[REG] Corporations

Non-taxable transaction on incorporation Sec. 351

1. Tax impact on contributing shareholders

- No gain or loss is recognized by shareholders who control(80% voting+nonvoting stock) the corporation soley in exchange of stock(property)

- Gain is recognized if

   1) stock is received for services rendered

   2) control requirement not satisfied > realized gain 

   3) control requirements satisfied, boot received > realized gain/boot

   4) liability relieved, exceeds basis of property transferred

   5) The character of gain depends on the type of property transferred

 - SH's inital basis for stock received

     Cash contributed + Basis of property transferred + Gain recognized - boot received

 

2. Tax impact on corporation

 - No gain or loss is recognized by corp on issuance, purchase or resale of stock

 - Corp's basis for contributed property

     Transferor's basis(비과세) + gain recognized by SH

 - Stock issued for services rendered> expenses

 - Holding period: includes the transferor holding period

    

Tax year

1) Either calendar year

2) Fiscal year, ex)4/1/20 ~3/31/21

3) 52-53 week tax year, ex)Last Sunday of December

* Change of tax year, must get IRS approval to change tax year

 

Tax accounting method

Cash basis	Accrual basis
revenue is actually or constructively received in cash or FMV of property	recognition occurs according to the rules of GAAP, revenue is the table when earned

1) Cash method

    cannot be used: inventory(exception: small company, ave annual gross receipts of 1M or less, for last 3yrs)

                               C corp, a Partnership that has a C corp as a partner

                                           

2) Accrual method

 - Large corporation(ave annual gross receipts of 30M for last 3yrs)

 - Tax shelter

- Manufacturer

   * Exception 1) small organization less than 30M/year, 2) personal service company

 

Income and Deduction

Rev
 1) income 2) revenue received in advance 3) dividend income

 4) Not taxable income: Life insurance proceeds+Int on state/city bond

 

Exp

1) Uniform capitalization rule:

    - all manufacturing Biz, Large retailers/whole sales w 25M 

    - Inventory cost: costs incurred in manufacturing, purchasing, holding property for sale>> capitalize, add to ending inv

      * Sales, mkt, fin, it. R&D > G&A exp

2) NOL (Deduction > Rev)

   - carryover indefinitely to offset 80% of taxable income, no carryback

   

3) Org cost

   - legal fee/ temporary directors cost/application fee for incorporation

   - Election to expense first $5K + Capitalize the remaining cost and amort over 15yrs(180M)

   - Beg the month Biz begins

~ 50K	5K + remin cost * 1/15 * M/12
50K ~ 55K	[5K - (org cost -50K)] + Remian cost * M/180
55K~	0 + cost * 1/15 * M/12

 

Start-up cost

 - biz expenses that are paid or incurred before the start of the corporation's activities

   ex)mkt survey, advertisement, personnel hiring, and training cost

 - Election to expense first $5K + Capitalize the remaining cost and amort over 15yrs(180M)

~ 50K	5K + remin cost * 1/15 * M/12
50K ~ 55K	[5K - (org cost -50K)] + Remian cost * M/180
55K~	0 + cost * 1/15 * M/12

 

Stock issue cost

  - no capitalization, no deduction

 

4) Charitable contribution deduction (CCD)

 - the deduction is limited to 10% of TI before CCD&DRD, capital loss carry back after NOL C/O

 - excess contribution over 10% of TI is carried forward for 5yrs, deducted only to the extent that the limitation of the subsequent year exceeds contributions made during that year

 - payment until April 15

- NOL일 경우 적용되지 않는다

 

5) DRD

- amount of DRD, determined by the stock ownership, limited to taxable income

Stock % < 20%	Lessor of 50% of Divi / 50% of TI before DRD + NOL
20% < Stock <80%	Lessor of 65% of Divi / 65% of TI
80% < Stock	100% of Divi

* Deduction of 50%/65% of Divi > NOL, Taxable limitation does not apply

* drd는 "income-deduction"이 세트로 움직이는 개념이라서  NOL인 경우에도 포함된다.

 

No DRD

- Debt- financed portfolio stock, Holding period 45 days or less

- Personal service corporations, personal holding companies, S corporations

 

Calculate CCD, DRD

Gross income <Special Deductions(not included)> : CCD, DRD, capital loss carry back Subtotal A <CCD>: no gift($25 for biz gifts), no political contributions, max 10% of A, 5y carry forward, accrued amount ok until April 15th Subtotal B <DRD>: lessor of % * dividends received or %* DRD, NOL carryforward, capital loss carry back Taxable income or loss Net operating loss  no CB, CF forever, offset 80% of future income

 

 

6) Other exp.

Business interest expense deduction limitation

sum of 
- business interest income
- 30% of adjusted taxable income(ATI) 
- floor plan financing interest expense
* ATI: biz income excluding all int income and expense
* disallowed biz int can be carried forward indefinitely
* limitation does not apply to taxpayers with average annual gross receipts of 30M or less for the prior three taxable years

* floor plan까지는 시험에 나오지 않는듯 하다

 

 

Capital loss

- capital loss can be offset against capital gain only

- excess capital loss is not deductible, CB 3yrs + CF 5yrs

- All capital losses are short-term

	Individual	Corporation
Deduction	CL offsets CG + 3K	CL offsets CG only
Excess CL	Excess CL carryover indefinitely	Excess CL cb 3yrs, co 5yrs
Character	ST or LT	ALL ST

 

Estimated expenses under the reserve method

- To deduct provision for expense/ accrued expense

- Expense must be filed and determinable 100%

  > Nondeductible expense: bad debt exp, warranty exp, litigation loss, allowances

 

Depreciation and amortization

https://letslearnsomethingnew.tistory.com/230

[REG] Depreciation(MACRS, sec179, bonus depre), Amortization

 

Research and development expenditures

- Expensed in the year incurred/ Capitalized over 60 months or more

 

Casualty loss is an ordinary loss

    FMV before the casualty - FMV after the casualty - insurance reimbursement = Net deductible casualty

 

Related party transactions

* related party

1) C corp & Major SH, more than 50% shareholder

2) C corp and S corp if the same person owns more than 50% of each corp

3) Corp and partnership if the same person owns more than 50% of each corp

4) if the related person(parent, child, bro, sis, spouse) is a shareholder in a corp

- Losses realized in related party transactions are not recognized

- Disallowed loss is recognized up to gain realized on a later sales to 3rd party

 

 

 

 

Reconciliation of book and taxable income(M-1)

Book Income

(+) Expenses in the book not in tax

    federal income tax

    net capital loss

    excess charitable contribution over TI limitation

    a business gift in excess of $25

    nondeductible life insurance premium paid in case the corporation is a beneficiary

    business meals 50%

    No entertainment expense 

    political contribution

    allowance for bad dect under reserve method

    interest expense for tax-exempt income

    book depreciation in excess of tax depreciation

    penalties

    organization expenditure written-off

   warranty expense accrued

 (+) Income in tax return not in book

   revenue received in advance

   dividend income in the year of receipt

 (-) Expenses in tax return not in book

   CL co /cb

   CCD co

   tax depreciation in excess of book depreciation

   Sec.179 deduction $1,050,000

   amortization of organization expenditure

 (-) Income in book not in tax return

   tax-exempt income

   federal income tax refund

   dividend income in the year of receipt

   life insurance proceeds                                                     

   Taxable income

 

* Organization cost

	2021	2022	2023
GAAP	<50K>	0	0
TAX	<8K>	<3K>	<3K>

50K => 5K + 45K * 1/180

 

Analysis of retained earnings per books(M-2)

Beginning Retained Earnings

(+) Net income after tax         

(+) Other increase(federal income tax refund)

available for Distribution

(-) Distribution(cash, FMV of property)

(-) Other decrease(RE appropriation, contingent lib, legal restriction, sinking fund)

12/31 End RE

 

Earnings and profits, and distributions

1) Earnings & Profits

      Beg accumulated E&P(AEP)

(+) Current Earnings & Profit 

(+) Gain on distribution of appreciated property

      Amount available for distributions

(-) Distribution to SH (Cash, FMV of property)

     Ending Accumulated E&P

 

2) Non-liquidating(current) distribution

Distributions: RE -> SH's basis in the stock(return of capital) -> Gain from sale of stock(capital gain)

Tax impact on shareholders  

   Dividend income= Cash + FMV of property distributed - liability assumed

   Shareholder's basis in distributed property = FMV of property distributed

Tax impact on the corporation

   Distribution of appreciated property(FMV> basis) > Gain as if corp sold to SH

   Distribution of property is subject to a liability, FMV of distributed property shall be treated no less than liability

   No loss is recognized on the non-liquidating distribution

 

3) Liquidating(complete) distribution

- A corporation recognizes G/L on a liquidating distribution of property

- Shareholders recognize capital G/L

      Cash and FMV of property received - Basis in stock = Gain(loss)

- Liquidation of subsidiary(80%), parent or subsidiary, No G/L

- Liquidation of the subsidiary, the basis for assets, and all tax attributes are transferred to the parent corporation

 

 

 

Stock Redemption 돈받고 주식을 반납하는것

 - treated as a sale or exchange (capital gain or loss to shareholders)

- Expenses incurred, not deductible by corp

 

 

Section 1244-small business corporation(SBC) stock 창업주가 소유하던 초창기 시절주식

- domestic corp with a capital of $1000K or less(received in sec351 transaction)

- Loss: Upto $100K(MFJ) + excess capital loss

- SH: individual, partnership, original holder of stock

 

Filing and payment of tax

Corporate income tax

- C Corp: F1120

- Due date: April 15th 

- 6-month Extension, file separate form, corporate income tax should be paid

- tax rate 21%

 

Estimated tax payments

- corporate income tax is $500 or more

- four equal installment payments are due on April 15th, June 15th, Sep 15th, Dec 15th

- Methods

  1) 100% of current year tax

  2) 100% of prior year tax

        Requirement: full 12M Biz, Paid tax

      * Large co. with TI>1000K cannot use prior year tax

  3) Annualized method  

 

Penalties

  - Estimated tax

  - Underpaid required tax: 0.5%/M (Max25%) -> Waived upon 90% rule

  - Non-filed Return: 5%/M(Max25%)

  - Int on late payment

  - Accuracy-related penalty(20% of tax due)

  - Civil fraud penalty(fraud, evasion, false, fictitious): 15%/M(Max75%)

 

Accumulated earnings tax(AET) and Personal holding company(PHC) Tax

충분히 배당을 하지않을 경우 내야하는 penalty 성격의 tax

 

Accumulated earnings tax (AET)

- AET can be avoided if sufficient dividends are paid

- regular tax + AET

- C corp, except PHC

- Consent dividends:

    hypothetical dividends, treated as if they were paid on the last day of Tax Y

    dividend income for SH, increase stock basis for SH

- Accumulated earnings credit

     Greater of $250K - AE&P / reasonable nees of the business

 

Personal holding company tax (PHCT)

- PHCT can be avoided if sufficient dividends are paid

- should be self-assessed by filling a separate schedule along with the regular tax return

Requirement, Stockownership Test

1) 5 or fewer SH > 50% 

     The constructive ownership rule applies

      closer than 3촌

 2) PHCT 투자회사
      Div inc + Int inc + Rental inc + CG = Gross income    > 60%

- Schedule-PH File with form 1120

 

 

 

Affiliated and Controlled corporations

Affiliated group

- Parent-subsidiary chain at least 80%

- Consolidated return

Advantage of the consolidated return Loss, offset Capital loss, offset Gain from inter-company transactions is deferred

Disadvantage of the consolidated return Irrevocable election Additional cost to maintain books Loss from inter-company transactions is not recognized

 

- Tax effect on consolidation

   1) Loss from one co. can offset income from another co.

   2) Capital loss from one co can offset CG from another co.

   3) Cain/Loss from inter-co transactions are deferred

       내부거래 제거하면서 과세이연효과 있음

 

Controlled group

- Affiliated group: parent & subsidiary, control( > 80%) can file a consolidated return, election > IRS

- Bro, Sis co.: SH with 5/ fewer SH > 80%

 

Corporate reorganizations

- No gain or loss is recognized in case of one of 7 types of reorganization

- Qualified non-taxable corporate reorganization: transferEE issues stock to the transferor at least 50% of the value

 

Acquisition Type

Type A_merger 100%/ consolidation

Type C_ partial Merger with dissenting SH

Type B_ stock for stock

Type D_: divisive(spin-off/split-off/split-up)

Type E_ recapitalization within one Co

               Exchange stock for stock: NT

                                stock for bone: T

                                bond for stock: NT

                                bond for bond: T

 Type F: Name, address change

 Type G_ Bankruptcy

 

- Tax effect of reorganization

   1) no G/L by transferEE and transferOR corporation

   2) transaferEE Basis: OR Basis+recog gain

   3) No G/L on the disposition of stock, party to the reorganization

 

- Basis for SH: Basis surrendered + gain recog - boot received = Basis in new stock & securities received

- carryover of NOL of acquired corporation to acquiring corporation

  * First Y limitation: Acquiring corporation's TI x Days after acquisition date / Total days in taxable year

  * Remaining NOL fully utilized in second and following years