Section 2: Corporate Tax Flashcards
When is no gain or loss recognized when property is transferred to a corp?
If the property is solely exchanged for stock if, immediately after the transfer, the transferors are in control of the corporation
Tax-free exchange of property situations
- Cash or property 80% or more (control)
- Tax free
- Carryover basis
- If product is subject to debt (CV-debt=basis)
- Carryover holding period
- Services or <80% of stock
- Taxable income at FMV of stock
- Wage expense for corp
- If no control
- Taxable to all parties, similar to services
- Reorganizations of corps also tax-free
- Carryover basis
Basis for shares issued for cash
Basis is equal to the amount of cash paid
Shares in exchange for the rendering of services to corp
Result in ordinary income to the service provider.
The service provider reports income equal to the estimated FMV of the shares
Shareholder’s basis in stock received equals:
Adj basis of property transferred
+ Recognized gain
+ Cash paid
+ Liabilties assumed
+ transaction costs and fees
- Cash rec’d
- FMV of property rec’d
- Liabiltities transferred
Corporation’s basis in property rec’d equals:
+ Adjusted basis of the property in the hands of the transferor
+ Gain recognized by the transferor
Corporate Income Tax Return (1120)
Gross Income (worldwide)
- Ordinary deductions
Income before “special deductions”
- Charitable Contributions
- Div Rec’d Deduction (DRD)
Taxable Income
x Tax Rate
Gross Tax Liability
- Foreign Tax Credit
Net Regular Tax Liability
+ Personal Holding Company Tax (PHC)
+ Accumulated Earnings Tax
+ Alternative Minimum Tax (AMT)
Total Tax Liablity
Corporate Revenues
Same as individual tax with some exceptions
Revenue recognized at the earlier of when earned or collected
- Rent income rec’d in advance
- Interest income rec’d in advance (not muni interest)
- Royalty income rec’d in advance
Life Insurance Proceeds on key employee
- If the corp is the beneficiary, the premiums pd on such policies are not deductible, since the proceeds are not taxable
- Premiums on life insurance to benefit employee’s family are deductible
- Company-Owned Life Insurance (COLI) - the beneficiary may exclude from gross income beenfits rec’d only up to the total amount of premiums and other amounts pd by the policy holder for the contract, any excess would be taxable
Taxpayer can accrue an expense when:
- The transaction meets both an all-events test and an economic performance test
All-Events Test
Met when the existence of a liability is established and the amount of liabilty can be determined with reasonable accuracy
Economic Performance Test
When the property or services are actually provided
Deduction of Organizational Expenses
- Corp may elect to deduct to $5k of organizational expenditures and start-up costs
- The $5k is reduced by the amount by which the organizational expenditures or start up costs exceeds $50k
- The balance not deducted is amortized over 180 months
- The entity must elect to amortize the orgizational costs in the period of organiztion
- If no election is made, the costs are capitalized and remain until the entity is liquidated
- Costs of issuing, printing, and selling stock are NOT organizational expenses
Deduction of Salaries and Wages
- Can only deduct up to $1M of compensation expense for each of the highest paid executive officers of a public corporation
- Entertainment expenses for officers, directors, and 10% or greater owners may be deducted only to the extent that they are included in the individual’s gross income
Deduction of Bonuses and Vacation Pay
if paid within 2 and a half months of year end (3/15)
Deduction of Estimated Losses
- Estimated losses are not deductible
- Bad debts not claimed until actual direct write-offs
- Warranty costs not claimed until actual repairs
- For book, both accrued
- For tax, direct write-off method
Deduction of Interest Expense
Not deductible if loan proceeds used for tax-exempt investments
Deudction of Reimbursed Employee Expenses
- 50% of M&E
- All travel costs
- The cost of a luxary skybox is disallowed to the extent that the cost exceeds the cost of the most expensive non-luxury seat in the venue
- Tee limit does not apply if the skybox is rented for one event only
- Rental of a skybox for more than one event in the same sports arena, such as a series of playoff tickets, is subject to the limitation
Deduction of Casualty Losses
- Business property-adjusted basis immediately before the casualty
- Bot that “$100 floor” and “10% of AGI” limitations do not apply
Deduction of Goodwill, Franchises, and Trademarks
- Amortized over 15 years
- For book, tested annually for impairment
Expenses that are never deductible
- Government fines, fees, and penalties, including interest penalties
- Federal income taxes
- Can deduct state and local taxes on the federal return
Deduction of Research and Development Costs
Immediately or over a minimum of 60 months
Deduction of Dividends
- Reported fully in gross income
- Dividend Reduction Deduction (DRD)
- <20% owned - 70% DRD Allowed
- >=20%-80% - 80% DRD Allowed
- >= 70% - 100% DRD Allowed
- Investor does not qualify for DRD if
- From foreign corp
- Borrowed money to buy the investment
- Rec’d from tax exmpt organization
- Owned for ess than 46 days
- If Dividend is more than Income before DRD, apply % to Income before DRD
Deduction of Charitable Contributions
- Claimed after all others except “special deductions
- Limited to 10% of income before claiming deduction (10% ATI)
- Unused amount carried forward 5 years
- Pledge may be accrued if paid within 2 and half months of year end
Adjusted Taxable Income (ATI) is
- Net Income adjusted for
- Charity
- DRD
- NOL Carryback
- Capital Loss Carryback
Deduction of Capital Gains and Losses
- Noncurrent assets used in trade or business are considered Section 1231 assets and are subject to special rules
- Held for 1 yr or less, G(L)s treate as ordinary income or loss
- Held for more than 1 yr, losses are ordianry and gains are long term capital gains
- Capital loses are not deductible to a corp
- Cap. Losses may only offset cap gains
- Unused carried back 3 years and forward 5
- All loss carryback/forward are considered short-term
Non-Deductible Items
- federal Income taxes
- Government fines and penalties
- Costs of issuing stock
- Lobbying costs
- Compensation
- Club dues
Deduction of Estimated Costs
Not deductible until actually paid
Foreign Tax Credit
U.S. Tax Liability x (Foreign Income / Worldwide Income)
- Never to exceed actual foreign taxes paid
- Any portion not deductible ($8k for. taxes actually paid, but $6k tax credit, balance of $2k remaining), the balance is carriedback 1 yr and forward 10 yrs
Accumulated Earnings Tax (AET)
- Penalize Corps that accumulate earnings beyond the reasonable needs for expansion, retirement of debt, and working capital needs
- Tax on undistributed income only (20%)
- Reduce or eliminate if pay any of the following
- Actual dividend
- Constant dividend (hypothetical dividends)
- If already paid PHC tax
- Reduce or eliminate if pay any of the following
- Tax on undistributed income only (20%)
- Safe harbor amounts allowed
- Manufacturing Co - $250k
- Personal Services - $150k
- PLUS sums retained to pay federal income taxes owed
Personal Holding Company Tax (PHC)
- Taxable if BOTH:
- 5 or fewer individuals own more than 50% of stock
- 60% or more of revenue from passive sources (taxable interest, dividends, rental and royalty income)
- Tax (20%) on undistributed personal holding company income (UPCHI)
- Self-assessed by filing form with return (1120 PHC)
- Avoidable if pay
- Actual dividend
- Consent dividend
Schedule M-1
- Reconciliation of book income to taxable income
- Temporary Differences
- Bad debt expense
- Warranty expense
- Depreciation expense
- Permanent Differences
- Muni bond interest
- 50% M and E
- Fines
- Penalties
- Premiums pd on key person life insurance
Schedule M-2
- Reconciliation of Unappropriated Beg RE to End RE
Schedule M-3
- Reconciliation of Financial Accounting Income with Taxable Income
- For Corps with total assets of $10M or more
- Prepared in lieu of schedule M-1 and is simply a more detailed M-1
Underpayment Penalties
- Corps must make quaterly estimated tax payments (1120-ES)
- No penalty if:
- Small balance - total underpayment > $500
- Annualized income - installments each quarter cover the tax on the income to date
- Current Yr - est. tax payments equal at least 100% of the CY tax liability
- Previous Yr - payments equal at least 100% of PY tax liability
- Corp had taxable income exceeding $1M in any of the preceding 3 yrs.
Corporate Distributions
Distributions are taxable as dividends to the extent of Earnings and Profit (E&P)
Section 1244 Stock
- Deducted as ordinary loss up to $50k single, $100k MFJ
- Any additional is trated as a capital loss subject to $3k per year limit
- Gains are taxed as capital gains
- To qualify, aggregate capital cannot exceed $1M when stock is issued and the corp cannot derive >50% of income from passive investments
Corporate Alternative Minimum Tax (AMT)
Regular Taxable Income
+/- Adjustments and Preferences
AMTI before ACE Adjustment
+/- Adjusted Current Earnings (ACE) Adjustment
AMTI before Exemption
- Exemption
AMTI
x Tax Rate (20%)
Tentative Minimum Tax
- Regular Tax
AMT
Adjustments and Preferences (PILE)
- Private activity bonds
- Installment Sales of Inventory - difference between accrual acounting and the installment method, when installment method was used for regualr tax purposes
- Long term contract income - must be calculated using the % of completion method
- Excess Depreciation on Personal Property - over 150% declining balance when double-declining balance was used for regular tax purposes
ACE Adjustment (SLIM)
- Seventy percent (70%) DRD on dividends from unrelated corps (80% and 100% do not have to be added back)
- Life Insurance proceeds on the death of a key employee
- Municipal bond interest from all such bonds (except private activity bonds, already included in AMTI before ACE adjustment)
- ACE adjustment is then multiplied by 75% to determine adjusment
AMT Exemption
Exemption = $40k - 25%(AMTI before exemption - $150k)
