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Flashcards in Corporate Taxation Deck (46):





Transferor's basis + Gain recognized by shareholder = Basis OR FMV of Corporate Interest - Adjusted basis of property = Gain


What basis do shareholders and Corporations use for property?

They both use ADJUSTED BASIS, NOT FMV of property.



A loss on worthless stock is an ordinary loss.



Taxpayer must be original stock owner, and either an individual or partnership $50k (single) or $100k (MFJ) limit - remainder is a capital loss Must have been issued in exchange for money or property (not exchanged for services) Shareholder equity must not be in excess of $1 million Both common and preferred stock is allowed


What are the basic rules for filing a form 1120?

Return is due regardless of income level Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year An automatic six-month extension is available



Required if more than $500 in tax liability expected, or 100% current year liability 100% previous year liability Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.


Describe the AMT calculation for C-Corporations

Taxable Income +Tax Preference Items +/- Adjustments = Pre-ACE +/- ACE Adjustments = AMTI - 40,000 Exemption = Tax Base x 20% = Tentative Minimum Tax - Regular Tax Liability = AMT



Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years Personal Property - use 150% MACRS, not 200% Construction must use % completion method



Municipal Bond Interest Life Insurance Proceeds 70% Dividends Received Deduction Organizational Expenditures must be capitalized, not amortized Note: AMT paid gets carried forward indefinitely, but never carried back


When are C-Corporations exempt from AMT?

In year one In year two, if year one gross receipts were less than $5 Million In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million In year four and beyond, if the average from the previous 3 years is less than $7.5 Million



Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock. If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.


How are Corporate organization costs handled?

Amortization of costs begin the month the Corporation commences business activity If the Corporation doesn't amortize organization costs in year one, they can never be amortized Costs associated with offerings are neither deductible nor amortized


How are a C-Corporation's deductible charitable contributions calculated?

Sales -COGS= Gross Profit Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains =Total Income Total Income - Deductions (No charitable contributions, Dividends Received Deductions (DRD), or NOL Carrybacks allowed) - NOL Carryforwards =Taxable Income before charitable contributions, DRD, NOL Carrybacks x 10% =Deductible Charitable Contributions


How are excess charitable contributions treated in a C-Corporations?







80% Interest = 100% DRD 20-79% = 80% DRD less than 20% = 70% DRD Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.



Only take DRD % x Taxable Income Note: If DRD brings a loss situation, then you can take the full DRD If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed





How are capital losses handled in a C-Corporation?

Capital Losses are deductible only to the extent of Capital Gains



Net Short Term Capital Gains are taxed at ordinary income rates


How are Corporate losses carried back/forward?



How are bad debt losses handled in a Corporation?

Bad debt losses are classified as ordinary


What is the casualty loss floor for a C-Corporation?

No floor on Corporate casualty loss like there is with an individual taxpayer If destroyed, the loss is the property's basis (minus proceeds) Calculation: Adjusted basis - Proceeds from Insurance = Loss If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)


How are net operating losses handled in a C-Corporation?

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year Any leftover NOL = This year's NOL


How is investment interest expense handled in a C-Corporation?

Unlike individual taxation, investment interest expense is not limited to investment income. Investment interest on tax-free investments are NOT deductible.



Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)



Reconciles beginning to ending retained earnings Beginning Unappropriated Retained Earnings + Net Income + Other Increases - Dividends paid - Other decreases = Ending Unappropriated Retained Earnings



Like M1, but for Corporations with $10M+ in assets


How are affiliated (80%) Corporation tax returns handled?

Consolidation election is binding going forward Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred. One AMT exemption One accumulated earnings tax allowed Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value


How are Corporate distributions to shareholders handled?

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income) Then, remainder (if any) is a return of basis. Then, add'l remainder (if any) is a Capital Gain Distribution amount = FMV of Property + Cash - Liability Assumed Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)



1. Distribution is a dividend to the extent of current and accumulated earnings and profits 2. Shareholder basis is then exhausted 3. Remainder, if any, is a Capital Gain



Beginning Accumulated Earnings and Profits + Net Income + Gain on Distribution (if not already in book income) - Distribution (but cannot create a deficit) - NOL of prior years = Ending Accumulated Earnings and Profits



If Capital Property, then Capital Gain If Non-Capital Property, then Ordinary Income Gain characterization is the same for both the Corporation and the shareholder



Corporation: Depends on if property is capital in nature, otherwise ordinary loss Individual: capital loss only


What is the treatment of the liquidation of a subsidiary?

No G/L to parent company


What is a consent dividend? How is it treated?

Consented by the Board of Directors but not yet paid Treat as if distributed by the end of the year


Describe the requirements for a personal holding company.

No banks or financial institutions can be PHCs 5 or fewer individuals own more than 50% of the stock 60% of the PHC's income must be from passive means PHC tax is self-assessing - 20% tax rate on undistributed PHC Income



Not Self-Assessing like a PHC


How is the accumulated earnings credit calculated for a Corporation?



What are the requirements for holding S-Corporation status?

Only individuals, estates and trusts can be shareholders Domestic only, no international S-corps or foreign shareholders Up to 100 shareholders allowed, and only one class of stock allowed Calendar tax year only


How is an S-Corporation election made?

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year To make election, 100% of the shareholders must consent


How is an S-Corporation terminated?

To terminate election, 50% of the shareholders must consent No S Corp election allowed for 5 years after termination S Corp termination effective immediately following an act that terminates status



These items are included on Schedule K, not in ordinary income: Foreign Taxes paid deduction No Investment Interest expense Section 179 Deduction 1231 Gain or Loss Charitable Contributions Portfolio Income (dividends or interest)


How is S-Corporation shareholder basis calculated?

Beginning Basis +Share of Income Items (including non-taxable income!) -Distributions (cash or property) -Non-deductible expenses -Ordinary Losses (but don't take income below zero) = Ending basis


