Chapter 3 - Tax Treatment for C-Corporations

What is the deduction for a appreciated property sale that would have resulted in a long term capital gain?

-Generally the deduction is 50% of the FMV of the property unless: The corporation donates a patent, copyright, trademark, trade name, trade secret, know-how, certain software, or other similar property; ▶ A corporation donates tangible personal property to a charitable organization and the organization's use of the property is unrelated to its tax-exempt purpose; or ▶ A corporation donates appreciated property to certain private nonoperating foundations. (deduction = property's FMV minus the long-term capital gain that would have resulted from the property's sale)

Explain advantages of Fringe Benefits

-They provide a tax deferral: Pension, profit sharing, and stock bonus plans (corp. doesn't pay tax, employee pays tax only when benefit is received later on) -They provide a tax exclusion: Group term life insurance, accident/health insurance, disability insurance. *A fringe benefit probably is the most cost effective form of compensation because the amount of the benefit is deductible by the employer and never taxed to the employee.

What are the special deductions of C Corporations?

-U.S. Production Activities Deduction -Dividends Received Deduction -NOL Deduction

What is the U.S. Production Activities Deduction?

-equal to 9% times the lesser of (1) qualified production activities income for the year or (2) taxable income before the U.S. production activities deduction. -Section 199 Qualified Production Activities Income includes COGS allocable to these receipts, other deductions, expenses and losses directly allocable and a ratable portion of other deductions, expenses and losses not directly allocable *Not financially expensed*

Who can file a consolidated return?

1) The common parent must directly own stock with at least 80% of the voting power and 80% of the value of at least one includible corporation. 2) One or more group members must directly own stock with at least 80% of the voting power and 80% of the value of each other corporation included in the affiliated group If qualified as an affiliated group, can also file consolidated return

Describe the M-1 of Form 1120

Begins with net income per books and ends with taxable income before special deductions (Line 28 of 1120) Left Side: items corporation adds back to book income : ▶ Federal income tax expense (per books) ▶ Excess of capital losses over capital gains ▶ Income subject to tax but not recorded on the books in the current year ▶ Expenses recorded on the books but not deductible for tax purposes in the current year Right Side: Items corporation deducts from book income: ▶ Income recorded on the books in the current year that is not taxable in the current year ▶ Deductions or losses claimed in the tax return that do not reduce book income in the current year

Define Brother-sister controlled groups

Two or more corporations with five or fewer indivuduals (trusts/estates) who meet both conditions: 1)More than 50% of the voting power of all classes of stock (or more than 50% of the total value of the outstanding stock) of each corporation, taking into account only the stock ownership that is common with respect to each corporation 2) At least 80% of the voting power of all classes of voting stock (or at least 80% of the total value of the outstanding stock) of each corporation. *Own 50% of common ownership and 80% stock ownership in brother sister group

When is controlled group status tested?

Usually on Dec 31 or last day in its tax year

What is the dividends received deduction?

When a corporation is issued stock, it must pay taxes on this dividend (as the corporation distributing must also pay income tax = double taxation). Those earning could potentially be taxed again if the corporation receiving the dividends distributes to shareholders = triple taxation. -Dividend received deduction helps mitigate effects of multiple taxation. General Rule for deducting: -own less than 20% of the distributing corporation's stock = deduct 70% of the dividends received. -owns 20% or more of the distributing corporation's stock (both voting power and value) but less than 80% of such stock = deduct 80% of the dividends received

When is the sale of property considered ordinary income property?

property whose sale would have resulted in a gain other than a long-term capital gain (i.e., ordinary income or short-term capital gain). Examples of ordinary income property include: investment property held for one year or less, inventory property, and property subject to depreciation recapture under Secs. 1245 and 1250. -The deduction allowed for a donation of such property is limited to the property's FMV minus the amount of ordinary income or short-term capital gain the corporation would have recognized had it sold the property.

What are advantages of filing a consolidated return?

▶ Losses of one member of the group can offset profits of another member of the group. ▶ Capital losses of one member of the group can offset capital gains of another member of the group. ▶ Profits or gains realized on intercompany transactions are deferred until a sale outside the group occurs (i.e., if one member sells property to another member, the gain is postponed until the member sells the property to someone outside the affiliated group). Most common reason is to offset losses Remember NOL are carried back or forward sometimes and could not offset gains in the current year

Book Tax Differences that are permanent: Book Expenses

▶ Some book expenses are never deductible for tax purposes. Examples include: 1. Expenses incurred in earning tax-exempt interest 2. Premiums paid for life insurance carried by the corporation on the lives of key officers or employees 3. Fines and expenses resulting from a violation of law 4. Disallowed travel and entertainment costs 5. Political contributions 6. Federal income taxes per books, which is based on GAAP (ASC 740)

Book Tax Differences that are permanent: Book Income not taxed

▶ Some book income is never taxed. Examples include: 1. Tax-exempt interest received on state and municipal obligations 2. Proceeds of life insurance carried by the corporation on the lives of key officers or employees

Book Tax Differences that are Temporary: Expenses/Losses deductible for tax after recognized for book purposes

▶ Some expenses or losses are deductible for tax purposes after they are recognized for book purposes. Examples include: 1. Excess of capital losses over capital gains, which are expensed for book purposes but carry back or over for tax purposes 2. Book depreciation in excess of tax depreciation 3. Charitable contributions exceeding the 10% of taxable income limitation, which are currently expensed for book purposes but carry over for tax purposes 4. Bad debt accruals using the allowance method for book purposes and the direct write-off method for tax purposes 5. Organizational and start-up expenditures, which are expensed currently for book purposes but partially deducted and amortized for tax purposes 6. Product warranty liabilities expensed for book purposes when estimated but deducted for tax purposes when the liability becomes fixed 7. Net operating losses (NOLs) that, for tax purposes, carry back two years (or extended period if applicable) and carry over 20 years ▶ Some expenses or losses are deductible for tax purposes before they are recognized for book purposes. Examples include: 1. Tax depreciation in excess of book depreciation 2. Prepaid expenses deducted on the tax return in the period paid but accrued over a period of years for book purposes

Book Tax Differences that are Temporary: Revenues, gains recognized for book but not tax until later years

▶ Some revenues or gains are recognized for book purposes in the current year but not reported for tax purposes until later years. Examples include: 1. Installment sales reported in full for book purposes in the year of sale but reported over a period of years using the installment method for tax purposes 2. Gains on involuntary conversions recognized currently for book purposes but deferred for tax purposes

Book Tax Differences that are Temporary: Revenues, gains taxed before reported in book

▶ Some revenues or gains are taxable before they are reported for book purposes. These items are included in taxable income when received but are included in book income as they accrue. Examples include: 1. Prepaid rent or interest income 2. Advance subscription revenue

Book Tax Differences that are permanent: Tax Deductions not taken for book purposes

▶ Some tax deductions are never taken for book purposes. Examples include: 1. The dividends-received deduction 2. The U.S. production activities deduction 3. Percentage depletion of natural resources in excess of their cost

Disadvantages of filing a consolidated return are

▶ The election is binding on all subsequent tax years unless the IRS grants permission to discontinue filing consolidated returns or the affiliated group terminates. ▶ Losses on intercompany transactions are deferred until a sale outside the group takes place. ▶ One member's Sec. 1231 loss offsets another member's Sec. 1231 gain instead of being reported as an ordinary loss. ▶ Losses of an unprofitable member of the group may reduce the deduction or credit limitations of the group below what would be available had the members filed separate tax returns. ▶ The group may incur additional administrative costs in maintaining the records needed to file a consolidated return.

Tax tip for Charitable contributions

-Tax law does not require a corporation to recognize a gain when it contributes appreciated property to a charitable organization. But a decline in value of donated property is not deductible as well. -Corporations should sell loss property to recognize the loss (and claim deduction) and donate the sale proceeds to charity to claim charitable contribution deduction

What factors determine the deduction of a charitable contribution?

-The timing of the deduction -The amount of the deduction -The amount of the deduction permitted for the contribution of certain noncash property, and the maximum deduction permitted in any given year

List some Organizational Expenditures

(1) incident to the corporation's creation; (2) chargeable to the corporation's capital account; (3) of a character that, if expended incident to the creation of a corporation having a limited life, would be amortizable over that life. ▶ Legal services incident to the corporation's organization (e.g., drafting the corporate charter and bylaws, terms of original stock certificates) ▶ Accounting services necessary to create the corporation ▶ Expenses of temporary directors and of organizational meetings of directors and stockholders ▶ Fees paid to the state of incorporation

Special tax rules: two or more corporations are members of a controlled group, the member corporations are limited to a total of $50,000 taxed at 15%, $25,000 being taxed at 25%, and $9,925,000 million being taxed at 34%. For brother-sister corporations, the broader 50%-only definition applies for limiting the reduced tax rates. What items must be apportioned when calculating income tax?

(For purposes of apportioning the Sec. 179 expense dollar limitation in a parent-subsidiary situation, the corporations are considered a controlled group if the ownership percentage is more than 50% rather than at least 80%) -Sec. 267(a)(1) allows no deduction for any loss on the sale or exchange of property between two members of the same controlled group, IF SALE BETWEEN CORP AND SHAREHOLDER: you can defer the loss (original selling member recognizes loss when the property is sold or exchanged in the intragroup transaction is sold outside the controlled group) -Section 267(a)(2) allows no deduction for certain accrued expenses or interest owed by one member of a controlled group to another member of the same controlled group when the two corporations use different accounting methods so that the payments would be reported in different tax years The Sec. 1239 rules that convert capital gain into ordinary income on depreciable property sales between related parties also apply to sales or exchanges involving two members of the same controlled group. Sections 267 and 1239, however, provide special definitions of controlled groups that differ somewhat from those described above

What are the allocable receipts in Domestic Production Gross Receipts

(No receipts from sale of food or beverages) -The lease, rental, license, sale, exchange, or other disposition of (1) qualified production property (tangible property, computer software, and sound recordings) manufactured, produced, grown, or extracted in whole or significant part within the United States; (2) qualified film production; or (3) electricity, natural gas, or potable water produced within the United States -Construction performed in the US -Engineering/architectural services performed in US for construction projects in US

Passive Activity Limitation Rules

- Passive losses and credits are allowed to offset the corporations net active income but not portfolio income (interest, dividends, annuities, royalties, and capital gains on sale of investment property)

After charitable contribution deduction is calculated what happens next?

-Add back any NOL Carry over deduction and charitable contributions deduction before computing the dividends received deduction. -Then subtract any NOL deduction to determine the US Production Activities Deduction if it applies *If you are carrying back NOL, it is not included when re-computing income taxes and charitable deduction

C-Corporations Deduction of Business Expenses

-Allowed to deduct ordinary and necessary business expenses.

What are some deductions of C-Corporations

-Alternative Minimum Tax -Accumulated Earnings Tax -Personal Holding Company Tax -Sales and Exchange of Properties: Gains/Losses

How can a corporation change its annual accounting period?

-Approval from IRS unless Treasury Regulations Specify authorized change -File Form 1128, on/before 15th day of the 3rd calendar month following the close of the short period. -Approval is substantial business purpose exist for change

Explain the timing of a charitable contribution and the associated deduction

-Board of directors authorize contribution in the year it accrued. -Corporation pays the contribution on or before the 15th date of the 3rd month following the end of the accrual year. -When filing tax return, attach copy of board of directors resolution to the return. -If cash = donation is cash amt -If property = donation is FMV

Define Cash/Hybrid Method

-Cash Method allows deferment of income until monies received. -Hybrid Method uses accrual method for sales, COGS, inventories, AR, AP and cash method for all other income and expense items. (Accrual for sales and inventories, cash for expenses like utilities, rent, salaries and taxes)

How much of a dividend received deduction can members of an affiliated group claim?

-Claim 100% of deduction -Must own 80% stock in at least one subsidiary company and group members must own 80% of company under parent company group *If the affiliated group files a consolidated tax return, the recipient of the dividend does not claim the 100% dividends received deduction because the intercompany dividend gets eliminated in the consolidation

Define Capital Gains and Losses (Including Net)

-Corporations must net Capital Gains/losses like individual -A corporation includes all its net capital gains (net long-term capital gains in excess of net short-term capital losses) for the tax year in gross income. -Unlike with individuals, a corporation's capital gains receive no special tax treatment, taxed in the same manner as any other ordinary income. -If a corporation incurs a net capital loss, it cannot deduct the net loss in the current year. A corporation's capital losses can offset only capital gains. They never can offset the corporation's ordinary income.

What is not tax deductible in Organizational Expenditures?

-Expenses issuing/selling stock (commission, professional fees, printing costs) -Expenditures related to transfer of assets to the corporation

What Form does a C-Corporation File to report net capital loss carry back?

-File form 1139 - Corporation Application for Tentative Refund or -File Form 1120X - Amended U.S. Corporation Income Tax Return. or -Form 1139 if loss carry back is filed within one year after the end of the year in which the net capital loss occurred.

What are reconciliations of Schedule M-1 or M-3?

-For many corporations, the reconciliation must be provided on Schedule M-1 of Form 1120. -Corporations with total assets of $10 million or more on the last day of the tax year must file Schedule M-3 This increases IRS ability to audit

Estimated Taxes and early Payments are required for corporation when

-If $500 or more in tax for current year is expected. 4 payments, of 25% each. -For larger corporations (1 million or more), required annual payment is 100% of tax return for current or preceding year (lesser of) -Estimated tax can be computed on Schedule 1120-W - Estimated Tax for Corporations Payment due dates: April 15, June 15, Sept 15 and Dec 15 Hint: A large corporation's estimated tax payments cannot be based on the prior year's tax liability except the first installment. If a large corporation bases its first estimated tax installment on the prior year's liability, any shortfall between the required payment based on the current year's tax liability and the actual payment must be made up with the second installment

What is Sec. 291 Tax Benefit Recapture Rule?

-If a taxpayer sells Sec. 1250 property at a gain, Sec. 1250 requires that the taxpayer report the recognized gain as ordinary income to the extent the depreciation taken exceeds the depreciation that would have been allowed had the taxpayer used the straight-line method known as sec. 1250 depreciation gain. -Corporations must recapture as ordinary income the amount equal to 20% of ordinary income that would have been recognized had the property been Sec 1245 prop

What are the limitations of the Dividends received deduction?

-If less than 20% owned of corporation distributing: the deduction is the lesser 70% of dividends received or 70% of taxable income computed without regard to any NOL deduction, any capital loss carryback, the dividends-received deduction itself, or the U.S. production activities deduction. -If more than 20% is owned, lesser of 80% of dividends received or 80% of taxable income computed without regard to the same deductions *When the dividends-received deduction creates (or increases) an NOL, the corporation gets the full benefit of the deduction because it can carry back or carry forward the NOL*

A corporation must use the accrual method of accounting unless it meets one of the exceptions:

-It qualifies as a family farming corporation -It qualifies as a personal service corporation (fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting & all stock is held by current or retired employees or inherited by said employees) -Meets $5 million gross receipts test for all prior tax years. Its average gross receipts for the three-year period ending with that prior tax year do not exceed $5 million -It has elected S-Corp status

What are the limitations of Net Capital Losses in C-Corporations?

-Must carry back all net cap. loss as short term cap. loss to the three previous years first -any remainder carries over as short term capital loss over 5 years. -Unused cap. loss after 5 years expire.

How are Net Operating Losses taxed?

-NOL is when deduction(including dividend received deduction) exceed income. -When computing deduction no NOL carryover or carryback is permitted -NOL does not allow the US Production activities deduction because no positive taxable income -if NOL - No other adj. required NOL carries back to two preceding years first and then forward up to 20 years. Or the corp. can elect to forgo carryback and carry all of it forward the next 20 years . This may be because of lower marginal tax rates in earlier years vs later on. *Carry over creates deferred tax asset.

What business expenses cannot be deducted in C-Corporations?

-No deductions allowed for interest on borrowed money to purchase tax-exempt securities, illegal bribes or kickbacks, fines or penalties imposed by government or insurance premiums incurred to insure the lives of officers and employees when the corporation is the beneficiary.

What are organizational expenditures and how are they expensed?

-Organizational expenditures are expenses incurred at the time of formation (legal fees, accounting fees) -Expenditures normally must be capitalized -Under Sec 248 a corporation may elect to deduct the first $5000 - the corporation must reduce the $5,000 by the amount by which cumulative organizational expenditures exceed $50,000 although the $5,000 cannot be reduced below zero. The corporation can amortize the remaining organizational expenditures over a 180-month period beginning in the month it begins business. *The amortized amount of first month is added to deduction credit to find first year deduction -Most amortize over specific period. They are expensed under ASC 720-15

How can a corporation reduce taxes for the company as well as their shareholders?

-Providing compensation via salary to avoid double taxation via dividends. -Keep C-Corporation status and enjoy nontaxable to the employee and deductible to the corporation fringe benefits (health/accident insurance)

What are the limitations of salary payments over dividends?

-Regulation Sec. 1.162-7(a) requires salary or fringe benefit payments to be reasonable in amount and to be paid for services rendered by the employee. (IRS can deem unreasonable and disallow a portion) -A corporation may not deduct compensation paid to an executive of a publicly traded corporation that exceeds $1 million. -A corporation is a taxpaying entity independent of its owners. The first $75,000 of a corporation's earnings is taxed at 15% and 25% corporate tax rates. These rates are lower than the marginal tax rate that may apply to an individual taxpayer and provides an incentive to retain some earnings in the corporation instead of paying them out as salaries. -A combined employee-employer Social Security tax rate of 15.3% generally applies, 1/2 of which is the employers responsibility

How are start up costs deducted and amortized?

-Sec. 195, a corporation may elect to deduct the first $5,000 of start-up expenditures. However, this amount is reduced (but not below zero) by the amount by which the cumulative start-up expenditures exceed $50,000. The corporation can amortize the remaining start-up expenditures over a 180-month period beginning in the month it begins business.

Define Start Up Expenditures? Are they capitalized with Organizational expenditures?

-Start up costs are ordinary and necessary business expenses. Includes: -Investigate creation or acquisition of active trade/business -to create active trade or business -conducting in profit or production of income by activity before it becomes active trade or business. (costs for a survey of potential markets; an analysis of available facilities; advertisements relating to opening the business; the training of employees; travel and other expenses for securing prospective distributors, suppliers, or customers; and the hiring of management personnel and outside consultants.)

Describe the elections that a corporation makes on its initial tax return

Once formed, the elections made are: - Tax Year (12 month period, may be fiscal or calendar). -Accounting Method (Cash, Accrual or Hybrid) -Tax year must be inline with accounting period used for financial accounting purposes.

TOPIC REVIEW C:3-2 Requirements for Paying Taxes Due and Filing Tax Returns

1. Estimated Tax Requirement a. Corporations that expect to owe more than $500 in tax for the current year must pay four installments of estimated tax, each equal to 25% of its required annual payment. b. Taxes for which estimated payments are required of a C corporation include regular tax and alternative minimum tax, minus any tax credits. c. If a corporation is not a large corporation, its required annual payment is the lesser of 100% of the tax shown on the current year's return or 100% of the tax shown on the preceding year's return. d. If a corporation is a large corporation, its required annual payment is 100% of the tax shown on the current year's return. Its first estimated tax payment may be based on the preceding year's tax liability, but any shortfall must be made up when the second installment is due. e. Special rules apply if the corporation bases its estimated tax payments on the annualized income or adjusted seasonal income method. 2. Filing Requirements a. The corporate tax return is due by the fifteenth day of the third month after the end of the tax year. b. A corporate taxpayer may request an automatic six-month extension to file its tax return (but not to pay its tax due).

Allocating reduced tax rate benefits (apportioning to members)

1. If aggregate positive taxable income is $100,000 or less, apportion the 15%, 25%, and 34% rates to members that have positive taxable income so as to maximize their benefit. a. To avoid "wasting" low tax rates on loss members, elect special apportionment of tax benefits. b. Summing the members' taxes results in the same total tax as would occur by applying the corporate tax rate schedule to the group's aggregate positive taxable income. 2. If aggregate positive taxable income is between $100,000 and $335,000, apportion the 15%, 25%, and 34% brackets as in Step 1 above. Follow the next steps to apportion the 5% surtax. a. Calculate the surtax as 5% times (aggregate positive taxable income − $100,000). b. If the calculated surtax is $9,500 or less, apportion the calculated surtax in proportion to the way the corporations apportioned the 15% bracket. c. If the surtax is greater than $9,500 ($11,750 maximum), apportion the first $9,500 as in Step 2b, and apportion the excess in proportion to the way the corporations apportioned the 25% bracket in Step 1 above. d. Summing the members' taxes results in the same total tax as would occur by applying the corporate tax rate schedule to the group's aggregate positive taxable income. 3. If aggregate positive taxable income is from $335,000 to $10,000,000, the 15% and 25% tax brackets are fully phased out, so each member's tax equals a flat 34% of its taxable income, and the group's total tax equals 34% of aggregate positive taxable income.

In three special cases, a corporation may deduct the donated property's adjusted basis plus one-half of the excess of the property's FMV over its adjusted basis (not to exceed twice the property's adjusted basis). This special rule applies to inventory if

1. The use of the property is related to the donee's exempt function, and it is used solely for the care of the ill, the needy, or infants; 2. The property is not transferred to the donee in exchange for money, other property, or services; and 3. The donor receives a statement from the charitable organization stating that conditions (1) and (2) will be complied with.

Brief Review of Charitable Contribution Deduction

1. Timing of the contribution deduction a. General rule: A deduction is allowed for contributions paid during the year. b. Accrual method corporations can accrue contributions approved by their board of directors prior to the end of the accrual year and paid within 2½ months of that year-end. 2. Amount of the contribution deduction a. General rule: A deduction is allowed for the amount of money and the FMV of other property donated. b. Exceptions for ordinary income property: 1. If donated property would result in ordinary income or short-term capital gain if sold, the deduction is limited to the property's FMV minus this potential ordinary income or short-term capital gain. Thus, for gain property the deduction equals the property's cost or adjusted basis. 2. Special rule: For donations of (1) inventory used for the care of the ill, needy, or infants, or (2) scientific research property or computer technology and equipment to certain educational institutions, a corporate donor may deduct the property's basis plus one-half of the excess of the property's FMV over its adjusted basis. The deduction may not exceed twice the property's adjusted basis. c. Exceptions for capital gain property: If the corporation donates tangible personal property to a charitable organization for a use unrelated to its tax-exempt purpose, or the corporation donates appreciated property to a private nonoperating foundation, the corporation's contribution is limited to the property's FMV minus the long-term capital gain that would result if the corporation sold the property. 3. Limitation on contribution deduction a. The contribution deduction is limited to 10% of the corporation's taxable income computed without regard to the charitable contribution deduction, any NOL or capital loss carryback, the dividends-received deduction, and the U.S production activities deduction. b. Excess contributions carry forward for a five-year period.

Why does a corporation's NOL or capital loss carryback not affect its charitable contributions deduction, but yet the corporation must take into account an NOL or capital loss carryover when calculating its charitable contribution limitation?

A carryback affects a tax return already filed in a prior year. If a carryback had to be taken into account when calculating the charitable contribution deduction limitation in the prior year, it might change the amount of the allowable charitable contribution. This change in turn might affect other items such as the carryback year's dividends-received deduction and some later years' deductions as well. To avoid this we limit the carryback when ammending. Also, info of NOL at time of charitable donation can affect decision which might be unfair

What form is filed at time of tax return, even if no tax is due? What about extensions?

A corporation must file a tax return, Form 1120 (U.S. Corporation Income Tax Return), even if it has no taxable income for the year. File by March 15, or request 6 month extension with Form 7004 - Application for Automatic Extension of Time to File Certain Business Tax Information and other Returns) Schedule L of Form 1120 requires a balance sheet showing the financial accounting results at the beginning and end of the tax year

What is a controlled group?

Comprised of two or more corporations owned directly or indirectly by the same shareholder or group of shareholders. -Parent-Subsidiary -Brother-sister -and a combined For purposes of the Sec. 179 expense dollar limitation, a more-than-50% threshold replaces the at-least-80% threshold in defining a parent-subsidiary controlled group

Dividends received from Foreign corporations are taxed how?

Deduction does not applies to foreign corporation dividend income because the US does not tax the income

Explain Fiscal vs. Calendar Year

Fiscal: 12 month period ending on the last day of any month other than December. Calendar: 12 month period ending on December 31st. -if the tax year in unacceptable, IRS requires switch to calendar year -If first tax year is short (i.e. fiscal period runs to Sept 30 after incorporation in March), the company must file a short-period tax return.

Personal Service Corporations are taxed at what rate?

Flat rate of 35% Section 448(d) defines personal service corporation when two tests are met: Substantially all activities involve the performance of services in health, law, engineerings, architecture, accounting, actuarial science and performing arts/consulting AND all stock is held directly or indirectly by employees -Encourages to withdraw earning via deductible salary rather than retain them or make an S Election

Tax strategy for using NOL Carryovers and Carrybacks

Forgo NOL Carryback and only take carryforward, utilizing deduction when a higher marginal tax rate may be imposed vs earlier 2 years.

If a corporation has an NOL that is carried back resulting in a refund, what form is filed?

Form 1139 - Corporation Application for Tentative Refund if one year or less has elapsed since the year in which NOL occured. If longer period - Form 1120x - Ammended US Corporation Income Tax Return (Carrying back to second year)

Gain on sale or exchange of transactions with controlling shareholder

If a controlling shareholder sells depreciable property to a controlled corporation (or vice versa) and the property is depreciable in the purchaser's hands, any gain on the sale is treated as ordinary income under Sec. 1239(a)

Corporation and Controlling Shareholder Using Different Accounting Methods and reporting

If using diff. accounting methods between controlling shareholder and corporation -Section 267(a)(2) defers a deduction for accrued expenses or interest owed by a corporation to a controlling shareholder or vise versa. -The payee therefore includes amt in gross income later when the payer accrues the deduction *Section 267(a)(2) is primarily aimed at the situation involving an accrual method corporation that accrues compensation to a cash method shareholder-employee. This provision forces a matching of the income and expense recognition by deferring the deduction to the year the shareholder recognizes the income.*

After determining taxable income, compute the income tax liability following which general steps?

Income x taxable rates -foreign tax credit (Sec 27) -General Business Credit (Sec 38) -Minimum tax credit (Sec 53) -Other allowed credits +recapture of previously claimed credits = Income (Regular) Tax Liability *If taxable income exceeds $100,000, a 5% surcharge applies to the corporation's taxable income exceeding $100,000. The max is 11,750 (335,000-100,000 x .05) *If taxable income is at least $335,000 but less than $10 million, the corporation pays a flat 34% tax rate on all of its taxable income. A corporation whose income is at least $10 million but less than $15 million pays $3.4 million plus 35% of the income above $10 million. *If a corporation's taxable income exceeds $15 million, a 3% surcharge applies to the corporation's taxable income exceeding $15 million (but not exceeding $18,333,333)

Define a combined controlled group

It is comprised of three or more corporations meeting the following: 1)Each corporation is a member of a parent-subsidiary controlled group or a brother-sister controlled group. 2)At least one of the corporations is both the parent corporation of a parent-subsidiary controlled group and a member of a brother-sister controlled group *The combined controlled group definition does just what its name implies: It combines a parent-subsidiary controlled group and a brother-sister controlled group. Thus, instead of trying to apply the controlled group rules to two different groups, the combined group definition eliminates the issue by combining the groups into one controlled group.

What is the maximum deduction for Charitable contributions?

Limited to 10% of AGI for corporations -Amounts not deducted in the year accrued can be carried forward for five years only after it deducts any contributions made in that year. This would create a deferred tax asset***

At Risk Rules - A corporation is subject to this rule when?

More than 50% of the stock (in value) is owned by 5 or fewer shareholders. -This means the corporation can deduct losses pertaining to an activity only to the extent the corporation is at risk for that activity at year-end. Any losses not deductible because of the at-risk rules must be carried over and deducted in a succeeding year when the corporation's risk with respect to the activity increases

Is the dividends received deduction allowed for debt-financed stock?

No, it is not allowed to the extent the corporation borrows money to acquire the dividend paying stock. (Prevents deduction of interest paid on money borrowed to purchase stock while paying little to no tax on the dividends received on the stock)

Define Parent-Subsidiary Controlled group

Parent corporation must directly own at least 80%voting power/value of stock -Can contain more than one subsidiary

Describe Schedule M-3 of Form 1120

Requires extensive detail in its reconciliation PART 1: Adjusts world wide income per books to worldwide book income for only includible operations Part 2: Corps. income and loss items Part 3: expense and deduction items Total items for Part 3 carries over to Part 2 for final reconciliation

Describe schedule M-2 of Form 1120

Schedule M-2 of Form 1120 requires an analysis of changes in unappropriated retained earnings from the beginning of the year to the end of the year. The schedule supplies the IRS with information regarding dividends paid during the year and any special transactions that caused a change in retained earnings for the year. Added: ▶ Net income per books ▶ Other increases (e.g., refund of federal income taxes paid in a prior year taken directly to the retained earnings account instead of used to reduce federal income tax expense) Deducted: ▶ Dividends (e.g., cash or property) ▶ Other decreases (e.g., appropriation of retained earnings made during the tax year) The result is the amount of unappropriated retained earnings at the end of the year.

Exceptions for closely held corporations: Transactions between a corporation and its controlling shareholders (owns more than 50% stock including individual and family)

Section 1239 may convert capital gain realized on sale of depreciable property between corp & controlling shareholder into ordinary income. -Section 267(a)(1) denies deduction for losses realized on property sales between a corp and controlling shareholder. -Section 267(a)(2) defers a deduction for accrued expenses and interest on certain trans.

What are Substantiation Requirements and Section 170(f)(11) when Charitable contribution deduction is concerned?

Section 170(f)(11) imposes substantiation requirements for non cash charitable contributions. If the corporation does not comply, it will lose the charitable contribution deduction. 1) if Deduction exceeds $500, must include description of property 2) If deduction exceeds $5000, the corporation must obtain a qualified appraisal and include with its tax return any info requested 3) If it exceeds $500,000 the corporation must attach a qualified appraisal to the tax return. *2 & 3 do not apply to contributions of cash, publicly traded securities; inventory; or certain motor vehicles, boats, or aircraft the donee organization sells without any intervening use or material improvement.

Losses on sale or exchange of transactions with controlling shareholder

Section 267(a)(1) denies deduction for losses realized on sale of property by a corporation to a controlling shareholder or vise versa. (If the purchaser later sells the property to another party at a gain, that seller recognizes gain only to the extent it exceeds the previously disallowed loss - if no loss is taken than disallowed loss is never recognized.)

Depreciation Recapture further tax notes

Section 291 results in the recapture, as ordinary income, of up to 20% of the gain on sales of Sec. 1250 property. This recapture requirement reduces the amount of net Sec.1231 gains that can be offset by corporate capital losses.

When is reconciliation needed for income tax reporting? Schedule L of Form 1120 requires a balance sheet showing the financial accounting results at the beginning and end of the tax year

The IRS also requires the reconciliation of the corporation's financial accounting income (also known as book income) and its taxable income (before special deductions). Book income is calculated according to generally accepted accounting principles (GAAP) including rules promulgated by the Financial Accounting Standards Board (FASB). On the other hand, taxable income must be calculated using tax rules. Therefore, book income and taxable income usually differ.

What is the penalty for Underpayment of estimated tax?

The IRS will assess a nondeductible penalty if a corporation does not deposit its required estimated tax installment. The penalty is the underpayment rate found in Sec. 6621. Factors include underpayment rate, amount of underpayment and amount of time lapsed until the payment is made

Explain the other two special computation methods for estimating income tax due: The annualized income method and adjusted seasonal income method

The annualized income method allows corp. to base first and second quarterly payments on its annualized taxable income for the first three months of the year. 3rd payment is based on first 6 months of the yr, 4th payment based on first 9 months of the year. Adjusted Seasonal income: For corporations with seasonal earnings - only can use if the resulting installment payment is less than the regular required one. A corporation reports its underpayment of estimated taxes and the amount of any penalty on Form 2220 (Underpayment of Estimated Tax by Corporations). A corporation must pay its remaining tax liability for the year when it files its corporate tax return. An extension of time to file the tax return, however, does not extend the time to pay the tax liability. If any tax remains unpaid after the original due date for the tax return, the corporation must pay interest at the underpayment rate prescribed by Sec. 6621 from the due date until the corporation pays the tax. In addition to interest, the IRS assesses a penalty if the corporation does not pay the tax on time and cannot show reasonable cause for the failure to pay.

When is approval from the IRS not needed to change the annual accounting period?

The following conditions must be met: -Corporation files short-period tax return and annualizes income when computing its tax for short period. -Files full 12 month return for subsequent years -The corporation closes its books as of the last day of the short-period and subsequently computes its income and keeps its books using the new tax year. -If NOL/capital loss in short period, it may not carry back losses but must carry forward. (if 50k or less they may carry back) - Corp. must not have changed accounting period in last 48 months -Corp is not S-Corp, personal service Corp or tax exempt organizations.

What is the sequence of Deduction calculations?

The rules for charitable contributions, dividends-received, NOL, and U.S. production activities deductions require that these deductions be calculated in the following sequence: 1. All deductions other than the charitable contributions deduction, the dividends-received deduction, the NOL deduction, and the U.S. production activities deduction 2. The charitable contributions deduction 3. The dividends-received deduction 4. The NOL deduction 5. The U.S. production activities deduction *the charitable contributions deduction is limited to 10% of taxable income before the charitable contributions deduction, any NOL or capital loss carryback, the dividends-received deduction, or the U.S. production activities deduction, but after any NOL carryover deduction

Why are there special rules applying to controlled groups in corporations?

To prevent them from avoiding taxes that otherwise would be due. Special controlled group rules prevent shareholders from using multiple corporations to avoid having corporate income taxed at a 35% rate. If these rules were not in effect, the owners of a corporation could allocate the corporation's income among two or more corporations and take advantage of the lower 15%, 25%, and 34% rates on the first $10 million of corporate income for each corporation.

If stock is held for 45 days

cannot claim dividend if it is held less than 46 days in a 91 day period that begins 45 days before the stock becomes ex-dividend. *Stock purchased on which a dividend has been declared has an increased value. This value will drop when the corporation pays the dividend. If the dividend is eligible for a dividends-received deduction and the drop in value also creates a capital loss, corporate shareholders could use this event as a tax planning device. To avoid this result, no dividends-received deduction is available for stock held 45 days or less.

What is a domestic corporation

corporations incorporated in one of the 50 states or under federal law and other entities taxed as domestic corporations under the check-the-box regulations