Study Unit 11 Flashcards
Describe the double taxation of C Corporations.
Corporate income of C corporations is subject to
* A 21% entity-level flat rate * A tax on dividends received when distributed to shareholders
How are non-corporate entities with two or more owners classified by default?
By default, noncorporate entities (e.g., LLCs, LLPs, etc.) with two or more owners are classified as partnerships for federal tax purposes.
State the corporate income tax formula.
Corporate income tax is computed as follows: Gross income - Deductions = Taxable income before special deductions - Dividends-received deduction - Net operating losses = Taxable income x Tax rate = Tax liability - Credits - Prepayments = Tax due or refund receivable
When properties are transferred to a C corporation, under what circumstance is gain or loss not recognized (Sec. 351)?
Section 351 required that no gain or loss be recognized if property is transferred to a C corporation by one or more persons
* Solely in exchange for stock (true even if boot is received) and, immediately after the exchange, * Such person(s) owns 80% or more (voting power and shares in each class) of the corporation.
Which type of contribution is not counted toward the 80% ownership test under Sec. 351?
Stock exchanged for services is not counted toward the 80%.
* The FMV of the stock is gross income to the contributing shareholder. * The shareholder’s basis in the stock exchanged is its FMV. * The corporation accounts for the services as an expense.
In a Sec. 351 transaction, how is the amount of gain recognized by the shareholder contributing the property calculated?
Liability Assumed by Corporation Recognized Gain
> (or equal to) AB of property Liability assumed by corporation - AB of property
< AB of property Lesser of realized gain or boot received
In a Sec. 351 transaction, how is the amount of loss recognized by the shareholder contributing the property calculated?
No loss is recognized by the contributing shareholder in a Sec. 351 transaction.
In a Sec. 351 transaction, how is the amount of gain or loss recognized by the corporation calculated?
The corporation recognizes no gain or loss on the exchange of its stock for property.
In a Sec. 351 transaction, how is the shareholder’s basis in the stock of the issuing corporation calculated?
Cash and AB in contributed property - Boot received - Liability relief (corporation assumes or takes subject to) \+ Gain recognized by shareholder = Basis in stock of issuing corporation
In a Sec. 351 transaction, how is the holding period of the stock determined?
The holding period of the stock includes the holding period of the property exchanged for stock (tacked holding period).
In a Sec. 351 transaction, how is the corporation’s basis in property calculated?
AB of Property vs. FMV of Property Basis in Property to Corporation
FMV > (or equal) AB AB in property to shareholder + Gain recognized by shareholder FMV < AB FMV
Give examples of items excluded from a corporation’s gross income.
- Gifts from non shareholders (except from customers or potential customers)
- Pro rate contributions by shareholders
- Sale or exchange of a corporation’s own stock
- Life insurance proceeds from policies purchased for key employees (related premiums paid are not deductible)
How is the decision to expense or capitalize organizational expenses and start-up costs incurred by a corporation determined?
Organizational Expenses or
Start-up Costs Expense or Capitalize
< (if equal) $5,000 Deduct entire amount
$5,000 < Amount < (or Deduct phaseout (deduction reduced dollar for dollar for costs
Equal $55,000 above $50,000) and amortize remained er over 180 months
> $55,000 No deduction, amortize entire amount over 180 months
What payments made to charitable organizations by corporation are considered made during a tax year for the determination of the charitable deduction?
Payment are considered to be made during a tax year if they are
* Paid during the tax year or * Authorized by the board during the tax year and paid no later than 3 1/2 months after the close of the tax year (for accrual taxpayers)
To what amount are charitable contribution deduction of corporations limited?
Deductions are limited to 10% (25% for tax year 2020 and 2021) or taxable income before any
* Charitable contributions * Dividends-received deduction * Capital loss carry back * Deduction allowed under IRS Sec. 249 for bond premium
How long is the carryover for a disallowed charitable contribution deduction of a corporation?
The disallowed deduction can be carried forward for 5 years. No carry back is allowed.
What is the deductible amount of dividends-received deduction (DRD) under different recipient ownership percentages?
Ownership Percentage of Limit: Percentage of
Percentage Dividends adjusted TI of
deductible receipient
< 20% 50% 50%
20% < (or equal) 65% 65%
Percentage <
80%
> (or equal) 80%
& affiliated 100% N/A
How is the adjusted taxable income for the determination of the limit of the dividends-received deduction (DRD) calculated?
Adjusted taxable income is taxable income before any
* Dividends-received deduction * Net operating loss deduction * Capital loss carryback
What compensation payments are considered made during a tax year for the determination of deductible compensation payments?
Payments are considered to be made during a tax year if they are
* Paid during the tax year or * Paid 2.5 months after year end (March 15 for calendar-year taxpayers) if related to services rendered in the prior year.
Give examples of non deductible items from a corporation’s gross income.
- Fines
- Federal Income taxes
- Political contributions
- Lobbying expenses
- Business gifts (per donee per year) in excess of $25
- 50% of business meal expenses (for meals not provided by a restaurant)
- 100% of entertainment expenses
- Bad debt expenses under the allowance method
Compare the deductibility of interest expenses incurred by individual taxpayers and corporations.
For corporations, interest expenses are deductible.
For individual taxpayers, personal interest expenses are not deductible, except for
* Expenses incurred in self-employment (as a business expense) * Expenses incurred for a principal residence (itemized) * Investment interest (itemized)
How are net operating losses (NOLs) carried over?
NOLs Arise Carry Back Carry Offset Taxable Income
Forward
Before 2018 2 years 20 years 100%
In 2018, 2019
And 2020 5 years Indefinitely 100%
In or after
2021 N/A Indefinitely 80%
Compare the capital losses of individual taxpayers and corporations.
Individual Corporations
Taxpayers
Deductible capital loss Not limited Limited to capital gain
capital gain
Offsetting ordinary $3,000 limit N/A
Income ($1,500 MFS)
Carryover No Cary-bk Carryback: 3 years
carry fwd in carry forward: 5 years
Character of NCL
Carried over retains short-term Capital loss
character
