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Module 36 Taxes: Corporate:: C % Es C, E, E, We, %, C, O, W e e G, Z C C e S V e C C S C Z

The document discusses various tax rules regarding losses and deductions for corporations, including limitations on deducting losses from transactions between related parties, differences in treating capital losses versus ordinary losses, and rules around net operating losses and the dividends received deduction. Capital losses can only offset capital gains and any excess is carried forward or back according to IRS rules. Casualty and bad debt losses are deductible according to different standards than personal casualty and bad debt losses for individuals.

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Zeyad El-sayed
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22 views2 pages

Module 36 Taxes: Corporate:: C % Es C, E, E, We, %, C, O, W e e G, Z C C e S V e C C S C Z

The document discusses various tax rules regarding losses and deductions for corporations, including limitations on deducting losses from transactions between related parties, differences in treating capital losses versus ordinary losses, and rules around net operating losses and the dividends received deduction. Capital losses can only offset capital gains and any excess is carried forward or back according to IRS rules. Casualty and bad debt losses are deductible according to different standards than personal casualty and bad debt losses for individuals.

Uploaded by

Zeyad El-sayed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as RTF, PDF, TXT or read online on Scribd
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570 MODULE 36 TAXES: CORPORATE

held the stock for more than two years before the dividend is announced. To the extent the non-
taxed portion of an extraordinary dividend exceeds the adjusted basis of the stock, the excess is
recognized as gain for the taxable year in which the extraordinary dividend is received.
(1) The nontaxed portion of a dividend is generally the amount that is offset by the DRD.
(2) A dividend is considered "extraordinary" when it equals or exceeds 10% (5% for preferred
stock) of the stock's adjusted basis (or FMV if greater on the day preceding the ex-dividend
date). ' I

(3) Aggregation of dividends


(a) All dividends received that have ex-dividend dates that occur within a period of 85 con-
secutive days are treated as one dividend. .
(b) All dividends received within 365 consecutive days are treated as extraordinary dividends
if they in total exceed 20o/d of the stock's adjusted basis.
(4) This provision is not applicable to dividends received from an affiliated corporation, and does
not apply if the stock was held during the entire period the paying corporation (and any prede-
cessor) was in existence.
EXAMPLE: Corporation X purchased 30% of the stock of Corporation Yfor $10,000 during June 2008.
During December 2008 X received a $20,000 dividendfrom Y. X sold its Y stockfor $5,000 in March 2009.
Because the dividend from Y is an extraordinary dividend, the non taxed portion (equal to the DRD al-
lowed to X) $20,000 x 80% = $16,000 has the effect of reducing the Y stock basis from $10,000 to $0, with
the remaining $6,000 recognized as gainfor 2008 At time of sale, the excess of sale proceeds over the
reduced stock basis $5,000 - $0 = $5,000 is also recognized as gain.
10. Losses in the ordinary course of business are deductible.
(1) Loss is disallowed if the sale or exchange of property is between
(a) A corporation and a more than 50% shareholder,
(b) A C corporation and an S corporation if the same persons own more than 50% of each, or
(c) A corporation and a partnership if the same persons own more than 50% of the corpora-
tion, and more than 50% of the capital and profits interest in the partnership.
(d) In the event of a disallowed loss, the transferee on subsequent disposition only recognizes
gain to the extent it exceeds the disallowed loss.
(2) Any loss from the sale or exchange of property between corporations that are members of the
same controlled group is deferred (instead of disallowed) until the property is sold outside
the group. See controlled group definition in Section D.2., except substitute "more than 50%"
for "at least 80%."
(3) An accrual method C corporation is effectively placed on the cash method of accounting for
purposes of deducting accrued interest and other expenses owed to a related cash method
payee. No deduction is allowable until the year the amount is actu~lly paid. ,
EXAMPLE: A calendar-year corporation accrues $10,000 of salary to an employee (a 60% shareholder)
during 2008 but does not make payment until February 2009. The $10,000 will be deductible by the corpora-
tion and reported as income by the employee-shareholder in 2009.
(4) Capital losses are deductible only to the extent of capital gains (i.e., may not offset ordinary
income).
(a) Unused capital losses are carried back three years and then carried forward five years to
offset capital gains.
(b) All corporate capital loss carrybacks and carryforwards are treated as short-term.
(5) Bad debt losses are treated as ordinary deductions.
(6) Casualty losses are treated the same as for an individual except
(a) . There is no $100 floor
(b) If property is completely destroyed, the amount of loss is the property's adjusted basis
(c) A partial loss is measured the same as for an individual's nonbusiness loss (i.e., the lesser
of the decrease in FMV, or the property's adjusted basis)
(7) A corporation's net operating loss is computed the same way as its taxable income.
(a) The dividends received deduction is allowed without limitation.

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