Professional Documents
Culture Documents
Things to review
1) Charitable contributions
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
Tax return due date for C corp is April 15 and the extended due date is Oct 15
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
1. When a parent company having 80% or more control choose to file a consolidated tax return with
its affiliates/subsidiaries
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.
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
It is a special deduction and generally applies as a percentage of the amt of dividend income received.
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.
Taxable Income for the DRD purposes is calculated without the following items:
A CFC is a foreign corp that is more than 50% owned by one / more US shareholders (Taxpayer + all
other UsS shareholders)
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.
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 :
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.
1.4: Deductions
C Corp are only allowed to amortize and deduct organizational expenses such as state fees of
incorporation, accounting and legal cost incidental to incorporation, temporary director fees and
organizational meeting expenses
2.Deductions
1) Business Gifts: Business Gifts are deductible up to maximum of $25 per person per year.
2) Business Meals: An employer may only deduct for tax purpose 50% of business meals expenses
that are neither lavish nor extravagant( No element of entertainment should be present)
3) Compensation: Deduction for compensation are allowed to $1 MM (includes salary +
performance based commissions and bonuses)
4) Business travel for meeting clients: Fully deductible
5) Fedral payroll Taxes: Fully deductible
C Corp can deduct charitable contributions upto maximum of 10% of adjusted taxable income.
Any excess contribution over this limit may be carried forward to a maximum of 5 succeeding
years.
In computing ATI deductions for charity, Domestic Productions Activity (DPAD), Capital Loss, Net
operating Loss (NOL), carryback and Dividends received (DRD) are not allowed.
5. Sec 197 – Intangibles
According to IRC, cost incurred to acquire Sec 197 intagibles are amortized over a period of 15
years or 180 months.
It includes:
Acquired goodwill
Patents
Copywriths
Covenant not to compete
Franchise
Trademark
Customer based intangibles
Supplier based intangibles
6. Bad Debts
Unlike GAAP which allows a deduction for estimated bad debts computed using
reserve/allowance method, for tax purpose bad debts are deducted only on actual write off
given rise to a temporary difference between book and tax.
An Org may elect to expense immediately $5000 of the first $50,000 of incorporation expense or
cost of organizing a corporation in the year of incorporation
For expenses in excess of $50,000 the initial write-off is reduced dollar to dollar .
The remainder is amortized over a period of 180 months from the start up month
8. Accural
When a corp follows accrual basis of accounting, the expenses are deducted when
1) All events have occurred that can establish the amount of liability with reasonable
accuracy and
2) Economic performance occurs when the property or services are used by the taxpayer
3) However for tax purpose accured bonuses and vacation pay are deducted only when
they are paid within 2 ½ of the close of the corp tax. For example, if a corp is on a
calander year, than these acccured items must be paid before March 15 of the following
year.
9. Capital Losses
A corp may deduct capital losses only to the extent of capital gain during the year.
Net Capital Losses not deducted in the current year are allowed to be carried back 3 years and
carry forward 5 years to be deducted against capital gains during those year
It is always short term capital loss irrespective whether the loss was short term or long term.
In reconciling book income to taxable income, calculation begins by increasing/decreasing items that
cause taxable income to be higher/ lower.
1. Tax and Penalties – Tax and Penalties are never deductible, even if the penalty is in the nature of
additional interest
2. Corporations that File a short year tax return (taxable period is less than 12 months )
It is imposed by the IRS in corporation that unreasonably accumulate excess earning instead of
distributing dividends to shareholders. The tax is 20% of undistributed income subject to
deductions and limitations such as
a) Credit of $250,00 for regular corp or $150,000 for personal service corp
b) Reduce for actual dividends paid or consent dividends
c) Reduce for federal income taxes, capital losses in excess of limits and charitable
expenses
Note : Accumulated Earning credit can be greater of
a) $250,000/ $150,000 or
b) Amounts set aside for reasonable needs of business
AET can be eliminated /reduced if
o Actual dividends are paid during the tax year or within 2 ½ months after the tax year
o Accumulated earnings which have reasonable needs as demonstrated by a specific,
definite and feasoable plan for use.
DRD is not allowed to personal service / Holding companies. They must include 100% of
dividends received from unrelated domestic corp while computing their taxable income.
5. Foreign Income Taxes
Corp in general are taxed on world wide income. So, double taxation of the income to be avoided by
taking a foreign tax credit for income that is already taxed in the foreign country. This credit can be
carried back 1 year or Forward 10 years.