2013 cch basic principles ch16 piii

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Transcript of 2013 cch basic principles ch16 piii

  • 1. Chapter 16Partnerships, Corporations,and S CorporationsPart III: C Corporations2012 CCH. All Rights Reserved.4025 W. Peterson Ave.Chicago, IL 60646-60851 800 248 3248www.CCHGroup.com

2. Chapter 16 Contents 1. Corporation Defined 2. C CorporationsSpecial Types 3. C CorporationsTax Years 4. C CorporationsAccounting Methods 5. C CorporationsTax Formula 6. C CorporationsComparison with Individual Taxpayers 7. Income Items Requiring Special Treatment 8. Exclusions Requiring Special Treatment 9. Deductions Requiring Special TreatmentOrganizationalExpenditures10. Dividends Received DeductionExample 111. Dividends Received DeductionExample 212. Deductions Requiring Special TreatmentCharitable Contributions13. Charitable ContributionsExample14. Deductions Requiring Special Treatment15. Deductions Requiring Special TreatmentBond and StockRedemptions at a Premium16. Deductions Requiring Special TreatmentCompensation andEducational ReimbursementChapter 16, Exhibit Contents A CCH Federal Taxation Basic Principles2 of 92 3. Chapter 16 Contents 17. Educational Expenses 18. Rules For Net Operating Losses (NOLs) 19. Net Operating Losses (NOLs)Example 20. Capital Gains and Losses 21. Depreciation Expense 22. Code Sec. 291 Depreciation for CorporationsExample 23. Reconciling Book and Taxable Income 24. Corporate Tax Rates 25. Corporate Tax Credits 26. Template for Computing the Foreign Tax Credit/Deduction 27. Foreign Tax CreditsExample 28. Formation of CorporationsOverview of Code Sec. 351 29. Code Sec. 351 Contribution of Part Property/Part ServicesExample 30. Code Sec. 351 ContributionsTax Effect on ShareholdersChapter 16, Exhibit Contents B CCH Federal Taxation Basic Principles3 of 92 4. Chapter 16 Contents 30. Code Sec. 351 ContributionsTax Effect on Shareholders 31. Code Sec. 351 ContributionsTax Effect on Corporations 32. Code Sec. 351 ContributionsExample 1 33. Code Sec. 351 ContributionsExample 2 34. Nonstock DistributionsEffect on Shareholder of C CorporationChapter 16, Exhibit Contents C CCH Federal Taxation Basic Principles4 of 92 5. Corporation DefinedDefinition of Corporation. Either an organization incorporatedunder state law, or an unincorporated association that haschecked the box for corporate tax treatment on Form 8832(Entity Classification Election). Code Sec. 7701; Reg.301.7701-1 to 3.Chapter 16, Exhibit 1a CCH Federal Taxation Basic Principles5 of 92 6. Corporation Defined Two Classifications of Corporate Entities. C corporations. Taxpaying entities. (This results in what isknown as a double tax effect. The corporation computes tax onthe net income. When a corporation distributes its income, thecorporations shareholders report dividend income on theirown tax returns.) S corporations. Not subject to regular corporate income tax.They are treated in a manner similar to partnerships, i.e., aspass-through entities, in that net profit or loss flows through tothe owners to be reported on their separate returns.Chapter 16, Exhibit 1b CCH Federal Taxation Basic Principles6 of 92 7. C CorporationsSpecial Types Professional association [PA]. An association of professionals (e.g., accountants, doctors, lawyers) treated as a C corporation for tax purposes if it has: a. Organized under a states ProfessionalAssociation Act; AND b. Checked the box on Form 8832 forcorporate tax treatment. [One individual maybe a professional association.]Chapter 16, Exhibit 2a CCH Federal Taxation Basic Principles7 of 92 8. C CorporationsSpecial Types Personal Service Corporation [PSC]. C corporation whose shareholder-employee(s) owns over 10% of the stock and provides personal services (e.g., acting, entertainment, medical, legal, consulting, or other services performed through their personal efforts). Generally, a PSC must use a calendar tax year. Code Sec. 441(i). PSCs are subject to a flat 35% tax rate.Chapter 16, Exhibit 2b CCH Federal Taxation Basic Principles8 of 92 9. C CorporationsSpecial TypesPersonal Holding Company [PHC]. A nonexempt,closely held corporation, with a significant portion ofits income that is passive in nature (e.g., fromdividends or interest). PHCs are subject to a 15%penalty tax on excess personal holding companyincome in addition to the regular corporate income tax.Chapter 16, Exhibit 2c CCH Federal Taxation Basic Principles9 of 92 10. C CorporationsSpecial Types Q: When is a corporation deemed to be closely held? A: When more than 50% of the value of the outstandingstock was owned by five or fewer individuals duringthe second half of the year. Q: When is passive income deemed to be significant? A: When passive income is 60% or more of adjustedordinary gross income [AOGI]. AOGI is grossincome less capital gains and Code Sec. 1231 gains,less adjustments such as certain expenses connectedwith rental and royalty income.Chapter 16, Exhibit 2d CCH Federal Taxation Basic Principles10 of 92 11. C CorporationsTax Years Every newly organized corporation other than a personal service corporation (PSC) has the unrestricted right to select its annual tax year, regardless of the tax years employed by its shareholders. PSCs generally must use a calendar year-end. However, they may use a fiscal year-end under the same conditions as listed for S corporations.Chapter 16, Exhibit 3CCH Federal Taxation Basic Principles11 of 92 12. C CorporationsAccounting MethodsMost corporations must use the accrual method.The cash method MAY be used by C corporations thathave average annual gross receipts of $5 million or lessin the three preceding years, or by PSCs.Chapter 16, Exhibit 4 CCH Federal Taxation Basic Principles12 of 92 13. C Corporations Tax Formula Ord. and Cap. Income From Whatever Source DerivedExclusionsCost of Goods Sold=Gross IncomeDeductions=Taxable Income (Loss)xTax Rate=Gross Regular Tax LiabilityCredits (If Any)=Net Regular Tax Liability+Alt. Minimum Tax (If Any)+FICA Taxes+Accumulated Earnings Tax (If Any)+Personal Holding Co. Tax (If Any)=Net Tax Due or RefundableChapter 16, Exhibit 5a CCH Federal Taxation Basic Principles13 of 92 14. C CorporationsTax FormulaAGI, standard deductions, personal exemptions, at-risk rules, and passive activity loss rules do notpertain to regular C corporations.Chapter 16, Exhibit 5b CCH Federal Taxation Basic Principles14 of 92 15. C CorporationsComparison with Individual Taxpayers IncomeSimilar Treatment Different Treatment Most items of gross income receive theBond Redemptions Discounts. same tax treatment. Sinking fund income. Cost of goods sold (actually, part of gross income) are similar.ExclusionsSimilar Tax Treatment Different Treatment Most exclusions receive the same taxCapital contributions. treatment.Gain/loss on sale of treasury stockChapter 16, Exhibit 6aCCH Federal Taxation Basic Principles15 of 92 16. C CorporationsComparison with Individual TaxpayersExpensesSimilar Tax Treatment Different Treatment Travel, Meals and Entertainment Organizational Expenditures Insurance Premiums Dividend Received Deduction Research and Experimental Charitable Contribution Fines (not deductible) Interest Expense Bad Debts Amortization of Original Issue Worthless Securities Bond Redemptions-Premiums Casualty Losses (same as individuals business use Stock Redemptions (not deductible)casualty losses) Compensation Taxes Educational Expenses Depreciation (except Sec. 1250 recapture) Net Operating Losses Amortization Capital Gains and Losses Depletion Political Contributions & Lobbying Business Investigation Expense Business Start Up ExpenseChapter 16, Exhibit 6bCCH Federal Taxation Basic Principles16 of 92 17. Income Items Requiring Special TreatmentBond Repurchases.A corporations income INCLUDES the original issue price of itsown bonds being repurchased, MINUS (i) The repurchase price, MINUS (ii) Any premium already recognized on the originalissuance. PLUS (iii) Any discounts previously deducted.Sinking Fund Income.Interest or other income from property in a sinking fundestablished to satisfy an obligation IS INCLUDED, even if in thehands of a trustee (since both funded and nonforfeitable).Chapter 16, Exhibit 7 CCH Federal Taxation Basic Principles17 of 92 18. Exclusions Requiring Special Treatment Treasury Stock. No gain or loss is recognized by a corporation on the sale or exchange of its own stock.Chapter 16, Exhibit 8a CCH Federal Taxation Basic Principles18 of 92 19. Exclusions Requiring Special TreatmentCapital Contributions.Gifts from nonshareholders are excluded.Noncash gifts. If a gift is property other than money, thecorporation carries it with a zero basis.Cash gifts. When cash is contributed, reduce the basis ofcorporate property in the following order:(i) Property acquired within 1 year after thecontribution;(ii) Then depreciable property in proportion to relativebases;(iii) Then, if there is a remaining balance, NON-depreciable property acquired over 1 year after thecontribution.Chapter 16, Exhibit 8b CCH Federal Taxation Basic Principles19 of 92 20. Exclusions Requiring Special Treatment Pro rata contributions from shareholders are excluded. Whether voluntary or by assessment, shareholder contributions are excluded from corporate income. The corporation carries the property at the same basis as had been reported by the contributing shareholder. That shareholder gets no deduction, but does get an increase in stock basis, equal to the basis in the property contributed.Chapter 16, Exhibit 8c CCH Federal Taxation Basic Principles20 of 92 21. Deductions Requiring Special TreatmentOrganizational Expenditures Amortizable expenditures. Organizational expenses qualify for amortization if:(a) = Incurred incidental to formation of the corporation (e.g.,legal fees for drafting the charter, state incorporationfees, expenses for temporary directors andorganizational meeting costs), and(b) = Incurred before the end of the tax year in which thecorporation commences business. Amortization period must be over 180 months, sta