Notes Chapter 3 REG
Notes Chapter 3 REG
Notes Chapter 3 REG
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C Corps, Depreciation, and MACRS
Formation
Corporation tax consequences
• No gain/loss recognized upon formation
• Basis of property received by corporation is the greater of:
- Adjusted NBV of the transferor + any gain recognized by the transferor
- Debt assumed by the corporation
- Exception: if the NBV is less than the FMV of the asset, the corp uses the FMV as basis to avoid built
in losses
Operations
Book income vs. taxable income is reconciles on schedule M-1
Some GAAP income items are not includible at taxable income, such as:
• Interest income from municipal or state bonds
• Proceeds from life insurance on key officers’ lives where the corporation is the beneficiary
These create permanent differences
Domestic Production Gross Receipts [gross receipts derived from production within the U.S]
(COGS)
(Other directly allocable expenses or losses)
(Proper share of other deductions)
= Qualified Production Activities Income (QPAI)
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REG - Notes Chapter 3
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Bonuses paid by an accrual taxpayer are deductible in the current tax year, provided they are paid within 2 ½
months after year end (so if 12/31 year end, then pay by 3/15)
Business losses or causualty losses related to business (its different than the individual/personal casualty loss)
• No $100 deductible
• No 10% of AGI reduction
Taxes
• State, local and federal payroll taxes relating to business are deductible when incurred
• Federal income taxes are not deductible
• Foreign income taxes may be used as a credit
Dividends from affiliated corps that file consolidated returns qualify for 100% deduction
Depreciation
MACRS depreciation rules for machinery and equipment
• Salvage value is ignored
• Half year convention – applies to personal property places in service or disposed of during a taxable year is
treated as being placed or disposed at the midpoint of the year
• Mid-Quarter convention – if more than 40% of depreciable property is placed in service in the last quarter
of the year, the mid quarter convention must be used
Depletion
• GAAP is cost depletion calculation (R3 – 28)
• % Depletion (non GAAP)
- The deduction is limited to 50% of taxable income
- Allowable percentages range from 5%-22% depending on the mineral being extracted
Amortization
• Intangibles such as goodwill, licences, franchises, and trademarks are amortized SL over 15 years
• Business start up costs and organization costs – 5,000 is expensed and excess is amortized SL over 180
months (explained earlier)
Section 1245 (machinery and equipment, gains only) – personal business property assets used in trade or
business for over a year (autos)
• Upon a sale of a 1245 asset all accumulated depreciation is recaptured as ordinary income
• Any remaining gain is a capital gain under section 1231
Section 1250 (buildings, gains only) – real business property used in trade or business for over 1 year
(warehouse)
• Recaptures deprecation in excess of straight line
Taxation of a C Corporation
Filing requirements – 15th day of the third month after tax year end, so 12/31 yr end, file by 3/15
Estimated payments of corporate tax
• Large corporations – must pay 100% of tax as shown on the current year tax return
• Not large corporations (less than a $1 million in taxable income in the past 3 years)
- 100% of tax as shown on the current year tax return
- 100% of tax as shown on the previous years tax return
An affiliated group of corporations may elect to be taxed a single unit, thereby eliminating intercompany
gains/losses
• An affiliated group means that a common parent owns:
- 80% or more of the voting power of all outstanding stock, and
- 80% or more of the value of all outstanding stock of each corporation
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Exemption Formula – the exemption amount is $40,000 less 25% of AMTI in excess of $150,000. As a result,
the exemption is completely phaseout for AMTI over $310,000
40,000 – [(Minimum taxable income – $150,000) * 25%] = Exemption allowed
The accumulated earnings tax is imposed on regular C corps whose accumulated (retained) earnings are in
excess of $250,000 is improperly retained
• 15% additional tax if found guilty
Personal holding company tax – corps set up by rich people to channel their investment income to corporate tax
rates (15-25%) instead of paying their higher individual rate
Personal holding company – corps more than 50% owned by 5 or less individuals and having 60% of adjusted
gross income consisting of:
• Net rent
• Interest that is taxable (non taxable is excluded)
• Royalties (not mineral, oil, gas or copyright royalties)
• Dividends from an unrelated domestic corp
Personal holding companies are taxed an additional 15% on net income not distributed
Corporate distributions
Dividends defined – earnings and profits (E&P)
• Current E&P (by year end) = taxable dividend
• Accumulated E&P (dist. date) = taxable dividend
• Return of Capital (No E&P) = tax free and reduced basis of common stock
• Capital Gain Distribution (No E&P/No Basis) = taxable income as capital gain
Stock redemption/buyback
• Proportional buyback – taxable dividend income (to shareholder – ordinary income)
• Disproportional (only shares from certain stockholders were bought back) – sale by shareholder is subject
to capital g/l to shareholder
Corporate liquidation – corp and shareholder recognize g/l (double taxation). Two types of corporate
liquidations
• Corp sells assets and distributes cash to shareholders
- The corp recognizes a g/l on the sale of the assets, and
- Shareholders recognize a g/l to the extent the cash exceeds adjusted basis
• Corp distributes assets to shareholders
- Corp recognizes g/l as if it sold the assets for the FMV (FMV-basis = g/l)
- Shareholder recognizes g/l to extent FMV of assets received exceed the adjusted basis in the stock
If you elect to be an S corp by March 15, then it takes effect for the whole year
S corps must adopt a calendar year, unless there is valid business purpose
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• Like P/S, S corps report both separately and non-separately stated items of income and/or loss
• Allocations to shareholders are made on a per share, per day basis
• Losses are limited to a shareholders adj basis in S corp stock + direct shareholder loans to the corp
- in a P/S, liabilities increase basis
An S corp shareholder is permitted to deduct (on their personal income tax return their pro rate share of the S
corp loss based on the following limitation:
Loss limitation = Basis + direct shareholder loans – distributions
AAA = Accumulated Adjustments Account = the cumulative amount of S corp income or loss (like R/E)
Once an S corp election is terminated or revoked, a new election cannot be made for 5 years unless the IRS
agrees otherwise.