Term
Corporation Formation
Tax Consequences |
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Definition
General Rule: Formation is non-taxable event
Formation: Issuance of Common Stock
Reacquistion: Purchase of Treasury Stock
Resale: Sale of Treasury Stock
Apart of HIDE IT (transactions of corporations) |
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Term
Corporation Formation
Basis of Property Received
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Definition
General Rule: Basis of property received is the greater of:
Adjusted NBV of shareholder PLUS any gain recognized by shareholder
OR
Debt assumed by corporation (shareholder may recognize a gain to prevent negative basis) |
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Term
Corporation Formation
Shareholder Tax Consequences
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Definition
No gain or loss recognized if:
immediately after shareholders own at least 80% of voting stock & at least 80% of non-voting stock
AND
NO BOOT RECEIVED (cash or bonds) |
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Term
Corporation Formation
Basis of Common Stock
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Definition
Cash: amount contributed
Property: NBV. Adjusted basis of property is reduced by any debt on property assumed by corp
Services: FMV of services rendered
(shareholder must recognize as ordinary income)
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Term
Corporation Formation
Basis Formula |
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Definition
NBV + FMV of services + Gain recognized by shareholder - Cash Received - Liabilities assumed - FMV of non money boot received =
Basis of common stock |
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Term
Book Income vs Taxable Income
What's a Schedule M-1 used for? |
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Definition
Reconciliation between tax return and financial statements appear on M-1
Both permanent & temporary differences |
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Term
Gross Income for Corporations |
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Definition
Cash received in advance of accrual, GAAP income is taxed.
temporary differences:
interest income received in advance
rental income received in advance
royalty income in advance
permanent (not taxable):
income interest from muni or state bonds
proceeds from life insurance of an officer
federal taxes paid |
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Term
Trade or Business Deductions |
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Definition
All oridnary and necessary expenses paid or incurred during the year
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Term
Trade or Business Deductions
Domestic Production Deduction:
Qualified Production Activities Income |
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Definition
9% of the lesser of QPAI
OR
Taxable Income (disregarding QPAI formula)
Domestic Production Gross Receipts
<CoGS>
<Other directly allocable expense or losses>
<Proper share of other deductions>
______________________________
QPAI |
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Term
Trade or Business Deductions
Executive Compensation
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Definition
Executive compensations in excess of $1,000,000 cannot be deducted for the top 5 employees.
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Term
Trade or Business Deductions
Bonus Accruals |
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Definition
Bonuses paid by an accrual basis taxpayer are deductible in the tax year when all events have occurred; provided they are paid within 2 1/2 months after year end.
Non-shareholder employees only.
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Term
Trade or Business Deductions
Bad Debts |
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Definition
Accrual Basis: deduct when specific A/R written off
Cash Basis: NOT allowed a tax deduction
*income never reported |
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Term
Trade or Business Deductions
Business Interest Expense
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Definition
- All interest paid or incurred during the taxable year on indebtedness incurred for business purposes is deductible
- Interest expense on loans for investment. Limited to the net investment income
- Prepaid interest: Must allocate to correct period (incurred and paid)
- General business interest:deductible
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Term
Trade or Business Deductions
Charitable Contributions
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Definition
- Maximum deduction of 10% of taxable income. Calculated before NOL, DRD, Cap. Loss, Production activities deduction
- May be carryfoward 5 years
- Accruals must be paid within 2 1/2 months of year end
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Term
Trade or Business Deductions
Business Losses or Casualty Losses
Related to Business |
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Definition
100% deductible
Partially destroyed: limited to lesser of: decline in the value of the property or,adjusted basis of property before casualty
Fully destroyed: NBV for the property |
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Term
Trade or Business Deductions
Organizing and Startup Cost
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Definition
Deduct up to $10,000 or organizational costs and $5,000 of startup costs.
Any excess amortized over 180 months
*Look for month business started
Excluded: costs of raising capital |
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Term
Trade or Business Deductions
Amortization, Depreciation, and Depletion |
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Definition
Goodwill, convenants not to compete, franchise, trademarks, and trade names must be amortized over a 15 years straight line basis
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Term
Trade or Business Deductions
Life Insurance Premiums |
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Definition
- If corporation is beneficiary NOT tax deductible
- Employee/family is beneficiary IS deductible.
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Term
Trade or Business Deductions
Business Gifts, Meals & Entertainment,
Penalties & Illegal Activities |
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Definition
- Business gifts limited to $25 per person per year
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- Meals & Entertainment are 50% deductible
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- Penalties & Illegal Activities are NOT Deductible
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Term
Trade or Business Deductions
Taxes
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Definition
State, City and Federal Payroll taxes are all deductible
Federal Income Taxes are NOT deductible
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Term
Lobbying & Political Expenditures |
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Definition
Lobbying expenses and political
contributions are NOT deductible |
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Term
Business Capital Gains and Losses |
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Definition
- Capital losses are NOT tax deductible. Can only offset capital gains
- Carryback 3 years. Carryforward 5 years.
- Taxed at corporate tax rate, same as ordinary income.
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Term
Business Net Operating Losses |
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Definition
- Carryback 2 years. Carryforward 20 years.
- In calculating NOL: No charitable contribution deduction is allowed.
- DRD is allowed to be deducted BEFORE calculating NOL
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Term
Inventory Valuation Methods |
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Definition
In general, the tax method used for accounting purposes can be used for income tax purposes.
Expense inventory when sold. |
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Term
****General Business Credits |
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Definition
MayNOT exceed Net Income Tax (Not refundable)
- Investment credit
- Work Opportunity credit
- Alcohol Fuels credit
- Increased research credit
- Low Income Housing credit
- Small Employee Pension start up costs
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Term
Dividends Received Deduction
% Tiers and Limits |
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Definition
1st corp must be taxed &stock owned for 45 days
% Owned DRD
0% < 20% 70%
20% < 80% 80%
80% or more 100%
Limited to the lesser of: % of dividend received or
% of taxable income w/o regard to the DRD, NOL or capital loss carryback
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Term
What types of companies are excluded?
"Don't take DRD's personally" |
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Definition
Personal Services Corporations
Personal Holdings Companies
(Personally taxed) S Corp |
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Term
Dividends Received Deduction
Who can get 100%?
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Definition
Affiliated corporations (80% ownership) who file consolidated returns qualifies for 100% deduction
Small business investment companies |
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Term
Depreciation
Half Year Convention |
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Definition
Applies to personal property
(Machinery & Equip)
Treated as having been in placed in service/disposed of at the midpoint of the year
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Term
Depreciation
Mid Quarter Convention |
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Definition
If more than 40% of depreciable property is placed in service during the last quarter of the year, the mid-quarter convention must be used. |
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Term
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Definition
Residential rental property 27.5 years S/L
Non-residential (office, warehouse) 39 years S/L
One 1/2 month is taken in the month
the property is placed in service. |
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Term
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Definition
Equip can b expensed in the year put into service
Max: $500,000. Reduced $ for $ after
$2,000,000 worth of property.
Not permitted when loss exists or created.
Max on SUVs $25,000 |
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Term
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Definition
Used on exhaustible natural resources (timber, minerals, oil, gas)
Cost Depletion: remaining basis of property is divided by remaining number of recoverable units.
i.e. 1000 units costing $2,000, sold 20.
2000/1000 * 20 = $40 |
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Term
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Definition
"Preference for AMT"
Limited to 50% of taxable income (excluding depletion) from the well or mine. Ranges from 5% to 22% depending on mineral extracted.
Can be taken even after costs have been completely recovered. |
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Term
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Definition
Intagiblies such as goodwill, lienses, franchises, and trademarks may be amortized using S/L over a period of 15 years.
Tax= 15 years
GAAP= impairment test/not amortized |
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Term
Amortization of Startup and Organizing Costs |
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Definition
Startup in excess of ($5,000) and organization costs in excess of ($10,000) are amortized over 180 months.
Tax= $5,000/$10,000 + amortized amount
GAAP= Expense |
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Term
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Definition
Depreciable personal and real property used in trade or business and held for at least 12 months
Applies to involuntary conversions.
Gains are treated as Capital Gains
Losses are treated ordinary losses.
*Losses cannot not be deducted in excess of Capital Gains except for the $3,000 allowance for individuals |
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Term
Section 1245
(Gains Only) |
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Definition
Personal property (machinery and equipment) used in the course of trade or business,
and held over 12 months.
When sold recapture all accum depreciation.
Any excess gets Capital Gains treatment under Section 1231 |
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Term
Section 1250
(Gains Only) |
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Definition
Real property (buildings) used in a trade or business, and held over 12 months
Recapture amount of accum. dep. in excess of S/L
Any excess gets Capital Gains treatment under Section 1231 |
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Term
Taxation of Corporation
Filing Requirements |
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Definition
15th day of the 3rd month after year end
(Dec 31 --> March 15th)
Statute of limitations same as for inviduals.
3 years, 6 with 25% misstatement. |
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Term
Taxation of Corporation
Estimated Tax Payments |
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Definition
Small corps must pay 100% of current tax or 100% of prior year tax if present.
Large corps must pay 100% of current years tax |
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Term
Taxation of Corporation
Consolidated Tax Returns |
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Definition
An affilitated corporation may elect to file as a single entity. Affiliated company must own 80% of outstanding AND voting stock.
Intercompany gains/losses are eliminated.
Brother/Sister corporations MAY NOT
file consolidated return
Consolidate GAAP = 50%
Consolidate Tax = 80% - 100%
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Term
Taxation of Corporation
Corporate Alternative Minimum Tax |
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Definition
Corporate AMT = 20% of AMTI less exemption
Only credit allowed is Foreign Tax Credit
Regular taxable income
+/- L.I.E.
+Preferences
+/- A.C.E.
<AMT NOL Deduction>
______________________________
AMT * 20%
______________________________
Gross AMT
<Foreign Tax Credit>
______________________________
Tenative Minimum Tax
<Regular Tax>
______________________________
Alternative Minimum Tax (AMT)
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Term
Taxation of Corportation
AMT
Adjust for a L.I.E. |
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Definition
Additions or subtractions
- Long-term contracts
- Installment sale of a dealer
- Excess depreciation (post 1986)
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Term
Taxation of Corportation
AMT
Add back Preferences "P"
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Definition
Preferences increase income
- Percentage depletion
- Private activity bonds - issued post '86 tax-exempt interest income
- Pre '87 ACRS depreciation over S/L
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Term
Taxation of Corportation
AMT
"Your M.I.N.D. is your A.C.E." |
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Definition
Add or subtract Adjusted Current Earnings
- Muni interest income - tax exempt interest income
- Increase CSV life insurance
- Non S/L depreciation after '89 vs ADS
- Dividends Received Decution (20% owners)
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Term
Taxation of a Corporation
Accumulated Earnnings Tax |
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Definition
Imposed on a regular C corporation whose retained earnings are in excess of $250,000 if improperly held instead of being distrubted as dividends.
Personal service corporations limited to $150,000
Additional tax rate of 15% on
accumulated earnings |
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Term
Taxation of Corporation
Personal Holding Company Tax
"Personal Holding Companies are N.I.R.D.s" |
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Definition
More than 50% owned by 5 or fewer individuals at any time during the last 6 months and at least 60% of adjusted ordinary gross income from:
- Net rent
- Interest that is taxable
- Royalties (not mineral, oil, gas, copyrights)
- Dividends from an unrelated domestic corp
Used by to shelter investment income of individuals to pay lower corporate tax rates.
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Term
Taxation of a Corporation
Personal Service Corporation Tax Rate |
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Definition
PSCs can NOT use graduated corporate rates
FLAT 35% rate
Accounting, law, consulting, engineering,architecture, health, actuarial science |
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Term
Corporate Earnings & Profits
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Definition
E&P is key factor in ability to payout dividends
Corporate Taxable Income
+/- Adjustments (Temp or Perm)
_____________________________
Currents Earnings & Profit
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Term
Corporate Earnings & Profits
Negative Adjustments
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Definition
Negative adjustments reduce E&P
- Federal income tax expense
- Non-deductible penalties, fines, political contributions
- Officer life insurance premium
- Expense for prouction of tax-exempt income
- Non-deductible charitable contibutions
- Non-deductible capital losses
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Term
Corporate Earnings & Profits
Positive Adjustments
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Definition
Increase current E & P
- Refunds of federal income tax paid
- Tax-exempt inome
- Refunds of items not subject to regular tax
- NOL deductions
- Life insurance proceeds
- DRD used to calculate regular tax
- Carryovers of capital losses that impacted TI
- Carryovers of charitable contributions
- Non taxable cancellation of debt
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Term
Corporate Earnings & Profits
Accumulated E & P
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Definition
Beg. Accum. E&P
+ Current E&P
-Distributions from Current E&P
- Distributions from Accum E&P
= Ending Accum E&P
Distributions first applied to current E&P, then Accum Depreciation, then Capital Gains |
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Term
Corporation Distributions |
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Definition
Distributions are taxable when defined as dividends
Current E&P --> Taxable
Accum E&P --> Taxable
Return of Capital --> Tax free, reduces basis
Capital gain distribution --> Taxable as capital gain |
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Term
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Definition
Not in the form of a dividend but treated as such when not in proportion to stock ownership
Excessive salaries paid to shareholder employees
Excessive rents & royalties
"Loans" to shareholders with no intent to repay
Sales of assets below FMV |
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Term
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Definition
Distributions of stock to shareholders
Generally NON taxable, unless cash or property was and option
FMV at ditribution date
Basis of a nontaxable stock dividend is
average of old basis i.e "stock split" |
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Term
Corporation Distributions
Shareholder Taxable Amount |
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Definition
Individual & Corporate
Cash dividends - amount received
Property dividends - FMV of propert received
Corporate shareholders subject to DRD |
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Term
Corporation Distributions
Corp Paying Dividend, Taxable Amount
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Definition
General Rule: Payment of a dividend does not create a taxable event for corp. A dividend is a reduction of E&P.
If accum. property is distributed treat as being sold (FMV - Adjusted Basis)
Gain increases corp current E&P which means the dividend is not taxable to receipt like a dividend |
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Term
Corporation Distributions
Stock Redemption
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Definition
Occurs when a company buys back stock from shareholders.
Proportional- Taxable dividend income (ordinary)
Disporportional- Capital Gains treatment |
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Term
Corporation Distribution
Liquidation |
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Definition
Transaction is subject to double taxation.
1st when corp sells assets
2nd shareholder recognizes proceeds received
If distributing property assets directly, gain is recognized. Shareholder recognizes excess over basis (FMV- Stock Basis) |
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Term
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Definition
Reorganizations are tax free event due to continuation of the business in a modified form.
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Term
Worthless Stock
Section 1244 Stock (small business stock) |
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Definition
When corp stock is sold or becomes worthless, stockholder can treat as an ordinary loss up to $50,000/$100,000.
Any excess treated at capital loss
If held for more than 5 years, shareholder can exclude up to 50% of the gain or exchange.
75% if held between 2/18/09 and 12/31/10 |
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Term
Small Business Corporation (S Corp)
100 USA people are common |
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Definition
- Limited to 100 shareholders.
- One class of stock (i.e. no preferred stock)
- Shareholders must be individual, estate, or trusts
- Made retroactive to Jan 1 if selected by March 15
- Calendar tax year
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Term
Small Business Corporation (S Corp)
Effect on S Corp when elected |
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Definition
S Corp MUST adopt calendar tax year unless valid business purpose exists
Tax return due March 15th
General Rule: No tax on corp level
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Term
Small Business Corporation (S Corp)
Effect on shareholder when elected
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Definition
- Pass-through income/loss to shareholder (K-1)
- Allocations made per share/per day
- Losses limited to adj basis plus loans provided
- Any disallowed loss carryfoward indefinitely
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Term
Small Business Corporation (S Corp)
Exception(s) to no taxation rule |
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Definition
Exceptions:
- LIFO Recapture Tax
- Built-in Gains Tax (when C Corp elects S corp status and FMV of assets exceeds adjusted basis)
- Passive investment income
Exception to Built In Gains Tax
- S corp was never a C corp
- Sale or transfers occurs after 10 years
- C corp can prove appreciation of property occured after S corp election
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Term
Small Business Corporation (S Corp)
Computing Shareholder Basis
B.A.S.E.
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Definition
Initial Basis
Add income items
Add shareholder investments in corp
Subtract distributions to Shareholders
Subtract loss or expense items
Ending Basis
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Term
Small Business Corporation (S Corp)
Tax treatment of Distributions
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Definition
Generally not subject to tax
with no C Corp E&P
Within stock basis- No taxable. ROC
In excess of stock basis- Taxed as Capital Gain
w/ C Corp E&P
- To the extent of AAA-non taxable, reduce basis
- To the extent of C corp E&P-taxed as div, does not reduce basis.
- To the extent stock basis- no tax, reduce basis. ROC
- In excess of stock basis- LTCG. Capital gain dist
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Term
Small Business Corporation (S Corp)
How is election terminated |
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Definition
- Holders of a majority of the corp stock mus consent
- S corp fails to meet elibility requirements
- More than 25% of gross receipts come from passive investment income for 3 straight years "3 strikes and you're out"
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Term
Exempt Organizations
Section 501(c)1 |
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Definition
Organized under and act of Congress as a US instrumentality
Does not require application |
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Term
Exempt Organizations
Section 501(c)3
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Definition
No part of earning may inure private shareholder
Causes:
Charitable, Educational, Religous, Scientific, Public Safety, Amateur Sports, Prevention of Cruelty
Prohibited Activities:
- Influencing legislation
- Participating in any political campaign
- Endorsing candidates
- Engaging in fund raising activities for political candidates
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Term
Exempt Organizations
Section 509 Private Foundations
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Definition
Private Foundation terminates when it becomes a public charity.
Private Foundation may voluntary terminate |
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Term
Exempt Organizations
Unrelated Business Income
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Definition
- Derived froman acivity that constititua a trade or buinsess
- Regularly carried on
- Not substantially related to org tax exempt purpose
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Term
Exempt Organizations
Unrelated Business Income
Tax Exemptions |
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Definition
- Regular tax payments should be made
- $1,000 max UBI allowed
- Royalties, dividends, interest, annuities excluded
- Rental income excluded
- Gains & Losses on sale of property
- Income from research of a college or hospital
- Income of labor unions used to establish a retirement home, or hospital
- Acitivities limited to exempt organizations (bingo)
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Term
Exempt Organizations
Membership Organizations
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Definition
Taxed on gross income less deductions for exemption function income (dues, fees)
If a social club makes a profit, profit is usually taxable |
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Term
Exempt Organizations
Annual Return
Requirements & Exclusions
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Definition
Form 990- Annual Information Return
Due May 15th
CHRIST and < $50,000 not required to report
- Churches
- High Schools -Religious
- Religious Orders
- Internal Support Auxiliaries
- Societies -missionary related
- Tax exempt- organized by congress
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