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62 Cards in this Set

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SEC 351 - TRANSFERS TO CONTROLLED CORP

Do you recognize a gain?
Control - at least 80% of stock ownership
NO GAIN OR LOSS IS RECOGNIZED IF PROPERTY (NOT SERVICES) TRANSFERRED TO A CORP IS SOLELY IN EXCHANGE FOR STOCK IN CORP
SEC 351 - NONRECOGNITION OF GAIN

How to avoid gain?
-TRANSFER CASH OR OTHER ASSETS WITH AN ADJUSTED BASIS UP TO GAIN REALIZED
-OR AGREE TO ASSUME ONLY
SO MUCH AMT OF LIABILITY
SEC 351 - TRANSFER TO A CORP CONTROLLED BY A TRANSFEROR

-GAIN RECOGNITION RULE
-W/RECOURSE LIABILITY
-REALIZED GAIN MUST BE RECOGNIZED TO THE EXTENT OF THE RECOURSE LIABILITY ASSUMED BY CORP (FMV>BASIS)
SEC 351

SHAREHOLDERS BASIS FOR STOCK
AB OF PROPERTY TRFRD
+GAIN RECOGNIZED
-BOOT RECD (CASH, ASSUMPTION OF LIABILITY)
SMALL BUSINESS CORP
ANY DOMESTIC CORP WHOSE ADJ BASIS FOR PROPERTY, CASH PAID IN CAPITAL DOES NOT EXCEED 1,000,000
SEC 1244

SMALL BUSINESS CORP STOCK
-ALLOWS ORDINARY LOSS ON SALE OR WORTHLESSNESS OF STOCK
-UP TO 50,000/100,000-S/MFJ)
-not allowable to shareholder if she wasn't original holder (gift or inheritance)
-EXCESS IS CAPITAL LOSS
*if basis is > than fmv, stock's basis must be reduced by difference
ORGANIZATIONAL COSTS

How much can you deduct?
What are the limitations?
AFTER OCT 22, 2004
-UP TO $5000 FOR THE TAX YEAR IN WHICH THE CORP BEGINS
-5,000 MUST BE REDUCED BY THE ORG COSTS WHICH EXCEED 50,000
-REMAINING COSTS CAN BE DEDUCTED OVER 180 MONTH PERIOD (15 YRS)
-MUST ELECT IN THE FIRST YEAR CORP ORGANIZED OTHERWISE CANNOT TAKE DEDUCTION (must attach stmt to tax return for election)
ORGANIZATION COSTS

What can or can't you deduct?
-accounting and legal fees (drafting by laws, corp charter, stock certificates)
-org meetings, temp director's meetings
NOT - COSTS FOR ISSUING OR SELLING STOCK, PRINTING COSTS, UNDERWRITING COMM)
LIFE INSURANCE PREMIUMS PAID TO EXECUTIVES AS PART OF COMPENSATION
(corp is not bene)

-What is deductible for book?
-What is deductible for tax?
FULLY DEDUCTIBLE FOR BOOK AND TAX
7 YR PROPERTY MACRS? -FURNITURE & FIXTURES

How do you depreciate for TAX?
How do you depreciate for AMT?
200% declining balance method for tax(understate AMTI before ACE ADJ, t/4 need to INCREASE ADJ to convert reg tax inc to AMTI)

150% declining balance method for amt
NON-RESIDENTIAL REAL PROPERTY MACRS FOR TAX?

FOR AMT?
STRAIGHT LINE METHOD OVER 39 YEARS FOR TAX (understates amti b4 ace adj, need to increase adj to convert reg tax inc to amti)

STRAIGHT LINE OVER 40 YEARS FOR AMT
MUNI BOND INTEREST INCOME

-for regular tax?
-for AMT?
-TAX EXEMPT FOR BOTH REG TAX AND FOR COMPUTING AMTI BEFORE ACE ADJ
-BUT INCLUDIBLE IN INCOME FOR CALC ACE ADJ
SEC 1223(1) HOLDING PERIOD OF STOCK
HOLDING PERIOD OF PROPERTY TRANSFERRED IF TRANSFERRED PROPERTY WAS EITHER A CAPITAL ASSET OR 1231 ASSET
US TREASURY BONDS, T-BILLS

Are they taxable?
FULLY TAXABLE
SEC 1231 ASSET

SEC 1231 GAIN

NON RECAPTURED 1231 LOSS
-DEPR ASSETS AND REAL ESTATE USED IN A TRADE OR BUSINESS FOR MORE THAN ONE YEAR

-LONG TERM CAPITAL GAIN

-
MIN TAX CREDIT
AMT PAID IS ALLOWED AS CREDIT AGAINST REGULAR TAX LIABILITY IN FUTURE
- CARRIED FORWARD INDEFINITELY
-CAN BE USED ONLY TO REDUCE REGULAR TAX LIAB, NOT FUTURE AMT LIABILITY
-CANNOT BE CARRIED BACK
SMALL CORP EXEMPTION FROM AMT
1ST TAX YEAR - EXEMPT
2ND YR - GROSS RECEIPTS TEST
3RD YR - AVG GROSS RECEIPTS FROM 1ST 2 YEARS < 7.5 MILLION
AMTI EXEMPTION
-40,000 EXEMPTION,

-BUT REDUCED BY 25% OF AMTI OVER 150,000

-PHASEOUT AT 310,000
DISALLOWED LOSSES
FROM SALE OR EXCHANGE OF PROPERTY
-A C CORP AND A MORE THAN 50% SHAREHOLDER
-C CORP AND S CORP IF SAME PERSON OWNS MORE THAN 50% EACH
-CORP AND PARTNERSHIP IF SAME PERSONS OWN MORE THAN 50% OF CORP AND MORE THAN 50% OF CAPITAL & INTERESTS OF PARTNERSHIP
CAPITAL LOSSES
ONLY DEDUCTIBLE TO EXTENT OF CAPITAL GAINS
-CANNOT OFFSET ORDINARY INCOME
-CARRYBACK 3YRS, CARRYFORWARD 5 YRS
-ALL CORP CAPITAL LOSS CARRYBACKS & CARRYFORWARDS ARE SHORT TERM
CORPORATE DISTRIBUTIONS OF PROPERTY

-DIVIDEND?
-RETURN OF STOCK BASIS?
-GAIN ?
div - included in gross inc

return of stock basis - nontaxable, reduces shareholder's basis in stock
gain - to extent distrib exceeds shareholder's stock basis
CORPORATE DISTRIBUTIONS

What amt of distribution to shareholder?
cash
+FMV of property recvd
-any liabilities assumed
CORPORATE DISTRIBUTIONS

What is shareholder's tax basis on distributed property?
FMV (at date of distribution)
not reduced by liabilities
CORPORATE DISTRIBUTIONS
Corp makes distribution to shareholder
Corp 's e&p = 6000
distribution = 10,000
sh's stock basis = 3000

How is distribution 10,000 treated?
Cash distribution from Corp 10,000
will be treated as
-dividend to shareholder up to 6,000 (current e&p)
-nontaxable return of stock basis 3000
-capital gain of 1,000 ??
CORPORATE DISTRIBUTIONS

What if corp distributed property subj to liability?
What if property had appreciated in value?
if FMV of property < less than liability, then gain is diff betw amt of liability and property's basis
DIVIDENDS RECEIVED DEDUCTION RULES

SEC 243 DIVIDENDS RECVD BY CORPS
100% DRD IF AT LEAST 80% OWNED
80% DRD IF AT LEAST 20% OWNED
70% DRD IF LESS THAN 20% OWNED
DIVIDENDS RECEIVED DEDUCTION

What if dividends are debt financed
portfolio stock?
What is DRD % for debt-financed portfolio stock?
-a portion of a corps 80% or 70% DRD will be DISALLOWED
-80% or 70% x (100% x avg % of indebtdness of stock
DEBT FINANCED PORTFOLIO STOCK DIVIDEND
A Corp bought 25% of B Corp 100,000, paid cash 50,000 and financed 50,000
A got 9000 in dividends from B corp
no pmts were made to loan

What is A's DRD if not debt financed? What if debt financed?
-if not debt financed - 9000 x 80% = 7200
-if debt financed - 80% x (100%-50%) = 3,600
Is DRD allowed if stock is held less than 46 days?
NO DRD IS ALLOWED IF STOCK IS HELD LESS THAN 46 DAYS
STOCK REDEMPTION
-CAPITAL GAIN OR LOSS
IF AT LEAST ONE OF 5 TESTS MET
CONSTRUCTIVE OWNERSHIP TEST
-IF DOESN'T MEET TEST, THEN
REDEMPTION PROCEEDS ARE TREATED AS ORDINARY SEC 301 DISTRIBUTION, TAXABLE AS DIVIDEND TO EXTENT OF E & P
-CANNOT DEDUCT AMTS PAID IN CONNECTION WITH REDEMPTION OF STOCK
-EXCEPT FOR INTEREST EXP ON LOANS USED TO PURCHASE STOCK
AFFILIATED & CONTROLLED CORP
Parent-sub chain of corps in which at least 80% of combined voting power and total value of all stock are owned

-may elect to file a consolidated TR

-if sep returns are filed, dividends from affiliated corps are eligible for 100% DRD
AFFILIATED & CONTROLLED CORP

-advantages of consolidated tax return
-if file consolidated TR, intercompany div are eliminated
-DEFERRAL OF GAIN on intercompany transactions
-OFFSETTING OPERATING/CAPITAL LOSSES of one corp against PROFITS/CAP GAINS of another
SCH M-1 ADJUSTMENTS

INCREASES (ADD TO BOOK INC)
+fed tax
+excess of capital losses>capital gains = net capital loss is ND
+prepaid rents, royalties, interest
+charitable contributions in excess of 10% limitation
+business gifts in excess of $25
+ND life ins prem paid
+50% of business meals&entertainment
SCH M-1 ADJUSTMENTS

DECREASES (REDUCE BOOK INC)
-tax exempt interest (muni bonds)
-life ins proceeds
-MACRS accelerated depr over s-l
-charitable contribution carryover
-DRD
SCH M-2 RETAINED EARNINGS
BEG RE 1/1/08
+BOOK INCOME
+ OTHER INC (prior period adj)
-DIVIDENDS TO SHS
-OTHER DEC (add reserve for contingencies
---------------------------------------------
EOY BAL 12/31/08
ACCUMULATED EARNINGS TAX
-penalty tax from government

-when corp has too much in retained earnings
ACCUMULATED EARNINGS TAX

SAFE HARBOUR for mfg co/service co?
-mfg firm - 250,000 (can hold in retained earnings) + fed tax liability

-service firm - 150,000 (can hold in retained earnings) + fed tax liability
HOW DO YOU AVOID ACCUMULATED EARNINGS TAX?

(if you have more than $250,000 in retained earnings)
1. pay out dividends OR
2. keep $$ in corp -CONSENT DIVIDEND-HYPOTHETICAL DIVIDEND
-shareholder's don't really get it, but basis will increase, govt gets tax
-shareholder will get taxed on it as if she really receives the dividend 15% tax OR
3. ACTUAL OR CONSENT DIVIDEND
- shareholder will have to pay tax anyway 15%
-otherwise, penalty is at least 15%
PERSONAL HOLDING COMPANY
-5 or fewer own greater than or equal to 50% of stock
-if certain amt of income is passive - dividends, interest, royalties
60 or more of passive taxable income
S CORP
-small and simple corporation
-no more than 100 shareholders
-no double taxation
-does not have to pay tax
-pass through entity like partnership
-all shareholders have limited liability
-husband and wife count as one shareholder, up to 6 generations of lineal descent
-can invest in partnership or corp, but they cannot invest in S corp
What happens when you blow an S Corp election?
-cannot be an S corp for 5 years, then taxed as a C Corp
S CORP ELECTION
-must be filed by the 15th day of 3rd month of taxable year
-if made after 3rd month of taxable year, treated as made for the following yr
How do you blow an S corp election?
TERMINATES
-shareholders owning more than 50% of stock consent to revocation of election
-corp fails to satisfy eligibility requirements
-if S corp owns C Corp passive income in excess of 25% of gross receipts for 3 consecutive yrs
S CORP ELIGIBILITY
-domestic corp
-can own any % of C corp or partnership & 100% of qualified subchapter S subsidiary
-only one class of stock, cannot have both common & preferred stock
-shareholders must be indvls, estates, trusts
-cannot be a non-resident alien shareholder
-# of shareholders limited to 100
-need not be a member of a controlled group
S CORP

GAIN ON DISTRIBUTION OF PROPERTY
Gain is recognized at FMV on distributed appreciated property
S CORP - SHAREHOLDER'S STOCK BASIS

tax exempt income 5000
ord loss from business 6000
shareholder stock basis 2000

What is shareholder's stock basis?
Shareholder's stock basis is increased by
basis 2000
+tax exempt income +5000=
7000
reduced by ord loss -6000 = 1000
S CORP CASH DISTRIBUTION

ordinary loss 6,000
cash distribution 7,000
shareholder basis 8,000
What happens to basis?
-cash distribution reduces basis
to 1000
-only 1000 of the 6000 ordinary loss as a deduction to shareholder
-5000 of remaining loss will be carried forward until have enough basis to absorb loss
S CORP DISTRIBUTIONS (cash + FMV of property) to shareholders
-nontaxable to the extent of AAA
-applied to AAA
-applied to shareholder's basis
S CORP ACCUMULATED ADJUSTMENTS ACCOUNT (AAA)
-cumulative total of undistributed net income items of an S Corp
-distributions are treated as ORDINARY DIVIDENDS to extent o AEP (during C Corp years)
S CORP SHAREHOLDER'S BASIS

beg basis 65,000
muni bond interest income 4,000
long term capital gain 4,000
ordinary loss 10,000
short term capital loss 9,000
basis is increased by
+muni bond income
+long term capital gain
decreased by
-ordinary loss
-short term capital loss
S CORP CASH DISTRIBUTION
-if S corp has no Accumulated Earnings and Profits from C years, distributions to shareholders are nontaxable & reduce a shareholder's basis
-if distributions exceed stock basis result = capital gain
S CORP LOSS
-passed thru to shareholders
-deductible to extent of stock basis
+debt basis
-remainder of loss can be carryfoward indefinitely until shareholder has enough basis to absorb loss
S CORP AAA adjustments
+increase by all income items
-decrease by distributions & loss
except for tax exempt income
-no adj made for fed tax when C corp, paymt for fed tax decreases S Corps AEP
S CORP AAA positive balance acct
S Corp income that has already been taxed to shareholders but not yet distributed
C CORP AEP positive balance acct
C Corp accumulated earnings & profits
that have never been taxed to shareholders
TRANSFERRED BASIS RECVD AS A GIFT
-equal to basis of the donor +any gift tax paid attributable to net appreciation in value of gift
-basis used to determine the gain on sale of property that was recvd as a gift
LIKE KIND EXCHANGE
-exchange of business or investment property of a like kind, even when boot (cash) is recvd
-nontaxable
AMT Formula
Tax Inc
+Tax Pref
+/- Adj
--------------------
Pre-ACE (AMTI)
+/-ACE adj (75%of diff between pre-ACE amti and ACE
-AMT NOL (limited to 90% of pre-NOL AMTI)
-------------------------------------------
AMTI
-exemption (40,000 less 25% of AMTI over 150,000)
---------------------------------------
AMT
x 20%
---------------------------
tentative amt
-AMT tax credit
----------------------------
tentative min tax
reg tax
-------------------------
amt
How to avoid penalties for underpayment of estimated taxes for C Corps?
ES-payments are at least equal to
1) 100% of tax on CY tax return
2) 100% of the tax based on annuallized income method
3) 100% of tax in PY
*except PY tax liability can't be used if no tax liability in PY
failure to pay taxes penalty: what is it?

how do you get out of it?
if you pay less than 90% of tax you owe by due date, you get penalized
-.5% per month, up to 25% maximum penalty

-pay 95% of the total tax
statute of limitations of reopening of a tax year for 1) claim of refund and 2) assessment of tax
LATER OF
3 years after the the return was filed OR
3 years after the due date of the return
statute of limitations if gross income is omitted from tax return exceeds 25% of gross income
6 years