Module 3 – C Corporations

C Corporations

 For a C corp, after the corporate income tax is paid on the business income, after any
distribution made to stockholders are taxed again at stockholders tax rates as dividends. Income
paid to shareholder as wages are also taxed in shareholders personal income.
 In its first year of filling taxes can choose an accounting method (cash/accrual/hybrid) on the
initial tax return it files. (Note: All C – Corp (except tax shelters) having 3 years annual avg gross
receipt of of $26M or less are eligible to use the cash method of accounting.)
 A C – Corp is the only entity that can adopt any tax year end that it chooses. A Taxable year can
be :
 Calander year with a Dec 31 year end
 Fiscal year ending on the last day of any month other than December
 52-53 week year/ period ending on the same day of the week

SEC 351

 According to Sec 351 of the IRC in the event of formation of a corporation, any contribution of
cash and property (not services ) in exchange of stock is non-taxable exchange as the
shareholders receive 80%or more control.
 However if the shareholders contributing property receive less than 80% control then they must
be reported at FMV as of date of contribution and recognize gain and loss. The gain or loss is
calculated as the difference between the FMV and the carryover basis.
 Also shareholders contributing services in exchange of stock must recognize ordinary income
equal to the FMV of the consideration received under all circumstances.
 Conditions that allow tax free formations
 One or more persons transfer the property (cash or property ) to the
corporation
 The transfer of property is in exchange for stock only
 Have 80% or more control.
 A relief of indebtness is generally a taxable event, however transfer of a asset subject to
mortage is non taxable except in the following 3 situations.
a) If the transfer is made to avoid tax
b) If there is no bona fide purpose for the transfer of mortage
c) If the aggregate amt of debt transferred exceeds the shareholder’s aggregate basis the
properties transferred even if there is no tax avoidance and a bona fide business reason
exist for transfer of debt

Basis
Shareholder Basis = Cash + Carryover basis of property contributed - Mortgage assumed by Corporation
+ Gain Recognized

Corporation Basis = Carryover Basis + Gain recognized

1.2: C – Corp Income Tax Return = Form 1120

1. When a parent company having 80% or more control choose to file a consolidated tax return with
its affiliates/subsidiaries

1) Certain Inter-company transactions are eliminated (profits, interest and dividends)

2) Losses (operating and capital ) of one corporation can offset the gains or profits of
another
3) A corporations NOL carryover may be applied against the income of the consolidated
group.

2. Which group may file for consolidated corporate returns?

Only affiliated group of corporations ( An Affiliated group is one or more corporations in a group
connected through stock ownership and having a common parent which owns at least 80% or more of
the voting power and total value of the stock) can file a consolidated tax return instead of filling
separately.

3. Advantages of Consolidated Tax Return

1) 100% intercompany dividend elimination

2) Netting of Capital gain/losses
3) Recognition of income on intercompany transactions can be deferred
4) Net operating Loss(NOL) carryover and any unused foreign tax credit (FTC) of
one group can be used by other group members etc.

4. What are covered Employees?

It includes CEO, CFO and 3 highest compensated officers and any formerly covered employee

1.3 Income

1.Lifo Method:

 Under the LIFO method the last of otem inventory purchased is the first one to be sold.
Therefore ending inventory on hand will consist of goods that were acquired the earliest.
  Rising prices = Lower taxable Income , Cost of Sales = Increase
 Lifo Conformanity rule: If Lifo is used for tax it must also be used for financial reporting
purposes.
 IRS permisiion is required only in the year a taxpayer has adopted a change in inventory method.

2. Capital Loss

 It can only deduct capital losses to the extent of capital gains during a tax year.
 Net capital losses not deducted can both be carried back 3 years and forward 5 years as short
term capital losses and deducted against the capital gains.
 No deduction is available against ordinary income.
 Any unsused net capital that is carried back or carried forward by a corp is always treated as
short term capital loss irrespective the nature of loss in the year sustained . This is based on
the premise that capital gains are always taxed at ordinary rates

3. Charitable Deduction

 In general when contribution of Inventory is made to aqualified organization, the amount of

charitable deduction is equal to the lower of FMV or tax basis of the property donated.

4. Dividend Received Deduction

It is a special deduction and generally applies as a percentage of the amt of dividend income received.

Deduction rates are as follows:

1. Dividends from less than 20% oened corporation = 50% DRD

2. Dividends from more than 20% owned corporation = 65% DRD
3. Dividends from from foreign source dividends from 10% or more owned foreign specified corp =
100% DRD

DRD % (only for 50% and 65%) is applied in the lesser of dividend income or taxable income

Exception – If applying the DRD % on the dividend income creates a net operating loss, DRD is again
calculated in the dividend income.

The Conditions to apply are

1) Only available to C – Corp, not LLC’s, S-Corp, or individuals

2) The stock must be held for more than 46 days during the 91 day period beginning on the
date 45 days before the ex dividend date.
3) Does not apply to preffered stock
4) Stock must not be debt financed.

Taxable Income for the DRD purposes is calculated without the following items:
 1) Net Operating Loss Deduction
2) Domestic production activities deductions
3) Deductions for dividends received
4) Any Adjustment due to the non taxable part of extraordinary dividend
5) Any capital loss carrybck to the tax year.

4. What is a SFC (Specified Foreign Corporation) and includes

1) All Controlled Foreign Coprorations (CFC’s) and

2) Any foreign corp which has a US corporate shareholder ( A US shareholder is a person
who owns 10% or more of total combined voting power of all voting classes of stock of a
corp.

5. What is a CFC ( Controlled Foreign Corp)?

A CFC is a foreign corp that is more than 50% owned by one / more US shareholders (Taxpayer + all
other UsS shareholders)

6. What is included in subpart F income of Controlled Foreign Corporations (CFC)

It generally includes income that is relatively movable from one taxing jurisdiction to another and is
subject to low rates of foreign tax. It consist of:

1) Foreign Personal Holding Company Income – Generally includes a CFC income from
dividends, interest annuities , rents, royalties and net gains on disposition of property
producing of any of the foregoing types of income.
2) Foreign Base Company Sales Income – Related- party purchases and saes of personal
property made through a CFC if the the country of the ccccccCFC incorp is neither the
origin nor the destination of the goods and the CFC itself has not manufactured these
goods.
3) Foreign Base Company Services – Income from services performed by aCFC for or on a
healf a related party where the sercices are performed outside the country of the CFC’s
incorporation.

7. Sec 965 Transition Tax

The new tax laws tax – free reparations of foreign income (with 100% DRD), it imposes a ‘’One Time’’
Sec 965 transition Tax on the foreign earning which have been accumulated post 1986 and as of end
2017. It is a one time tax which represents a tax on accumulated untaxed foreign earnings of 10% or
more specified foreign corporations.

The Tax rate for one time Sec 965 Transition tax is :

 15.5 % to the extent of US shareholders aggregate foreign cash position and

 8% for the remainder.
 Futher Taxpayer may elect this one time tax calculated as of end 2017 in 8 Installments over 8
Taxable years
 Installment (1 – 5) = 8% of the net Sec 965 Tax liability
 Installment 6 = 15% of the net Sec 965 Tax liability.
 Installment 7 = 20% of the net Sec 965 Tax liability
 Installment 8 = 25% of the net Sec 965 Tax liability.

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