Taxation II CH 3

Calculate a corporations' tax liability (Practice problems!)

Taxable Income x income tax rates = regular tax liability minus: foreign tax credit = regular tax minus:general business credit minimum tax credit other allowed credits plus:recapture of previously claimed credits = income regular tax liability

parent-subsidiary controlled group

parent-subsidiary controlled group, one corporation (the parent corporation) must directly own at least 80% of the voting power of all classes of voting stock, or 80% of the total value of all classes of stock, of a second corporation (the subsidiary corporation)

Calculate a corporation's taxable income.

gross income - operating expenses Taxable Income before special deductions (NOL if so) - dividends received deduction U.S. production activities deduction Taxable Income (NOL if so)

What are the major advantages and disadvantages of filing a consolidated tax​ return?

An advantage includes income of a profitable member can be offset by losses of another member.​ However, a disadvantage includes losses of an unprofitable member may limit deductions or credits of a profitable member.

When is a corporate tax return due for a​ calendar-year taxpayer? What​ extension(s) of time in which to file the return are​ available?

A corporate tax return is due by March 15. An automatic​ six-month extension is available by filing Form 7004 by March 15. This extends the due day out until September 15.

What corporations must pay estimated​ taxes? When are the estimated tax payments​ due?

A corporation must pay estimated taxes if it expects its tax liability to exceed​ $500. The payments are due April​ 15, June​ 15, September​ 15, and December 15 for a calendar year corporation unless the fifteenth falls on a weekend or​ holiday, in which case amounts paid on the next business day are considered as paid on the due date. For a fiscal year​ corporation, the due dates are the fifteenth day of the​ fourth, sixth,​ ninth, and twelfth months of the tax year.

Special Deductions

C corporations are allowed three special deductions: the U.S. production activities deduction, the dividends-received deduction, and the NOL deduction.

Compare the tax treatment of capital gains and losses by a corporation and by an individual.

Corporations and individuals compute capital gains and losses the same way.​ However, corporations cannot deduct capital losses from ordinary​ income, and instead carry a capital loss back three years and forward five years to offset capital gains. Individuals carry losses forward for an indefinite period.

Describe tax planning strategies to minimize the amount of corporate taxes.

If a corporation distributes all its profits as deductible salary and fringe benefit payments, it will eliminate double taxation 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 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. Thus, where possible, fringe benefits are an excellent compensation planning tool. A corporation might elect to forgo an NOL carryback if it would offset income at a low tax rate, resulting in a small tax refund compared to a greater anticipated benefit if the NOL instead were carried over to a high tax rate year. A controlled group may elect to apportion the tax benefits of the 15%, 25%, and 34% tax rates to the member corporations in any manner it chooses. If the corporations elect no special apportionment plan, the $50,000, $25,000, and $9,925,000 amounts allocated to the three reduced tax rate brackets are divided equally among all the corporations in the group

A combined controlled group

It combines a parent-subsidiary controlled group and a brother-sister controlled group A combined controlled group is comprised of three or more corporations meeting the following criteria: Each corporation is a member of a parent-subsidiary controlled group or a brother-sister controlled group. ▶ 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

Why is a​ dividends-received deduction disallowed if the stock on which the corporation pays the dividend is​ debt-financed?

It is disallowed to prevent a corporation from deducting interest paid on money borrowed to purchase the​ stock, while paying little or no tax on the dividends received on the stock.​ Otherwise, the corporation could gain an arbitrage advantage by acquiring​ debt-financed stock.

Identify the items that must be reconciled in the schedules M-2 and M-3.

M-3: Part I adjusts worldwide income per books to worldwide book income for only includible corporations. As described in Chapter C:8, some corporations may be included in the financial statement consolidation that might be excluded from the tax consolidated tax return. This resulting figure is then reconciled to taxable income before special deductions (again Line 28 of Form 1120). Part II enumerates the corporation's income and loss items, and Part III enumerates the expense and deduction items. The total items from Part III carry over to Part II for the final reconciliation. Both Parts II and III contain the following four columns: (a) book items, (b) temporary differences, (c) permanent differences, and (d) tax items. M-2: 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. Schedule M-2 starts with the balance in the unappropriated retained earnings account at the beginning of the year. The following items, which must be added to the beginning balance amount, are listed on the left side of the schedule: ▶ 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) The following items, which must be deducted from the beginning balance amount, are listed on the right side of the schedule: ▶ 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.

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

Once formed, a corporation must make certain elections, such as selecting its tax year and its accounting methods(accrual, cash, or hybrid). The corporation makes these elections on its first tax return. They are important and should be considered carefully because, once made, they generally can be changed only with permission from the Internal Revenue Service (IRS). A new corporation may elect to use either a calendar year or a fiscal year as its accounting period. The corporation's tax year must be the same as the annual accounting period used for financial accounting purposes. The corporation makes the election by filing its first tax return for the selected period. A calendar year is a 12-month period ending on December 31. A fiscal year is a 12-month period ending on the last day of any month other than December Whereas partnerships and S corporations generally must adopt a calendar year, C corporations (other than personal service corporations) have the flexibility of adopting a fiscal year. The fiscal year must end on the last day of the month.

Explain the special tax rules used for controlled groups in corporations.

Special controlled group rules prevent shareholders from using multiple corporations to avoid having corporate income taxed at a 35% rate. The most important restrictions on a controlled group of corporations are that the group must share the benefits of the progressive corporate tax rate schedule and pay a 5% surcharge on the group's taxable income exceeding $100,000, up to a maximum surcharge of $11,750, and also pay a 3% surcharge on the group's taxable income exceeding $15 million, up to a maximum surcharge of $100,000. A controlled group is comprised of two or more corporations owned directly or indirectly by the same shareholder or group of shareholders. Controlled groups fall into three categories: a parent-subsidiary controlled group, a brother-sister controlled group, and a combined controlled group. As discussed earlier, if 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.

Describe three ways in which the treatment of charitable contributions by individual and corporate taxpayers differ.

They differ three​ ways, (1) the timing of the​ deduction, (2) the amount of the deduction permitted for the contribution of certain nonmonetary​ property, and​ (3) the maximum deduction permitted in any given year.

Brother-Sister Controlled group

Thus, under the 50%-80% definition, the five or fewer shareholders not only must have more than 50% common ownership in the corporations, they also must own at least 80% of the stock of each corporation in the brother-sister group. This definition is narrow because the shareholders must meet two tests.