Corporate Income Taxes - Cpa

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Corporate tax forms

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Form 1120

Schedule M-1: reconciles book income to taxable income

Schedule M-2: reconciles retained earnings of books and tax return

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Related party transactions: taxability

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If one party owns over 50% of the other: gains are taxable but losses are not deductible

If one party owns 80% or more of the other: gains and losses not taxable

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Capital gains/losses: taxability

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Gains are taxable as ordinary income

Losses are not deductible

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Carryback/forward: capital losses

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Back 3 years and forward 5 years to reduce future capital gains

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Section 1231 assets: definition

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Revenue-generating assets held for over 1 year

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Section 1250 assets: definition

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Subsection of Section 1231 assets: real estate

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Section 1245 assets: definition

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Subsection of Section 1231 assets: tangible and intangible personal property

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Gain on sale of section 1245 property: special rule

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Taxed as ordinary income up to amount of accumulated depreciation

Excess is "section 1231 gain": may be capital gain or ordinary income

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Organization costs: how deductible?

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Immediate deduction allowed up to $5K

Deduction reduced dollar for dollar for total costs in excess of $50K

Any amount not deducted immediately is amortized to expense over 180 months (15 years)

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Section 179 assets:
Definition?
Deductibility?

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Cost of business equipment and off-the-shelf software

Deductible up to $108K

Deduction is reduced dollar for dollar for total Section 179 purchases over $430K

After Section 179 deduction, regular depreciation is deducted

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MACRS: how to determine level of accelerated depreciation?

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Life of asset less than 10 years: double-declining balance

Life of asset between 11 and 20 years: 150% declining balance

Life of asset over 20 years: straight-line

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MACRS: how to determine mid-period convention?

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Personal property: half-year convention

Real property: half-month convention

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Charitable contributions:
Amount of deduction?
Carryback/forward?

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10% of operating income (revenues less ordinary & necessary expenses)

Excess can be carried forward 5 years

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DRD: exception

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If operating income is less than total dividend received, deduction is based on operating income instead of dividend received

Exception to exception: if DRD would create a loss or if company has an operating loss, deduction is based on dividend received

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Employee life insurance premiums: deductible?

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Deductible unless company is beneficiary

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Bad debts & warranty expense: deductible?

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Only if

1) Company is accrual-basis taxpayer
2) Bad debt is actually uncollectible or warranty payment is actually made

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Section 197 asset:
Definition?
Deductible?

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Part of purchase price (in acquisition) assigned to goodwill or intangible assets

Deduction amortized over 15 years

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Casualty/theft losses: deductible?

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Yes (in full)

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Accumulated earnings tax: how/why assessed?

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Assessed by government if accumulated earnings grow above reasonable needs of business

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Co is classified as personal holding company if:

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Five or fewer individuals own over 50% of stock at any time during last half of tax year

AND

60% or more of income is from dividends, interest, rent, royalties, other passive income

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Distribution: dividend vs. return of capital

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Distribution viewed as a dividend up to the higher of
1) Net income for current year
2) Accumulated earnings as of last day of current year

Excess is return of capital

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Nonliquidating cash distribution:
Taxability to shareholder

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Ordinary income to extent of corporation's E&P

Excess: tax-free return of capital to extent of shareholder's basis in stock

Excess: capital gain

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Nonliquidating property distribution:
Taxability to shareholder?
Shareholder's basis in new property?

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Ordinary income at FMV to extent of corporation's E&P

New basis = FMV

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Nonliquidating property distribution:
Treatment by corporation?
Gain/loss?

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Distribution treated as a deemed sale

Gain = FMV of property, less corporation's basis in property

Losses are not allowed

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Liquidating distribution:
Taxability to shareholder?
Shareholder's basis in new property?

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Ordinary income = FMV of property, less shareholder's basis in stock

New basis = FMV

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Liquidating distribution:
Gain/loss to corporation?

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Gain/loss = FMV of property, less corporation's basis in property

Losses are allowed unless distribution is to a related party

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Distribution to affiliated shareholder:
Gain/loss to parties?
Recording by parties?

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No gain/loss

Corporation records dividend at asset's tax basis

Shareholder reduces tax basis of investment

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Property conveyed to corporation in exchange for stock:
Gain/loss to corporation?
Tax basis to corporation?

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No taxable gain/loss

New basis = FMV

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Property conveyed to corporation in exchange for stock:
Gain/loss to shareholder?
Tax basis to shareholder?

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Gain/loss = FMV - previous tax basis of property

New basis = FMV