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149 Cards in this Set
- Front
- Back
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C Corporation |
The only type of entity whose earnings are subject to double taxation. Income is taxed at the corporate level and then when dividends are provided to the shareholder they are taxed again at the individual level. |
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Formation (Corporate Tax Consequences) |
General Rule- No gain or loss recognized If issuing stock in exchange for property for formation, reacquisition (purchase of treasury stock), or resale (sale of treasury stock), no gain or loss is recognized. |
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Basis of Property (Corporation receives) |
Nontaxable= Net Book Value The basis is the greater of the adjusted basis (net book value) or the debt assumed by the corporation. (If the adjusted basis exceeds the FMV, the property is recorded at FMV) |
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Basis of Property (Shareholder tax consequences) |
No gain or loss recognized IF: A. 80% Control (control group must own at least 80% of the voting stock and nonvoting stock) B. No Boot Involved |
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Boot |
Boot is taxable and triggers gain recognition. Occurs if cash is withdrawn or receipt of debt securities. |
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Cancellation of Debt |
The amount of liabilities assumed that exceeds the adjusted basis of the total assets transferred to the corporation is not boot (per se) but does generate gain. |
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Calculation for Boot |
NBV ______________ Excess Liability= Boot |
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Basis of Common Stock (to shareholder) |
The basis of common stock received from the corporation will be: a. the amount of cash contributed b. property's adjusted basis, reduced by any debt on the property assumed by the corp. Also, when debt exceeds the basis it is added to bring the stock basis to 0. c. Services for stock- FMV of services as ordinary income (shareholder who contributes only services not counted as part of the 80% control group). |
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M-1 Reconciliation (Temporary Differences) |
Interest Income (received in advance) Rental Income (received in advance) Royalty Income (received in advance) |
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M-1 Reconciliation (Permanent Differences) |
GAAP Items not includible as taxable income: 1. Interest income from municipal or state bonds 2. Certain proceeds from life insurance of key person Federal income taxes are not deductible on tax return. |
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Trade or Business Deductions |
Ordinary and Necessary Expenses (common or accepted) |
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Domestic Production Deduction |
9% Deduction (the lesser of qualified productions activity income (QPAI) or taxable income (disregarding the QPAI deduction) |
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Calculating QPAI |
Domestic production gross receipts _____________________________________ Qualfiied Productions Activities Income |
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Domestic Gross Receipts Defined |
Gross receipts derived in significant part within the US from any disposition of qualified production that is manufactured, produced, grown, extracted, constructed, engineering activities, architectural services. |
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Executive Compensation |
A publicly held corporation may not deduct compensation expenses in excess of $1mil paid to the CEO or the four other most highly compensated officers. Entertainment expenses may be deducted only to the extent that they are included in the individuals gross income. |
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Bonus Accruals |
(non-shareholders/employees) Must pay by March 15 of the following year if accruing on tax return. |
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Bad Debts |
Accrual Basis- Tax deduction when specific A/R is written off. Cash Basis- Was never income so no tax deduction. |
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Business Interest Expense |
On business- deduct when incurred and paid On investments- deduct up to investment income. Prepaid- Deduct "later" when incurred. |
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Charitable Contributions |
10% of adjusted taxable income limitation. (any disallowed contribution may be carried forward for 5 years) If accrued must be paid by March 15. Total taxable income is calculated before the deduction of any charitable contribution deduction, the dividends rec'd deduction, any operating loss carryback, any capital loss carryback, US productions activity deduction. |
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Business Losses or Casualty Losses Related to Business |
100% Deductible for anything not compensated by insurance. (No $100 reduction or AGI requirement) |
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Partially Destroyed Property |
For property only partially destroyed the loss is limited to the less of: a. the decline in FMV b. the adjusted book value of the property immediately before the casualty. |
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Fully Destroyed Property |
The amount of the loss is the adjusted basis of the property. |
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Organization Expenditures and Start-Up Costs |
1. Calculation= $5000+excess over 15 years 2. Allowable costs include fees paid for legal services in drafting corporate charter, by-laws, minutes or organization meetings, fees paid for accounting services and fees paid to the start of incorporation. 3. Excludable costs are costs of issuing and selling the stock, commissions, underwriters fees, and costs incurred in the transfer of assets to a corporation |
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Amortization, Depreciation and Depletion |
Goodwill, covenants not-to-compete, franchises. trademarks and trade names must be amortized on a straight line basis over 15 years. |
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Life Insurance Premiums |
1. Corporation named as beneficiary (owns policy/key person)- Not tax deductible 2. Insured Employee Named as Beneficiary (employee owns policy)- Tax deductible |
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Business Gifts |
$25 per person per year. |
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Business Meals and Entertainment |
50% deductible to the corporation |
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Taxes |
State Income, City Income and Federal Payroll taxes are tax deductible. Federal income taxes are not deductible. Add them back to book income. |
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Lobbying and Political Expenditures |
Not tax deductible |
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Capital Gains and Losses |
1.Capital Loss deduction not allowed, only to offset capital gains. 2. Capital Loss Carryover 3 years back/5 forward 3. Taxed at the same rates as ordinary income |
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Net Operating Losses |
Carryback 2 years, carryforward 20. Same as individuals. *No charitable contribution deduction allowed in calculating NOL. |
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Inventory Valuation Methods |
In general the method used for accounting purposes must be used for tax purposes. All taxpayers with inventory must use the accrual method for purchases and sales. |
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Cost Method |
Inventories are valued at cost (including direct labor, direct materials and attributable indirect costs) less discounts, plus freight-in. |
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Lower of Cost or Market Method |
Inventories are valued at the lower of cost or market. (current bid price at date of inventory= market) |
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Rolling-Average Method |
Not allowed when inventories held for a long period of time or when costs fluctuate significantly. |
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Retail Method |
Approximate the cost of the market of items by subtracting the mark-up percentage to retail from the retail price. |
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FIFO |
(First In, First Out)- The most commonly used method unless the inventory can be specifically identified. |
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LIFO |
Must be elected by the taxpayer in the first year it is used, and the taxpayer must use the same method for it's financial statement purposes. |
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Specified Identification Method |
Another common inventory identification method. |
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Uniform Capitalization Rules Impact |
Certain methods for accounting for inventory do not provide for the capitalization of inventory costs that are required by uniform capitalization rules. If taxpayer subject to these rules, there may be certain valuation methods that can't be used. |
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Unsalable or Unusable Goods |
When inventories are deemed to be unsalable they must be valued at their expected selling price within 30 days minus the costs to dispose of them. |
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General Business Credit |
Consists of a combination of the following: A. Investment Credit B. Work Opportunity Credit C. Alcohol Fuels Credit D. Increased Research Credit E. Low income housing credit F. Small employer pension plan start-up costs G. Alternate Motor Vehicle Credit H. Other Infrequent Credits |
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Formula for General Business Credit |
The credit may not exceed "net income tax" less the greater of: a. 25% of regular tax liability above $25,000 or b. Tentative minimum tax for the year Can be carried back one year and carried forward 20. |
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Dividends Received Deduction |
Domestic corporations are allowed this deduction. This helps prevent triple taxation. If the investor owns 0-20%- 70%, 20-80%- 80% 80% or more- 100%. Must hold stock for at least 46 days (big corp pays div to little corp pays div to shareholder) |
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Taxable Income Limitation for Dividends Received Deduction |
This deduction equals the lesser of 70% (or 80%) of dividends received or 70 or 80% of taxable income computed without regard to DRD, any NOL deduction, capital loss carryback, or DPAD. This not apply if after taking into account the full dividends received deduction, the result is a NOL. |
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Entities for which the DRD does not apply |
A. Personal Service Corporations B. Personal Holding Companies C. (Personally Taxed) S corporations |
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Affiliated Corporations |
Receive 100% deduction if they file consolidated returns. |
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Taxation of a C Corp |
Filing requirements March 15 (year-end 12/31) |
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Accrual Basis vs. Cash Basis |
Accrual Basis Accounting required for" 1. accounting for purchase and sale of inventory. 2. tax shelters 3. certain farming corporations 4. business has greater than $5mil of average annual gross receipts for the three year period ending with the tax year. |
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Estimated Payments of Corporate Tax |
Required to make quarterly tax payments. Small Corps= 100% of the tax shown on the tax return for the current year or 100% of the tax shown on the return for the preceding year. (This cannot be used if corp owed no tax for the preceding year or did not have a full 12 month preceding year.) Large Corps= Taxable income of $1mil or more in any of the three preceding years. Must pay 100% of the tax as shown on the current year return. |
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Consolidated Tax Returns |
= 100% dividend received deduction An affiliated group of corporations may elect to be taxed as a single unit, thereby eliminating intercompany gains and losses. |
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Affiliated Group |
= consolidated tax return This means a common parent directly owns: A. 80% or more of the voting power of all outstanding stock and B. 80% or more of the value of all outstanding stock of each corporation |
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Brother-Sister Corporation |
Corporations where an individual (not a corporation) owns 80% or more of the stock of two or more corporations may NOT file consolidated returns. |
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Corporate Alternative Minimum Tax |
Corporations are subject to AMT. Certain C-Corps exempt if avg gross receipts from prior 3 periods are $7.5 mil or less or $5 mil for a c corp it's first three years of business. Exempt it's first year of existence. |
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AMT Add or Minus Adjustments |
Long-Term Contracts Installment Sale Dealer Depreciation Adjustments |
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AMT Add-Back Preferences |
Percentage Depletion Private Activity- issued post-86 Tax-Exempt Interest Income Pre 87 ACRS Excess Depreciation |
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Adjusted Current Earnings |
ACE. Increase/Decrease Muni Interest Income Organizational Expense Amortization Life Insurance Proceeds on Key Employees Difference between AMT and ACE depreciation Dividends received deduction (under 20% ownership |
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Long-Term Contracts |
An adjustment is calculated for the difference between revenue calculated under the completed contract method and percentage of completion method. The percentage of completion method must be used for AMT. |
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Installment Sales- Dealer (AMT) |
An adjustment is calculated for the difference between full accrual revenue and installment sales revenue. Installment method is not allowed for alternative minimum tax purposes. |
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Depreciation Adustment (AMT) |
Must be depreciated using alternative depreciation system (ADS) straight-line over 40 years. 150 percent declining balance for personal property using applicable class life must be used. Any difference would be an adjustment. |
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AMT Preference Items |
Normally not taxed, added back for AMT calculation. Percentage Depletion (excess of percentage depletion over the adjusted basis) Private Activity Bonds Pre-1987 ACRS Depreciation |
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Adjusted Current Earnings (ACE) |
Included to ensure that corporations do not report a profit for financial statement purposes by pay little or no income taxes. Similar to the calculation the company uses to determine E&P. |
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AMT Adjusted by... |
Municipal bond interest is added back Deductions related to organizational expense amortization is added back Life insurance premiums on key employee is added back The difference between AMT depreciation and ACE depreciation added back or subtracted depending on which is larger. Amount taken for the 70% dividends received deduction is added back. The total after these adjustments is called ACE |
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Exemption Amount |
Taxpayer is allowed an AMT exemption. It is subtracted from AMTI. The exemption amount is $40k less 25% of AMTI in excess of 150,000. |
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AMT Tax Rate |
Flat 20% |
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AMT tax credits |
Only foreign tax credit |
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Minimum Tax Credit (MTC) |
A corporation that pays AMT in one year may use this AMT as a credit in future years against the corporation's regular income tax liability. It can only be carried forward, not back. |
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Accumulated Earnings Tax |
Imposed on regular C corporations whose accumulated (retained) earnings are in excess of $250,000. Personal Service Corporations are entitled to only $150,000. Not imposed on personal holding companies, TE corporations or passive foreign investment corporations. The additional tax rate for accumulated earnings is a flat 20%. |
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Personal Holding Company Tax |
PHCs are really corporations set up by high tax bracket taxpayers to channel their investment income into a corporation and shelter it at lower tax rates. They are defined as corporations that are more than 50% owned by 5 or fewer individuals (either directly or indirectly at any time during the last half of the tax year) and having 60% of adjusted ordinary gross income consisting of, net rent, interest that is taxable, royalties, dividends. |
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Personal Holding Company- NIRD |
N- Net rent (if less than 50% of ordinary gross income) I- Interest that is taxable (nontaxable is excluded) R- Royalties (but not mineral, oil, gas, or copyright) D- Dividends from an unrelated domestic corporation. |
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Personal Holding Company- Additional Tax Assessed |
They are taxed an additional 20% on personal holding company net income not distributed. Taxable income must be reduced by federal income taxes and long-term capital gain to determine the undistributed personal holding company income prior to dividend received deduction. |
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Personal Service Corporations |
Normally involved in the performance of accounting law consulting engineering architecture health and actuarial science. They do not get graduated tax rates, taxed at flat 35%. |
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Corporate Earnings and Profits (E&P) |
Similar to retained earnings, but not exactly the same. E&P calculated according to tax rules, retained earning calculated according to GAAP. |
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Impact on Corporate Distributions and Other Activities (E&P) |
A corporation's E&P is a major factor in determining the ability of the corporation to pay a dividend to the shareholders. |
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E&P Calculation |
Start with corporate taxable income. From there positive or negative adjustments will be made, they may be permanent or temporary in nature. |
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Negative E&P Adjustments |
-Reduce current E&P a. federal income tax expense b. nondeductible penalties, fines, political contributions, other 50% of meals and entertainment c. officer life insurance premiums (where corp is beneficiary) d. expenses for production of TE income e. nondeductible charitable contributions f. nondeductible capital losses |
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Positive E&P Adjustments |
-Increase current E&P a. refunds of fed income tax paid b. TE income c. refunds of items that were not subject to regular tax under the tax benefit rule d. NOL deductions e. Life insurance proceeds where corp is bene f. dividends received deduction used to calculate regular taxable income g. carryovers of capital losses that impacted taxable income h. carryovers of charitable contributions i. nontaxable cancellation of debt not used to reduce basis of property. |
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Positive or Negative Adjustments |
(Adjust current E&P + OR -) a. losses and gains that have different effects on taxable income vs. E&P b. changes in the cash surrender value of certain life insurance policies c. excess depreciation for E&P over that for regular income tax d. differences in allowable deductions for organizational and start-up expenses e. installment income method adjustments f. completed contact income vs percentage-of-completion income adjustments g. amortization of intangible drilling costs adjustments h. Section 179 expense per regular tax versus ratable depreciation on the same property using a 5-year life. |
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Classification of Distributions |
Corporate distributions are first applied to current E&P then accumulated E&P and then to return of capital. If any excess remains, it is classified as "excess distributions" and reported as a capital gain distribution (taxable income) by the shareholder. |
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Distributions when E&P exists (current of accumulated) |
Dividend income |
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Distributions when no E&P exists |
Return of capital (not taxed) |
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Distributions with no E&P and no basis |
Capital Gain Distribution |
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Corporate distributions |
Distributions from corporations to shareholders are taxable to such shareholders if the distributions are classified as dividends. |
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Dividends Defined |
Defined by IRS as a distribution of property by a corporation out of it's E&P |
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General Netting Rules |
Current E&P and Accumulated E&P not netted. Come first from current E&P then accumulated E&P. If current E&P is negative and accum E&P is positive the amounts are netted. If the amount is positive the distributions are dividends. |
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Matching Cash Dividends to Source |
When dividends are paid in excess of earnings and profits the following allocation applies: a. current earnings and profits are allocated on a pro rata basis to each distribution. b. accumulated earnings and profits applied in chronological order; beginning with the earliest distribution |
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Constructive Dividends |
Some transactions, while not in the form of dividends, are treated as such when the payments are not in proportion to stock ownership. Examples include: a. excessive salaries paid to shareholder employees b. excessive rents and royalties c. "loans" to shareholders where there is no intent to repay d. sale of assets below market value. |
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Stock Dividends |
This is a distribution by a corporation of its own stock to its shareholders. They are generally not taxable unless the shareholder has a choice between cash or other property and the stock. The value of a taxable stock dividend is the FMV on the distribution date. The basis of a non-taxable stock dividend when old and new shares are the same is the total shares divided by the old basis. |
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Shareholder taxable dividend amount |
1. Individual Shareholder a. cash dividends- amount received b. property dividends- FMV of property received 2. Corporate Shareholder a. cash dividends- amount received b. property dividends- FMV of property received |
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Corporation Paying Dividend- Taxable Amount |
The general rule is the payment of a dividend does not create a taxable event. A dividend is a reduction of E&P. If a corp distributes appreciated property it recognizes gain as if the property had been sold. |
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Stock Redemption |
This occurs when a corporation buys back stock from its shareholders. 1. Proportional- Taxable dividend income (to shareholder-ordinary income). Generally the corp either redeems or cancels the stock pro rata for all shareholders. 2. Disproportional (substantially disproportionate)- Sale by shareholder subject to taxable capital gain/loss to shareholder. Percentage of ownership after must be less than 50% and must be less than 80% of the ownership before the redemption. |
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Corporate Liquidation |
The transaction is subject to double taxation |
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Corporate Liquidation- Corporation sells assets and distributes cash to shareholders. |
The result is: 1. The corporation recognizes gain or loss (as normal) on the sale of assets and 2. Shareholders recognize gain or loss to extent cash exceeds adjusted basis of stock. |
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Corporate Liquidation- Corporation distributes assets to shareholders |
The result is: 1. Corporation recognizes gain or loss as if it sold the assets for FMV and 2. Shareholders recognize gain or loss to extent FMV of assets received exceeds the adjusted basis of stock. |
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Tax-Free Reorganizations (Reorganizations defined) |
Includes: a. Mergers or consolidations (Type A) b. The acquisition by one corporation of another corporation's stock, stock for stock (Type B) c. The acquisition by one corporation of another corporation's assets, stock for assets (Type C) d. Dividing the corporation into separate operating corporations (Type D) e. Recapitalizations (Type E) f. A mere change in identity, form, or place of organization (Type F) |
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Parent/ Subsidiary Liquidation |
No gain or loss is recognized by either the parent corporation or the subsidiary when the parent who owns at least 80%, liquidates its subsidiary. The parent assumes the basis of the subsidiary's assets as well as any unused NOL or capital loss or charitable contribution carryovers. |
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Reorganization effects on the corporation |
Nontaxable. All tax attributes remain. |
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Reorganization effects on the shareholder |
Nontaxable. The shareholder continues to retain his or her original basis. The shareholder recognizes gain to the extent he or she receives boot (cash) in the reorganization. |
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Continuity of Business |
A reorganization is treated as a nontaxable transaction because it results in the continuation of a business in a modified form. To meet this requirement the acquiring corporation must continue the business of the old entity (or entities) or use a significant portion of the old corporation's assets. |
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Liquidation |
Corporation completely ceases. It is taxable to the corporation and the shareholder. |
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Reorganization |
Corporation continues. Nontaxable to corporation and the shareholder. |
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Worthless Stock |
Section 1244 Stock (small business stock) When a corporations stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (fully tax deductible) up to 50k (100k if MFJ). Any loss in excess would be a capital loss which would offset capital gains and then a max of $3000 per year. |
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Small Business Stock |
A noncorporate shareholder who holds qualified small business stock for more than 5 years may generally exclude 50% of the gain from the sale or exchange of stock. The includible portion of the gain is taxed at 28%. |
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S Corp Eligibility (Qualified Corp) |
Must be a domestic corporation. A S-corp may own any interest in a C-Corp but it may not file a consolidated return with a C-Corp. |
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S Corp Eligibility (Eligible shareholders) |
1. Must be an individual, estate or certain types of trusts. 2. An individual may not be a non-resident alien 3. Qualified retirement plans, trusts and 501(c)(3) charitable organizations may be shareholders. 4. Neither partnerships or corporations are eligible shareholders. 5. Grantor and voting trusts are permissible shareholders. |
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Shareholder Limit (s-corps) |
There may not be more than 100 shareholders. |
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One class of stock (S-Corps) |
There may not be more than one class of stock outstanding. However differences in common stock voting rights are allowed. Preferred stock is not permitted. |
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Electing an S-Corp status |
All shareholders (voting and nonvoting) must consent to a valid election. If the election is made by March 15 it is retroactive to the beginning of the year. |
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S Corporation Tax Year |
Must adopt calendar year tax year, unless a valid reason for otherwise. Taxes due March 15, |
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No Tax on S-Corp at corp level |
All earnings are passed through to shareholders. Certain exceptions. |
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LIFO Recapture Tax |
C corps that elect S corp status must include in taxable income for the last C corp year, the excess inventory computed under FIFO over LIFO. The resulting tax may be paid in four equal installments, first of which is due with the final C corp return. Remaining installments paid by S Corp |
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Built-in Gains Tax |
An unrealized built-in gain results when: 1. A C-Corp elects S-Corp status AND 2. The FMV of the corporate assets exceeds the adjusted basis of corporate assets on election date. The excess between the basis and FMV is the built-in gain |
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Exemptions from built in gains tax |
1. S corp was never a C corp 2. The sale or transfer does not occur within 10 years (5 years through period ending 12/31/14) of the first day of first year S election made. 3. S corp can demonstrate the appreciation occurred after the S election 4. Can demonstrate that asset was acquired after the S election was made. 5. The net unrealized built in gain was recognized in previous years. |
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Built in Gains Tax Calculation |
Calculated by multiplying 35% by the lesser of: 1. recognized built-in gain for the current year 2. the taxable income of the S corp if it were a C corp. |
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Tax on Passive Investment Income (S-Corp) |
S corp is subject to an income tax imposed at 35% on the lesser of net income or excess passive investment income if: a. The S corp has accumulated C corp earnings and profits AND b. Passive investment income exceeds 25% of gross receipts |
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Effect of S Corp Election on shareholders |
Shareholder taxed when earned, not when distributed/received. Net income (or loss) is passed-through to shareholders as follows: S-Corps report both separately stated items of income and deductions and the non-separately stated items of business income or loss. Allocations to shareholders are made on a per-share, per-day basis. Losses are limited to shareholders adjusted basis in S Corp stock plus direct shareholder loans to the corporation. Shareholder guarantees do not increase basis. Any disallowed losses are carried forward indefinitely and deductible as the shareholders basis increases. Losses limited to shareholders at risk amount in corporation. |
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S-Corp items flow through to shareholder |
a. ordinary income b. rental income/loss c. portfolio income d. TE interest e. percentage depletion f. foreign tax income g. section 1231 gains and losses h. charitable contributions i. expense deduction for recovery property j. unrecaptured Section 1250 income k. gain/loss on sale of collectibles |
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Deductible Fringe Benefits |
Fringe benefits are deductible for non-shareholder employees or those employee shareholders owning 2% or less of the S corp. |
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Nondeductible Fringe Benefits |
The cost of fringe benefits for shareholders owning over 2% is not deductible to the S corporation, unless the corporation includes the benefits in the employee/shareholder's W-2 income. |
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Accumulated Adjustments Account |
The tax effects of distributions paid to shareholders of an S corp that has accum earnings and profits are computed using this account. The AAA is 0 at the inception of the S corp. It is increased by income and gains except TE income and certain life insurance proceeds. It is decreased by corporate distributions. However AAA may not be reduced below 0. Also certain expenses and losses reduce AAA. |
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S-Corp Shareholders |
Each shareholder receives a K-1 and the individual reports on 1040 schedule E |
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Computing shareholder basis in S-Corp Stock |
B- initial basis + A- income items (includes tax free income) + additional shareholder investments in corp stock - S- Distribution to shareholders - loss or expense items = E- Ending Basis |
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Taxability of Distributions to Shareholders- No E&P |
To extent of basis in stock- not subject to tax reduces basis in stock (return of capital) In excess of basis of stock- taxed as a long-term capital gain (capital gain distribution) |
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S Corp with C Corporation E&P |
1st to extent of AAA, not subject to tax reduces basis in stock 2nd to extent of c corp E&P taxed as a dividend, does not reduce basis 3rd to extent of basis of stock. not subject to tax, reduces basis of stock 4th in excess of basis of stock, taxed as a long-term capital gain |
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S Corp Status Terminates |
Will terminate as a result of: 1. Holders of majority of corp stock, consent to a voluntary revocation. 2. The corporation fails to meet all of the eligibility requirements for S corp status. 3. More than 25% of the corporation's gross receipts come from passive investment income for 3 consecutive years and the corp had c corp earnings and profits at the end of each year. S corp would be terminated at the beginning of the 4th year. |
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Reelecting S Corp Status |
Once an S Corp status has been terminated or revoked, a new election cannot be made for 5 years unless the IRS consents to an earlier election. |
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Tax-Exempt Organizations |
Must make written application for exempt status be approved by the IRS, become incorporated, and issue capital stock. The articles of organization must limit the purpose of the entity to the charitable/exempt purpose. |
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Section 501(c)(3) Corporation |
Includes a community chest, community fund, foundation organized and operated exclusively for religious, charitable, scientific, public safety testing, literary, or educational purposes or a foundation organized to foster national or international amateur sports competitions or to prevent cruelty to children or animals. |
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Section 501(c)(3) Requirements |
No part of the net earnings may inure to the benefit of any private shareholder or individual. The organization may not directly participate or intervene in any political campaign. May not endorse candidates, engage in fund raising for political candidates. |
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Section 509 Private Foundations |
Include all 501(c)(3) corporations other than those specifically excluded. A foreign corp may qualify as a private foundation/ |
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Excluded Organizations (private foundation) |
a. Maximum (50% type) charitable deduction donees. b. Broadly publicly-supported organizations receiving more than 1/3 of their annual support from member and the public and less than 1/3 from investment income and unrelated income. c. Supporting organizations D. Public safety testing organizations |
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Required Returns (private foundation) |
An annual information return (Form 990-PF) that discloses substantial contributors and amounts of contributions received is required. |
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Involuntary Termination (private foundation) |
Terminates when they become public charities. They cannot be both. Termination by IRS occurs if foundation commits repeated violations or a willful and flagrant violation of any of the private foundation provisions. |
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Voluntary Termination (private foundation) |
May be achieved by notifying IRS of the plan to terminate. Subject to a termination tax payback of the value of its aggregate tax benefits or its net assets, whichever is lower. Or a foundation may elect to distribute all of its assets to an organization qualifying for the max 50% deduction or it may operate as a public charity for at least 5 years. |
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Unrelated Business Income |
The gross income from any unrelated trade or business "regularly" carried on. minus business deductions directly connected. UBI is: 1. derived from an activity that constitutes a trade or business 2. regularly carried on 3. not substantially related to the organization's TE purposes. |
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Tax Filing and Estimated Taxes |
Tax on UBI. When subject to tax must comply with code provisions regarding installment payments of estimated income tax by corporations. The corporation is allowed a $1000 deduction from unrelated business income, so only UBI over this amount is subject to tax. |
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Annual Return Requirement |
Due May 15. An annual information return stating gross income, receipts, contributions, disbursements, etc is required of most organizations exempt from tax under code 501 and is open to public inspection. |
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Exceptions to annual filing requirement |
Do not have an annual filing requirement. a. Religious or internally supported organizations. Churches and exclusively religious activities of a religious order are exempt. b. Certain organizations that have less than $5000 in gross receipts (and this is typical) c. Organizations that normally have less than $50k of gross receipts. |
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Not required to file form 990 |
-$50k or less gross receipts Churches High schools-religious Religious orders Internal support auxiliaries Societies- missionary related Tax exempt-organized by Congress |
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Penalties |
Apply for failure to file a required tax form (including 990N) and failing to comply with the requirements and disclosures of the exempt organization. If organization fails to file the required return for 3 consecutive years they will lose their TE status. |
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Controlled Taypayer |
Any one of two or more taxpayers owned or controlled directly or indirectly by the same interests, and the definition includes a taxpayer that owns or controls the other taxpayers. |
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Controlled Transaction |
Means any transaction or transfer between two or more members of the same group of controlled taxpayers. |
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Uncontrolled Comparable |
Means the uncontrolled transaction or uncontrolled taxpayer that is compared with a controlled taxpayer. |
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Arm's Length Standard |
The IRS adjustments necessary to determine "true taxable income" apply to controlled transactions and controlled transfers. The controlled transaction meets the arm's length standard if the transfer is consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction. |
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Comparable Transactions and Standards of Comparability |
a. Comparable uncontrolled price (CUP) only for tangible property (sales, purchases, leases) b. CUP based upon reference to published market data c. Comparable uncontrolled transaction (CUT) only for intangible property (royalty payments) d. Resale price- tangible property only e. Cost Plus- tangible property only f. Comparable profits method- based upon operating margin, gross margin, return on assets, or return of capital |
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Transfer Pricing Issues |
The IRS often makes adjustments when there are transfer pricing issues. This exists when: a. A US based taxpayer transfers, sells, purchases, or leases tangible property or intangible property to or from an affiliate that is not subject to US tax or does not file a consolidated return. b. A US taxpayer enters into a loan agreement or service contract with an affiliate that is not subject to US tax or does not file consolidated return. c. A US taxpayer shares costs with an affiliate that is not subject to US tax or does not file a consolidated return. |
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IRS Options (Transfer Pricing) |
1. Modify the basis of assets 2. Require the taxpayer to recognize income with respect to an otherwise tax-free transaction. |
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Avoidance of Penalties |
A taxpayer may owe additional taxes from IRS adjustments. They can avoid a "substantial valuation misstatement" and "gross valuation misstatement" penalty if: 1. Section 482 Study Based on allowable pricing methods. 2. Section 482 NOT based on allowable pricing methods. |
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Competent Authority |
Entity can get the IRS to approve before the transaction is done. |
