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52 Cards in this Set
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Section 2.01 C Corp overview |
It created formally (Articles of incorporation) Limited Liability Tax-paying entity (1120) Legal entity Use GAAP (Accrual method) Filing due 4/15 (C) or 4th month of 15th day (F) 5 M extension (C), 6 M extension (F), 7 M extension (6/30 F) Fiscal year (52 to 53 weeks) |
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Section 2.02 Formation of C Corp |
Tax free if property transferred to Corp to exchange for stock if transferor is in control of the corp (80% or more) after transfer Cash, property, service, or reorganization |
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Cash or Property (Aggregate) |
As long as 80% or more of stock transfer, it is tax free transaction
Cash: Carryover basis is AMT of cash paid Property: If 80% or more Tax basis of property, less than 80% FMV at date of contribution
If less than 80%, contributor need to report GAIN (FMV - Cost) |
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Service transfer (Less than 80%) |
If service rendered in exchange for stock in Corp, received shares treated as COMPENSATION therefore report as ordinary income at FMV of stock |
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Transfer of property that has liability |
Shareholder's basis is = Adjusted Basis - Liability transferred If Adjusted basis is less than liability, shareholder recognize gain on excess and has zero basis in stock |
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Shareholder basis in stock received (공식) |
Adjusted basis transferred + Cash paid, Recognized gain, liability assumed, Transaction cost and fees - Cash, FMV of property received, liability transferred |
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Corporation's basis in property received |
Adjusted basis transferred + Gain recognized by transferor |
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Reorganization |
Transfer of all A&L to another in exchange of stock in new Corp (Not-Taxable) if shareholder gets same basis as they had in old Corp - Changes in place of Org - M&A of business - Absorption of subsidiary |
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Additional won't be issued if |
Shareholder not recognize G or L and increase tax basis in stock received by tax basis of property transferred Shareholder's tax basis in transferred property carry over to Corp and become its tax basis in property |
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Section 2.04 Computing Taxable Income |
Revenue Recognized at earlier of earned or collected - Rental income received in advance - Royalty income received in advance - Interest income received in advance (No Muni) |
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Life ins proceed for key employee |
- If Corp is beneficiary, premium is not deductible because proceed is not taxable - Premium for employee's family is deductible |
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Deduction |
Corp mostly use Accrual Basis accounting, to deduct expense two test must be met 1. All-event test is met if - Existence of liability is established - AMT of liability can determine resonably - Economic performance has occurred w/ respect to liability 2. Economic Performance - If taxpayer receive service or property - Taxpayer use property that other party provided - Taxpayer provide property or service to other party |
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2.5 month rule |
If Wages, Bonuses, Vacation pay, Charitable contribution can be paid within 2.5 month after year end, Corp can accrue those expense in current year |
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1. Organizational Expense (Deduction) |
Organizational expense (Legal counsel, ACC fee, drafting doc, state fee, cost of certificate, organizational meeting) Start-up cost (Employee training, initial ad, cost related to negotiation w/ legal counsel)
Each of those 5000 is DEDUCTIBLE, any leftover AMT after deduction Amortized 180 M |
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2. Salary, Wage, Payroll, fringe benefit (Deduction) |
All salary and wage is deductible (Employee)
Deductible up to 1 Mil of wage expense for the highest paid executive officer of public Corp
Entertainment expense for officer, director, 10% or more owner can be deducted up to AMT that is included in individual's gross income |
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3. Bonus & Vacation pay 4. Estimated loss 5. Interest expense (Deduction) |
Bonus & Vacation: 2.5 M rule Estimated Loss: Not deductible - Bad debt can be deducted if direct write-off - Warranty cost deduct after actual repair Interest Expense: Not deductible if loan proceed used for tax-exempt investment, otherwise deductible |
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6. Reimbursed employee expense |
Meals & Entertainment: Can deduct 50% - If reimbursed M&E is treated as compensation by employer, 100% deductible by Corp All Travel cost: Deductible Luxury Skybox: If rented for one event, 50% deductible. If for whole season, most expensive non-luxury seat in venue is deductible |
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7. Theft & Casualty Loss 8. Goodwill, Franchise & Trademark 9. R&D cost |
- Casualty loss: 100 per event, 10% AGI not apply - GFT: Amortize over 15 yrs - R&D cost: Expense immediately or ammortize 60 months
So far all deduction was ORDINARY DEDUCTION GI - Ordinary deduction = Income before special deduction |
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Nondeductible item |
Federal income tax, Gov fine & penalty, cost of issuing stock, lobbying cost, club due, compensation over 1 mil |
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Item cannot deduct until paid |
Bad debt: Deductible when written off Warranty: When incurred, Lawsuit: Not until paid. Not permit because it is probable and estimable Marketable security: At the time of sale, change in MV not report Inventory: Decline in MV not deduct until disposal of inventory |
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Section 2.05 Special deduction |
DRD (Dividend Received Deduction) Charitable contribution Capital Gains and Losses |
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1. DRD |
Dividend is fully reported in Gross income but gets deduction in DRD - Corp own more than 80%: 100% deductible - Corp own between 20 to 80%: 80% - Corp own less than 20%: 70% |
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DRD is not available if |
- Dividend is from foreign Corp - Borrowed money to buy investment - Dividend from tax-exempt Org (Muni bond) - Own less than 46 days |
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Rare limitation for DRD |
Only applies for 70 and 80% DRD if IBDRD is less than dividend but not lower than dividend multiplied by applicable % DRD < IBDRD < Dividend
If this is the case DRD % apply to IBDRD not dividend |
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2. Capital Gains and Losses |
Ordinary Asset: Current asset * G&L from this asset recognize at ordinary rate 1231 Asset: Non current asset * G from this LTCG Rate, L is ordinary rate Capital Asset: Neither current or non-current * G is ordinary rate dont matter S/T or L/T * L carryback 3 yrs forward 5 yrs (S/T) |
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3. Charitable Contribution |
Limited to 10% of Adjusted Taxable Income (ATI = Income before special deduction)
Unused amount Carryfoward 5 years |
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Foreign Tax Credit |
U.S tax liability*(Foreign income/World income)
Any remaining carryback 1 forward 10 yrs |
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Work opportunity credit, Research credit |
WOC: 40% of qualified first-year wage for year - Avail when Corp hire certain target group (Veteran, ex-felon, summer youth employee) - One-time credit for each new hire |
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Research credit |
Equal to 20% of qualified research expense over base AMT Research exp = In-house cost+contract expense |
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Section 2.07 Penalty Taxes (AET, PHC) |
Accumulated Earnings Tax (AET) - Penalty for too much RE in judgement of IRS - Penalty is 20% of undistributed income - To reduce or eliminate * Pay actual dividend, consent dividend * If already pay PHC tax Accumulation is not allowed for avoiding tax or loan to shareholder (Expansion, paying debt, working capital need ok) |
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Safe harbor AMT for AET |
Manufacturing 250000 + AMT retained for federal income tax liability Personal service 150000 + AMT retained for federal |
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Personal Holding Company Tax (PHC) |
PHC is C Corp that more than 50% of stock owned by 5 or fewer individual (Alter-ego test) and that receive at least 60% of taxable income from passive source (Gross income test) 20% of Undistributed PHC income will be taxed |
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Personal Service Corp (PSC) |
Qualified PSC taxed at 35%, to be PSC * Activity involve health. law, engineering, architecture, ACC, actuarial science, arts, consulting * 95% or more of stock is owned by employee performing activity |
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Section 2.07 Supplementary Sch M-1 2 3 |
M-1: Reconciliation of book income w/ tax * Tax income use IBSD (Before DRD, CC) * Tem difference: Bad debt, warranty, depreciation * Permanent difference: Muni, 50% M&E, fine, penalty, premium paid on life insurance |
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M-2 M-3 |
M-2: Reconciliation of unappropriated RE to examine any PPADJ require amendment (To squeeze more money) M-3: M-1 on steroid, for company $10 mil or more of asset, lots more detail than M-1 |
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Claim of retund |
later of * 3 yrs after original return due * 2 yrs after PMT of tax |
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No underPMT penalty if |
Balance is less than $500 Annualized income Current year: Estimated tax PMT equal 100% of current tax liability Prior year: PMT equal 100% of prior liability * Not avail if no prior liability * If Corp has taxable income exceeding 10mil preceding 3 yrs |
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Statute of Limitation |
Time period that IRS come after me for tax due * 3 yrs, 6 yrs if gross income omission exceeds 25% of gross income reported on corp return * For fraud unlimited If underPMT is due to fraud, 75% of underPMT will penalize |
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Section 2.11 Corporate Distribution (Non liquidating) |
Is it earning? (Taxable) or ROC? CEP (Similar to NI) AEP (Similar to RE) Dividend income will be up to AMT of higher of * CEP or CEP + AEP
Carefully read question when property received as dividend (Normally include in CEP if not add) |
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Stock redemption |
Stock redemption normally result in capital G or L to shareholder if one of following met * Redemption is not equivalent to dividend * " is substantially disproportionate * All of shareholder's stock is redeemed * Redemption is from non-corporate sharehold * Distribution is redemption of stock to pay death taxes under sec 303 |
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Terminating Orgamization |
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Property distribution |
If liability is less than FMV of property, it will just reduce distribution AMT for shareholder If liability is higher than FMV of property, Corp recognize gain from (FMV - Tax basis) and (Liability - FMV) |
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In complete liquidation |
Company recognize G&L as if all asset had been sold, may deduct expense associated w/ it |
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Reorganization |
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Affiliated Group? |
* Affiliated group is two or more Corp that are related through common ownership * Consists of parent Corp and subsidiary Corp * Parent Corp own at least 80% of Sub's stock * Corp within group can use ordinary loss to offset each other's ordinary income |
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Consolidated return |
Affiliated group may elect to file consolidate return
C and S Corp cannot be consolidated together |
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Section 1244 Stock (Encourage to open new business) |
-Loss from sale of small, domestic Corp stock * Apply for the first $1mil of stock issued * If value appreciate, capital gain rate * If decline, ordinary rate for first 50000 (X2 MFJ) (From 4797 L/T business property) * Rest is capital loss (3000/yr) * Must be sold by original purchaser |
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Section 1202 Stock (QSBS) |
Qualified Small Business Stock * Up to $10 mil of Gain from sale of QSBS acquired after 9/27/2010 and held more than 5 years is 100% excludable even from AMT purpose and 3.8% surtax Before 2/18/2009 (50%) 2/18 to 9/27 (75%) |
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Section 2.13 AMT |
Adjustment & Preference (PILE) ACE Adjustment (SLIM) Exemption AMT is 40000 for the first AMTI 150000 after that reduced by 25% |
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Adjustment & Preference |
Private activity Bond Installment Sale of inventory * Difference between accrual accounting and installment method Long-term contract Income (% of completion) Excess depreciation of personal property |
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ACE adjustment |
ACE adjustment calculated after Adjustment/preferences at 75% Seventy % of DRD from unrelated Corp Life Insurance proceed on death of key employ Muni bond that was not included in adjustment/preferences |
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AMT exclusion |
Corp is exempt AMT regardless of income for first tax year Second year also will be exempt if first year gross receipt is less than $5mil |
