Tax - C-corp

Question 1

Estimated tax payments

Answer 1

The 15th day of months: 4, 6, 9, and 12 of tax year.

Total estimated payments should equal lesser of:
– 100% of tax in prior year return
- 100% of tax in current year return

Question 2

Gross income

Answer 2

Income accrual rule:
– Amounts can be reasonably estimated
– Right to receive is not contingent on future event
– Reasonable expectation it will be received in due course

– Includes 100% of dividends received from other corporations
– No gain or loss recognize on sale or acquisition of corporation’s own capital stock
– Distributing appreciated property to its shareholders will be taxed on appreciation

Question 3

Deductions from gross income

Answer 3

– None allowed for capital losses in excess of capital gains
– Losses can only be used to offset capital gains in carryover years. Capital losses carryback three years and forward five years as STCL
– Dividends received deduction, unlimited
– 50% of business meals are deductible
- No deduction allowed for NOL carryback or carryforward

Question 4

Special deductions : Charitable contributions

Answer 4

Limit is 10% of taxable income before:
– Charitable contribution deductions
– Dividends received deduction
– Net operating loss carry back
– Capital loss carry back
– Domestic production activities deduction

Contributions in excess of limits may carry forward five years

Accrual basis may deduct if paid within 2-1/2 months after close of tax year.
Cash basis may deduct only amounts actually paid out, plus any carryovers.

Question 5

Special deductions: dividends-received deduction

Answer 5

Deduction for dividends received from taxable domestic operations.

Ownership ::: Deduction
0% -

Question 6

Tax rates

Answer 6

Taxable corporations subject to tax rate structure.

Qualified personal service corporation is flat 35% on all taxable income.

Question 7

Corporate AMT

Answer 7

Corporations also subject to AMT.

Computed at a rate of 20% on AMTI in excess of $40,000.

If this amount exceeds corporation regular tax, excess is added to companies tax liability.

Question 8

AMT exemptions

Answer 8

Small corporations: exempt if has avg gross receipts for preceding three-year period of less than $7.5M.

New corporations:
– Exempt for first tax year
– Second tax year, test is $5M to qualify as a small corporation. For all later years, test is $7.5M.

Question 9

Penalty taxes

Answer 9

Two penalty taxes that corporations can avoid by paying enough in dividends.
If both apply, only PHC tax imposed.

Accumulated earnings tax: can also avoid if prove reasonable needs of business.

Personal holding company tax:
PHS is:
– Stock ownership test: more than 50% of value of outstanding stock must be owned by five or fewer individuals at a time during last half of taxable year.
– Gross income test: 60% or more of gross income must consist of PHC income. PHCI is passive types of income (dividends, interest, rents and royalties).

Avoids tax if pays enough in dividends, including actual dividends paid and consent dividends.

Question 10

Personal service corporation

Answer 10

Tax rate is flat 35% on all taxable income.

Cannot deduct passive losses against active or portfolio income.

Performs services in fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.

Question 11

Corporate NOL

Answer 11

May be carried back 2 years and forward 20 years.

NOL is excess of deductions over gross income: i.e. negative taxable income.

Question 12

Installment payments

Answer 12

If estimated taxes are $500 or more, must make installment payments

Estimated tax installments are lesser of:
– 100% of tax in prior-year returns
– 100% of tax in current year

Question 13

Entity/owner transactions: Tax-free contributions to form new corporation

Answer 13

– Property must be contributed by investors
– Investors must receive control corporation under 80%
– Must receive only stock in exchange
– Investor of property had no gain or loss if receives only stock in return
– If receive cash/other property in exchange, gain recognized up to smaller of boots received or gain realized

New corporation adjusted basis=
Adjusted basis for shareholder
+ Any cash paid to shareholder

Shareholder's basis of stock received=
Adjusted basis of property transferred
\+ Gain recognized
- Boot received & liabilities transferred
- Election to adjust property for loss

Question 13

Entity/owner transactions: definition of gain resulting from boot

Answer 13

General rule: if investor relieved of liability or transfers property subject to liability, consider boot equal to another liability.
Exception: if acquiring corporation assumes liability as part exchange, no gain recognized by contributor

Question 14

Entity/owner transactions: shareholder concerns – property transfers

Answer 14

Cash or property received by shareholders in exchange for capital stock will generally result in capital gain or loss to shareholder.
Basis of property received: FMV

Exception: when subsidiary distributes property to parent corporation (80%) ownership, no gain or loss is recognized by parent

Question 15

Entity/owner transactions: corporation concerns – distributions

Answer 15

Liquidating corporations required to recognize gain or loss on both liquidating sales and distributions.
For complete liquidation: property treated as if sold at FMV

Exception: no gain or loss recognized if distribution is to an 80% corporate parents.

Question 16

Entity/owner transactions: non-liquidating distributions

Answer 16

Effects on shareholder:
– Amount distributed equals FMV on date of distribution
– To extent of E&P, is ordinary dividend income
– Excess is return of capital, then capital gain

Effect on Corporation
– Nonliquidating distributions of appreciated property generate gain
– Losses are nondeductible
– Corporate distributions reduce E&P by greater of FMV or adjusted basis of property distributed

Question 17

Earnings and profits: distribution guidelines

Answer 17

– First from current E&P
– Then from accumulated E&P
– Then excess is return of capital

First two are considered dividend income to shareholders

Question 18

Earnings and profits: adjustments

Answer 18

E&P similar to taxable income, but has adjustments:

– Accelerated depreciation not allowed, must use straight line
– Cost depletion used, not percentage depletion
– Interest on state or municipal bonds increases E&P, expenses incurred to generate this income reduces E&P
– Nondeductible capital losses reduce E&P
– Federal income taxes reduce E&P
– Charitable contributions in excess of deduction limit reduce E&P

Question 19

Consolidated returns

Answer 19

Seven types of corporate reorgs:
– Statutory merger or consolidation
– Acquisition using voting stock for stock exchange
– Acquisition using voting stock for assets exchange
- Transfer of all or part of assets to another corp when original corp shareholders are in control of new corp immediately after transfer
– Recapitalization
– Mere change in identity, form or place of organization
– Transfer of all or part of assets to another corp in bankruptcy or receivership proceeding

Question 20

Consolidated returns: affiliated groups

Answer 20

Generally, combined group will reduce nets taxable income and minimize taxes due.

Affiliated group is at least two corporations:
– One must be parent
– One must be subsidiary at least 80% owned by parent

80% ownership:
– At least 80% of voting power of stock
– At least 80% of value of all stock

Question 21

Consolidated group: any domestic corporation except:

Answer 21

– Tax-exempt corporation
– Insurance company
– Foreign corporations
– S corporations
– Corporations electing possessions tax credit
– Regulated investment companies
– Domestic and international sales corporations

Question 22

Consolidated group: consolidated tax returns

Answer 22

Preparation:
– Compute each corporate member’s separate taxable income
– Use income to prepare consolidated income and balance sheet
– Eliminate intercompany transactions
– Separate items subject to special tax treatment

Special tax treatment:
– Capital gains and losses
– Section 1231 gains and losses
– NOL deductions
– Charitable contribution deduction
– Dividends-received deduction