Regulation 3 C & S Corporation Taxation & Exempt Organizations

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C Corporation Formation---Corporation

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No gain/loss recognized
Basis = greater of shareholder basis (NBV) in property or debt assumed

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C Corporation Formation---Shareholder

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No gain/loss recognized if property is exchanged for 80% control or if NO boot involved
Adjusted basis in stock = NBV property transferred + gain recognized by shareholder

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Schedule M-1

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book income reconciled to taxable income

Permanent & Temporary Differences

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Form 1120

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US C-Corps
Schedule C---Dividends
Schedule J--- Tax Comp & Payments
Schedule L---Balance Sheet per books
M-1 book income reconciliation to taxable income

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Temporary Differences

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Interest Income received in advance
Rental Income received in advance
Royalty Income received in advance
Depreciation
Organizational Costs

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Permanent Differences

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Interest income from state/municipal bonds
Certain proceeds from life insurance on life of an officer
Federal Income Taxes
50% Meals & Entertainment Expense

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Domestic Production Deduction

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9% of lesser of Qualified Production Activities Income (QPAI) or Taxable Income
Must be ordinary & necessary expenditures

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QPAI

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Qualified Production Activities Income- domestic production gross receipts - COGs - other applicable overhead costs

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Executive Compensation Deduction

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up to $1,000,000 for CEO or other 4 highest paid officers

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Bonuses

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Accrual basis taxpayer--paid by 2.5 months after year-end to be deductible

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Bad Debts

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Specific Charge-Off Method- permitted if debt has become worthless for accrual basis taxpayers only

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Business Interest Expense

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General Business Interest- deductible--incurred & paid
Investment Interest Expense- limited to net taxable interest income
Prepaid Interest Expense- Deduct when incurred & paid

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Charitable Contributions

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10% of adjusted taxable income
Taxable income before DRD, NOL carryback, Capital loss carryback, and US production activities deduction

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Business & Casualty Losses

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100% deductible after insurance reimbursement

Partially destroyed--loss limited to lesser of decline in value or adjusted basis immediately before casualty

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Organizational & Start-up Costs

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$5,000 expensed immediately; amortize excess over 180 months
DOES NOT INCLUDE: issuing/selling stock, commissions, underwriter fees, costs of raising capital
GAAP Difference- expense immediately

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Goodwill/Intangibles

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Amortize over 15 years/ 180 months

GAAP- not amortized, tested for impairments

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Life Insurance

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Premiums on key employees when corporation is beneficiary = NOT deductible

Fringe benefit for employees = deductible

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Meals and Entertainment

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50% deductible

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Business Gifts

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$25/person/year

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Penalties & Fines

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NOT deductible

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Taxes

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State income, city income, federal payroll = deductible

federal income taxes NOT deductible
Foreign income taxes may be used as a credit

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Political & Lobbying Expenses

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Generally NOT deductible except direct-type lobbying of local government

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Capital Gains & Losses

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Capital gains tax rates for corporation are same as ordinary rates
Net capital losses- 3 year carryback, 5 years forward
Only offset capital gains

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Net Operating Losses

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2 year carryback; 20 years forward

Does not include charitable contributions, but does include DRD

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General Business Credit

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may not exceed net income tax less greater of 25% of regular liability above $25,000 or tentative minimum tax for year

Carryback 1; forward 20 years

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Dividends Received Deduction (DRD)

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0-20% ownership: 70%
20-<80% ownership: 80%
>80% ownership: 100% of dividends received OR

70/80% taxable income unless full DRD will create NOL
NOT for personal service, personal holding, & SCorp

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Estimated Tax Payments- Small Corporations

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based on 100% current year tax or 100% preceding year tax

Can't be used if preceding year tax was $0
>$1,000,000 in any of 3 preceding years

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Estimated Tax Payments- Large Corporations

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ONLY 100% current year tax

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Consolidated Returns

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Affiliated group where common parent directly owns 80% or more of voting power & value of outstanding stock of corps may elect to be taxed as single unit
Eliminates intercompany gains & losses
GAAP > 50%

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Corporate Alternative Minimum Tax

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Taxable Income +/- Adjustments + Preferences +/- ACE - AMT NOL Deductions = Min Taxable Income
-AMT Exception = AMT * 20% = Gross AMT
-Foreign Tax Credit = Tentative Minimum - Regular Tax liability = AMT

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Corporate AMT Adjustments

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LID
Long-term Contracts- % Completion
Installments for sales of dealer- Not allowed
Depreciation Adjustment

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Corporate AMT Preferences

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% depletion
Private activity post 1986 tax exempt interest income
Pre-1987 ACRS excess depreciation

ALWAYS add back to taxable income

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Adjusted Current Earnings

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ACE --->MOLDD
Municipal bond interest income
Organizational Expense Amortization
Life insurance proceeds
Difference between AMT & ACE Depreciation
DRD- unrelated 70%

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AMT Exception

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$40,000 - 25% excess allowable over minimum taxable income

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Accumulated Earnings Tax

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C Corps with RE in excess of $250,000 if funds are improperly retained
Personal Service Corps-- $150,000 RE
20% tax rate on top of other taxes
Doesn't include- charity, capital losses, taxes, dividends paid

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Personal Holding Companies

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>50% owned by 5 or fewer individuals & have 60% adjusted ordinary gross income consisting of NIRD
Net rent
Interest
Royalties
Dividends from unrelated domestic corps

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Corporate Earnings & Profits (E&P)

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Corporate taxable income +/- adjustments

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Negative adjustments to E&P

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Federal Income Tax expense, Nondeductible penalties/contributions, Meals & entertainment, Officer Life Insurance premiums, Charity Contributions, Capital Losses

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Positive Adjustments to E&P

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Refunds of federal income taxes
Tax exempt income
NOL Deductions
Life Insurance Premiums- corp is beneficiary
DRD
Carryover of capital losses

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Cash Dividends

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taxable to shareholder
Current E&P (dividends)---Accumulated E&P (dividends)---Stock Basis (return of capital- not taxed)---Capital gains

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Stock Dividends

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generally not taxable to shareholder depending on whether shareholder has choice of receiving cash or other property---FMV

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Standard Liquidation

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Corporation recognizes gain on sale of assets
Shareholder recognizes gain to extent of basis in stock

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Tax-free Reorganizations

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Nontaxable; no gain/loss
Continuity of business
Basis of assets in shareholders hands is adjusted basis (NBV)

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Section 1244 Stock

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Ordinary loss up to $50,000 ($100,000 MFJ)
Excess loss = capital loss
Original owners only

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S Corporation

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<100 Shareholders, individuals/estates/trusts
NOT nonresident aliens
only one class voting stock
December 31st year end required
Income flows through to shareholders

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S-corporation Election

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Election is effective as of beginning of year if made anytime before 3/15
All shareholders must consent
New shareholders don't need to consent unless shareholder owns >50% stock

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LIFO Recapture

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C Corps that elect S status must include excess of inventory computed under FIFO over LIFO in taxable income for last C corporation year

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Built-in Gains Tax

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C-corporation conversion to S corp & FMV corporate assets > NBV on election date. Sale of such assets over 10 year period result in that gain being taxed at the corporate level

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Tax on Passive Investment Income

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Income tax at highest corporate tax rate on the lesser of:
Net Income OR
Excess passive investment income if tests met:
S-corp has accum. C Corp E&P and Passive investment income > 25% gross receipts

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Separately stated items

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Capital G/L; interest; rental income
Per share/day
Losses limited to adjusted basis & direct shareholder loans to corporation---guarantees don't increase basis

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Non-separately stated items

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Ordinary income

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Shareholder Basis (S-Corp)

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Initial Basis + Income (include non-taxable) + additional shareholder investments - distributions to shareholders - losses or expenses (include non-deductible)
Loss limitation= basis + direct shareholder loans - distributions

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Form K-1

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individuals' portion of S-Corp income & expenses

report on 1040 Schedule E

Shareholders taxed when earned not distributed

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S-Corp Revocation/Termination

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Voluntary termination; Fails to meet eligibility requirements; More than 25% corp's receipts come from passive investment income for 3 consecutive yrs & S Corp has C-Corp E&P

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Section 501 C1 Corporations

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Created by Act of Congress
Tax-exempt

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Section 501 C2 Corporations

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Organized for exclusive purpose to hold title to property, collect income from property, and turn over net income to an exempt organization

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Section 501 C3 Corporations

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Must apply & be approved---community chest/fund, foundation organized exclusively for religious, charitable, scientific, public safety, educational purposes
Lose status- influence legislation, participate/intervene political campaign, benefit any private shareholder/individual

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Section 509 Private Foundations

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includes all Section 501 3C corporations other than those specifically excluded:
50% type charitable deduction donees
Broadly publicly supported orgs>33% annual support
Supporting Organizations
Public Safety testing organizations

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Unrelated Business Income (UBI)

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gross income from any unrelated trade or business "regularly" carried on, minus business deductions directly connected therewith---not substantially related to org's tax exempt purpose
NOT any activity where all work performed by unpaid workers

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UBI Taxation

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$1,000 specific deduction---excess is taxed

Exclude: royalties, dividends, interest, annuities, rent real property < 50% personal, research, bingo games

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Annual Return Requirement---Tax Exempt Organizations

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Form 990---gross income, receipts, contributions, disbursements
Required for most orgs under Section 501 & open to public inspection

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Annual Return Requirement---Exceptions

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Religious/internally supported orgs <$5,000 gross receipts for year, or normally <$50,000
Churches, High schools (religious), Religious Orders, Internal support auxiliaries, Societies (missionary related), Tax exempt organized by Congress