Agenda BA128A-1 4/12
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Return exams
Go over exam
Projects
Review - Chapter C2
Assignment - C2-30,33,40
Additional - C2- 38,39
Forms of organizations
• Sole Proprietorship
– report all business income/loss on individual tax return
– adv - no double taxation, loss can offset other source of
income, withdraw/put $ without tax consequences
– disadv - income flow through, self employment taxes,
no tax-exempt fringe fringe benefits
• Partnerships
– tax reporting entity
– adv/disadv similar to sole proprietorship
– additional adv - partnership basis increase by share of
income - ie reduce gain recognized if sold later
Corporations
• C-corp, S-corp
• C-corp
– tax rate 15%- 35%
– SH not taxed on earnings but on distributions
– Dividends taxed at ordinary rate
– Capital gains taxed at disposal
– Adv - lower tax rate?, not taxed if earnings not
distributed (accumulated earnings tax limitation), can
deduct salary payments, tax free fringe benefits, use of
fiscal year vs. calendar year, disposal of qualified small
business stock can exclude half of the capital gain
– Disadv- double taxation, put or withdraw$ may have
tax consequences, no NOL/capital loss benefit in
current year
S-corp
• Flow through entity
– SH taxed like partnership for fed income tax
partnership but enjoy other advantages of
corporations like limited liability
– adv - exempt from corporate tax, losses flow
through to SH to offset other income, SH
contribute/withdraw $ without tax consequences,
SH basis increase when income is recognized
– disadv - lots of restrictions e.g. number of SH,
can’t choose fiscal year, no tax free fringe benefits,
all income taxed to SH
Check the box regulations
• Before this rule, entities are taxed as corp if possessed 3 of
the 4 characteristics, limitied liability, centralized
management, free transferability, continuityof life
• Emergence of LLC and LLP, taxed as partnership but with
limited liability
• Check the box regulations - allow unincorporated business
to elect to be taxed as partnership/sole proprietorship or
corporation
• Default rules - if doesn’t elect, taxed as partnerships (2 or
more) and sole proprietorship (1 person)
Legal requirements of forming
corporations
• Minimum amount of capital
• State incorporation - corporate charter by
state
• Articles of incorporation - purpose, name,
type of stock, board members,
• Issuance of stock
• Annual franchise fee and incorporation fee
Tax considerations in forming
corporations
• Tax free and taxable transfer of property
• Section 351 - allows the deferral of gains and loss upon
incorporation, apply to new and existing corporation
• Requirements – for stock
– transfer in control immediately after exchange (no
prearranged plan to sell)
– Property must be transferred
• Control - >= 80% of total voting stock and >=80% of each
class of nonvoting stock
• Property - money, A/R, inventory, equipment, intangibles and
etc.
• Exclusions - services, indebtedness with no security
Other 351 considerations
• Transfer of both prop and services
– all stock count towards 80% control if property >=10%
of property transferred
– disproportionate transfer, basis may be adjusted
• Non simultaneous exchange OK, but transactions should
be executed expeditiously and orderly
• Preferred stock that is not qualified
– stock redemption provisions
– dividend rates varies with interest rate or price indices
– stock rights and warrants not qualified
Receipt of Boot
• SH receives cash, notes
• SH recognized gain up to lesser of realized
gain or FMV of boot
• Character of gain depends on asset received
• SH basis = adjusted basis of property
transfer + gain recognized - (boot received,
cash received or liability assumed by
transferee (ie corp))
• SH holding period - include property’s
holding period
Transferree Corp’s Recognition
• No recognition if transfer stock even if 351
is not applied
• If transfer appreciated property as part of
section 351- recognized gain but not loss
• Transferee corp basis = transferor’s adjusted
basis for property + gain recognized by
transferor
• Holding period includes holding period of
transferor + any depreciation recapture
potential
Choice of capital
• Debt
– adv - deductibility of interest, no recognition of income upon
repayment
– disadv - transfer of property at FMV
– scrutinized by IRS - nature of debt may look like equity
• Equity
– adv - 70% - 100% dividend received reduction
– section 351 - allow transfer at basis
– stock dividend distribution is tax free
– section 1244 allows recognition of ordinary loss if small
stock becomes worthless
– exclusion of half of capital gain for disposal qualified small
business stock
– disadv, cash dividends taxed at ordinary income, redemption
of stock is taxed as dividend
Capital contribution by SH
• Voluntary
– no gain/loss recognized by corp
– SH basis of stock increased
– Basis of property = basis of property
contributed + gain recognized by SH
• Involuntary contribution
– regard as an exchange transaction
– SH must recognized G/L of property
Capital contributions by non SH
• Basis of property of corp is zero
• prevent company from claiming additional
depreciation
• If contribute cash, and cash used to buy
property, basis of property needs to be
reduced, if $ not spent in 12 months, reduce
basis of other property- order - depreciable
prop, amort. Prop, depletable prop and all
others
Worthless security
• Capital loss on last day of tax year where
worthless occur
• include stock, bond and the right to
subscribe/receive a share of stock
• Ordinary loss - securities that are not capital
assets, affiliated corp (80%), section 1244
qualified small business stock (limited to
$50,000 a year for single)
Unsecured debt obligations
• Unpaid loan not evidenced by a security
• Non-business bad debt - investments STCL
• Business bad debt - deducted as ordinary
business deductions - in connection with
trade or business, loan to keep employment