capital gain adjustments
or
-Minimum floor, Generally $250,000 less accumulated E&P at the close of the preceding year
AET Reasonable Needs of the Business
Based on the excess of undistributed current earnings over the increase in the reasonable needs of the business.
-Only items required to meet future needs with a specific foreseeable plan for use.
AET Not Reasonable Needs
- Funds to declare a stock dividend
- Funds to redeem stock
- Unrealistic business hazard protection
- Investment property unrelated to business
- Loans to shareholders.
Personal Holding Company (PHC) Tax Penalty
20% tax on undistributed PHC income. no offsetting credit or deduction allowed.
PHC Self-Assessment
Tax liability filed on Sch PH is filed with Form 1120. Six year statute of limitations if not filed.
PHC Objective Test
Stock ownership test
-5 or fewer shareholders own 50% or more by value at any time during last half of year.
Nature of Income test
-60% or more adjusted ordinary gross income of the corporation is personal holding company income.
PHC exempt entities
- S Corporations
- Tax-exempt corporations
- Foreign personal holding companies
- banks
- Insurance companies
PHC Adjusted Ordinary Gross Income
OGI: Gross income adjusted for property dispositions
AOGI: OGI reduced by certain rental items and other activities
PHC Income
Generally Passive income Includes: -Interest (unless exempt from GI) -Dividends, i.e., taxable distributions of E&P -Annuity proceeds -Royalties -Rental Income -Personal services income -Distributions from estates or trusts
Personal Service Income
Included only if
- Earned by 25% or more shareholder
- From a personal services contract
- Certain persons perform/may perform services
PHC Tax
20% of undistributed PHCI
