BA128A Agenda 4/19
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Questions from lecture
Project
Review C3
Assignment - C3-38,51,58
Additional - C3-40,43,45
Accounting methods and
calendar year of corporations
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Cash
Accrual
Hybrid
Fiscal year vs. calendar year
limitations on Personal Service
Corporations and S-corps - prevents deferral
of income
Deductions and losses - a
comparison to individual rules
• No itemized deductions
• No hobby losses or net investment interest
deduction limitations
• No personal exemption
• No section 212 production of income expense
deduction
• No non-bus bad debts, alimony, IRA contribution
• Casualty losses are fully deductible
• No deduction for interest expenses incurred to
borrow tax-exempt securities
Capital Gains and Losses
• Same process of netting LTCG, LTCL;
STCG, STCL
• Additional 20% depreciation recapture for
section 1250 property
• No $3000 capital loss offset against
ordinary income; carry back 3 and forward
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• No capital gain rate preferential; same
treatment as ordinary income
Organization and start up expenditures
• Capitalized and amortized for a period of >= 60 months
• Election must be made
• Organization expenditures
– expenses incurred for the creation of corp
– legal and accounting services
– fees paid for incorporation
– expenses for temporary directors and organization meetings
– exclude : expenses incurred in issuing and selling stock or transfer
of assets to corporation
• Start up expenditures
– expenses to investigate the creation or acquisition of trade/business
– expenses to create an active trade/business e.g. survey of potential
markets, analysis of available facilities, advertisements for opening
of business, training of new employees and etc.
– if business is discontinued or disposed of before amortization
period, can deduct as a loss
Charitable Contributions
• 10% of adjusted taxable income
• adjusted taxable income excludes charitable contribution
deduction, NOL carryback, capital loss carryback, dividendsreceived deduction but INCLUDEs NOL carryover
• timing of deduction: for accrual method taxpayers, can deduct in
the year Board of Directors authorizes the contribution and that the
contribution is paid on or before the 15th day of the 3rd month
following the end of the accrual year
• Similar rules regarding ordinary income and capital gain property
– Ordinary income property - at FMV -minus ordinary gain ie
adjusted basis, exceptions: inventory, scientific research
property and computer technology related property - at FMV(0.5*ordinary gain)
– Capital gain property - at FMV exception: unrelated use
property and appreciated property to private nonoperating
foundations
Special deduction - Dividends-received
deduction
• Include dividends in Gross Income
• receive dividends deduction <20% - 70% deduction,
>=20% but < 80% - 80% deduction
• limitation - lesser of 70%(80%) of dividends or
70%(80%) of taxable income without regard to any
NOL deduction, capital loss carryback or dividendsreceived deduction itself
• Does not apply if an NOL results after the deduction is
taken into account
• If ownership >=80% - receive full 100% dividends
deduction with no limitations - members of affiliated
group
Restrictions on dividend-received
deduction
• Dividends received from foreign corp - not
deductible
• Stock held for 45 days or less - prevent
corporate taxpayers from buying stock,
receiving dividends deduction and at the same
time able to deduct capital loss at the time of
sale
• Debt-financed stock - prevent corporate
taxpayers from borrowing $ to buy stock
where both interest expense and dividends are
deductible
Net Operating Loss
• Carry back 2 (earliest of the 2 first) and
forward 20 (first preceding year)
• May elect not to carry back, once elected
for the year, irrevocable
• Deduction sequence
– Charitable Contribution (include NOL
carryover)
– Dividends received deduction (not include NOL
carryover)
– NOL
Corporate Income Tax Liability
• $0-$50000
• Amount over
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$50000 - $75000
$75000 - $100000
$100000 - $335000
$335000 - $10m
$10m - $15m
$15m - $18.33
>$18.33m
15%
25%
34%
39% - phase out
34% - flat 34%
35%
38% - phase out
35% - flat 35%
• PSC taxed at 35% regardless of income
Transactions between controlling
SH and corporation
• Defined as >50% of stock ownership
• constructive ownership rules applies
• gain on sale/exchange transaction - selling of
depreciable property between controlling SH and
corporation is treated as ordinary income
• no deduction for losses on sale of property
• different accounting methods -defers deduction for
accrued expenses and interests until income is
recognized by the other party
Controlled group of corps
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Parent-subsidiary controlled groups
Brother-sister controlled groups
Combined controlled groups
prevent corporation from breaking into smaller corporations to enjoy
lower tax rates
• share progressive tax rate schedule
– treat as one corporation when calculating tax rates
• required allocation on
– section 179 depreciation
– business tax credits
– AMT statutory exemption
• Other limitations - sale of depreciable property between the corps in
the same group - subject to ordinary income, no early accrual of
expenses and interests if accounting methods are different between the
corps, deferral of loss of sale transactions between corps until a sale
outside the group
Consolidated return
• File one income tax return
• Usually apply to the parent-subsidiary group of corps and
members of an affiliated group
• Adv - profit of one corp and offset losses of another, profit
from intercompany transaction can be deferred until a sale
to outside the group occurs
• Disadv- loss on intercompany transaction is deferred,
section 1231 loss of one corp needs to be netted against
1231 gain of another corp, losses on an unprofitable
member may reduce deduction limitation of the group,
additional administrative costs