How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis.
- If shareholders have 80% control after a property transfer, no taxable event occurs.
- If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
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How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
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.
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
- Taxpayer must be original stock owner, and either an individual or partnership.
- $50k (single) or $100k (MFJ) limit - the 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?
Rules for filing a form 1120:
- Return is due regardless of income level.
- Return is due 4/15 if on a calendar year basis, or 3 1/2 months after the end of fiscal year.
- An automatic six-month extension is available
- S Corp returns are due 3/15 vs 4/15 for C Corps
When are Corporate federal tax estimated payments required, and how are they calculated?
Corporate federal tax estimated payments are required if:
- more than $500 in tax liability expected
- 100% current year liability, or
- 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.
When are C-Corporations exempt from AMT?
Always - Corporate AMT was repealed under TCJA.
How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.
If the 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
- Deductions (No charitable contributions, Dividends Received Deductions (DRD)) - NOL Carryforwards = Taxable Income before charitable contributions & DRD
x 10%
= Deductible Charitable Contributions
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback).
When can a board of directors authorize charitable contributions for a tax year?
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year.
What are the dividends received deduction (DRD) ownership thresholds?
80%+ Interest = 100% DRD
20-79% interest = 65%
Less than 20% interest = 50% DRD
Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
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 Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed.
How are capital losses handled in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains.
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates.
How are Corporate NOLs carried back/forward?
Under TCJA, in general, Corporations can no longer carryback Net Operating Losses (NOL).
Corporate NOLs can be carried forward indefinitely, but are subject to an 80% of taxable income limitation going 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).
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction.
It includes:
- permanent differences such as tax-exempt interest and non-deductible expenses; and
- temporary differences (accelerated depreciated tax depreciation, straight-line, etc).
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Schedule M-2 reconciles beginning to ending retained earnings.
Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings
What is the purpose of Schedule M-3 on a Corporate tax return?
Schedule M-3 is like M1, but for Corporations with $10M+ in assets.
How are affiliated (80%) Corporation tax returns handled?
How to handle affiliated (80%) Corporation tax returns:
- Consolidation election is binding going forward.
- Dividends between them are eliminated.
Advantage - Gains are deferred.
Disadvantage - losses are deferred.
- 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, the remainder (if any) is a return of basis.
- Then, the additional 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)
What is the order of treatment in a Corporation’s distribution to a shareholder?
- Distribution is a dividend to the extent of current and accumulated earnings and profits.
- Shareholder basis is then exhausted.
- The remainder, if any, is a Capital Gain.
What is the basic calculation for accumulated earnings and profits in a Corporation?
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
What is the treatment of a gain in a complete Corporate liquidation?
How to treat gain in a complete Corporate liquidation:
- 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.
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if the 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 the parent company
What is a consent dividend? How is it treated?
Consent dividend is consented by the Board of Directors but not yet paid.
It is treated 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.
- Five 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
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
It is not self-assessing like a PHC.
How is the accumulated earnings credit calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building).
What are the requirements for holding S-Corporation status?
Requirements of S-Corporation:
- 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.
What items are not included in calculating an S-Corporation’s ordinary income?
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
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date
- Adjust. Basis of Assets
= Built-in Gain
x 21% Corporate Tax Rate
