corporation formation
No gain or loss recognized to the corporation issuing stock in exchange for property in the following transactions:
Formation
-- issuance of common stock
Reacquisition
-- purchase of treasury stock
Resale
-- sale of treasury stock
corporation tax basis
The BASIS of the property received from the shareholder is the GREATER OF:
--
Adjusted basis (NBV) of the asset plus any gain recognized by the shareholder/transferor
OR
--
Debt assumed by the corporation
shareholder tax consequences
part of corporate formation;
The shareholder contributing property in exchange for corporation common stock has no gain or loss if the following two conditions have been met:
--
Shareholders have 80%
control AND
--
Boot NOT involved
-- no cash withdrawn o
domestic production deduction
(business deduction)
9% of QPAI or Taxable Income
QPAI = Qualified Production Activities Income
executive compensation
(business deduction)
-- compensation deduction, may not deduct in excess of $1M
bonus accruals
(business deduction)
-- deduct these in the tax year if paid within 2.5 months of the year end
bad debts
(business deduction)
-- corporations must use the specific charge off method and deduct when specifically charged off
business interest expense
(business deduction)
-- deduct business interest incurred and paid
-- deduct investment expenses up to investment income
-- prepaid expenses are deducted when paid
charitable contributions
(business deduction)
-- 10% of AGI limitation
-- any accrual must be paid within 2.5m of year-end to be deductible and must be paid to an qualified charity org
business casualty losses
(business deduction)
-- these are 100% deductible to the corporation (differs from individuals' deduction rules)
organization expenses
(business deduction)
-- $5,000 can be expensed and the remaining amount amortized over 15 years
-- this only includes costs like legal and professional fees, not stock issuance costs
intangible amortization
(business deduction)
-- intangible assets such as patents and trade agreements are amortized over 15 years for tax purposes
life insurance premiums
(business deduction)
-- when the corporation is the beneficiary of the insurance, then the premiums are NONdeductible
-- when the corporate employees are the beneficiary of the insurance premiums, then it is tax deductible.
business gifts
(business deduction)
-- deductible up to $25 per person, per year
business meals and entertainment
(business deduction)
-- these expenses are 50% tax deductible
business taxes
(business deduction)
-- state income tax = DEDUCTIBLE
-- city income tax = DEDUCTIBLE
-- federal payroll tax = DEDUCTIBLE
--
federal income taxes = NONdeductible
political expenditures (lobbying)
(business deduction)
-- these expenses are NONdeductible
capital gains and losses
(business deduction)
-- capital loss deductions are only allowed to offset capital gains
-- the losses carryback 3 years and carryforward 5 years
-- the capital gains tax is calculated on ordinary corporate tax rates
net operating losses
(business deduction)
-- can be used to offset operating income, carryback 2 years and carryforward 20 years
inventory valuation methods
(business deduction)
-- the tax method used for accounting purposes for these assets must be used for income tax purposes
general business credit
(business deduction)
-- the credit may not exceed "net income tax" less the GREATER of:
1) 25% of regular tax liability above $25K OR
2) the "Tentative minimum tax" for the year
dividends received deduction (DRD)
the amount of dividends received deduction allowed is dependent upon the percentage of the investee corporation owned by the invested corporation.
-- 0-20% ownership = 70% DRD
-- 20-80% ownership = 80% DRD
-- 80%+ ownership = 100% DRD (consolidated compan
consolidated tax returns
an affiliated group of corporations may elect to be taxed as a single unit, thereby eliminating intercompany gains and losses.
--
Affiliated Group = 80% of voting power or common shares
-- Brother-Sister corps may NOT file consolidated returns (where an i
adjusted current earnings (ACE)
-- included to ensure that corporations do not report a profit for financial statement purposes but pay little or no income taxes.
Equal to unadjusted AMTI adjusted by the following items (MOLDD):
--
M
unicipal bond interest added back
--
O
rganizational
accumulated earnings tax
imposed on regular C corporations whose accumulated earnings are in excess of $250K and not distributed as dividends.
-- Tax is a flat 20%
-- To avoid unreasonable accumulation of earnings, there must be:
1) a demonstrated, specific and defined plan for u
personal holding company tax
corporations set up by high tax bracket taxpayers to channel their investment income into a corporation and shelter that income through a low normal corporate tax.
Definition: PHC a corp. owned 50% by 5 or less individuals and having 60% of AGI from --
--
E&P (corporate earnings & profits)
similar to retained earnings; E&P are calculated according to the rules of federal income taxation, while RE is calculated according to GAAP
Classification of distributions from E&P:
-- E&P accumulated and current is DIVIDEND INCOME
-- No E&P is left = RE
corporate liquidation
If a corporation is liquidated, the transactions is subjected to double taxation (both the corporation and the shareholder recognized a gain or loss).
The corporation generally deducts its liquidation expenses (filing fees and professional fees) on its fi
tax free reorganizations
a reorganization is treated as a nontaxable transaction because it results in the continuation of a business in a modified form
-- Mergers and consolidations (Type A)
-- Acquisition of one corporation of another corporation's stock, stock for stock transa
worthless stock (Section 1244 stock)
-- when a corp stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (fully tax deductible), instead of a capital loss, up to $50,000 ($100K if married).
-- Any loss in excess of this amount would be a capit
small business stock
-- a noncorporate shareholder, who holds qualified small business stock for more than five years, may generally exclude 50% of the gain on the sale or exchange of the stock
-- the includible portion of the gain is taxed at 28%
S Corporations
Qualifications:
-- must be domestic; 100 common US shareholders
-- can own interest in C corp but cannot consolidate tax return
-- All shareholders (voting and nonvoting) must consent to a valid election
-- no corporate taxation; all earnings are passed t
built in gains tax
distribution or sale of S corp assets may result in a corporate-level tax, if two conditions occur:
1) A C Corp elects S Corp status AND
2) The FMV of the corporate assets exceeds the adjusted basis of the corporate assets
fringe benefits
Fringe benefits paid by an S corporation are deductible by the S corporation only for non-shareholder employees and those employee-shareholders owning 2% or less of the S corporation.
-- Other fringe benefits paid are deductible by the S corporation if in
accumulated adjustments account (AAA)
the tax effects of distributions paid to shareholders of an S corporation that has accumulated earnings and profits since inception are computed using the accumulated adjustments account. The AAA is zero at the inception of the S Corporation:
+ to AAA = s
Section 509 private foundations
Section 509 private foundations include all Code 501(C)(3) organizations, except:
-- Max 50% charitable deduction
-- Broadly publicly-supported organizations
-- Supporting organizations
-- Public safety organizations
unrelated business income (UBI)
type of exempt organization income:
1. Derived from an activity that constitutes a trade or business,
2. Is regularly carried on, and
3. Is not substantially related to the organization's tax-exempt purpose.
an exempt organization may not
1. Directly participate or intervene in any political campaign,
2. Have any part of net earnings inure to the benefit of any private shareholder or individual, and
3. Have substantial part of its activities for non-exempt activities.
organizations qualify as tax exempt if
1. It is both organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes; for public safety testing; for the prevention of cruelty to children or animals; or to foster national or international amateur spor