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Chapter 16 Corporations

Chapter 16 Corporations. Intro, Operating Rules, Related Corps. Business Forms (Tax Returns OH). Sole Prop P’ship Trusts & Estates S Corps C Corps. Sole Proprietorship . Schedule C, Form 1040 Tax 1 Chapters 2,5,7 especially. Partnerships, LLC’s. Form 1065 Schedule K-1

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Chapter 16 Corporations

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  1. Chapter 16 Corporations Intro, Operating Rules, Related Corps

  2. Business Forms (Tax Returns OH) • Sole Prop • P’ship • Trusts & Estates • S Corps • C Corps

  3. Sole Proprietorship • Schedule C, Form 1040 • Tax 1 • Chapters 2,5,7 especially

  4. Partnerships, LLC’s • Form 1065 • Schedule K-1 • Part share of inc/loss & sep md/exp • Chapter 20 • Tax 2

  5. Trusts & Estates • Form 1041 • Chapter 27 • Tax 3

  6. S Corps • Distinguish S Corps • Chapter 21 • generally not pay tax • similar to p’ship

  7. Regular Corps - C Corps • Tax paying entities • Form 1120 • double tax • Tax Rate Schedule • Dividends

  8. Reasonable Comp to Sh’s • deductible • amount & quality of work • unreas = constructive div

  9. Choosing Corp Form - Tax Factors • Corp rates v. individual rates • character of div income v. flow through income • C Corp losses remain with corp

  10. Choosing Corp Form - Non Tax Factors • Limited v. unlimited liability (sole prop, GP) • Raising capital through stock • free transferability • continuity of life • centralized management

  11. Limited Liability Companies(LLC’s) • 1988 IRS ruling: p’ship for tax purps • and limited liability • Pre 97: IRC 7701(a)(3) characteristics • majority: continuity of life, centralized management, limited liability, free transferability

  12. LLC’s & other entitiesPost 96 • Check the box regs • elect p’ship or corp status • default • Form 8832 • Morongo tribe gambling income = corporation dividend (not taxable to NR of CA)

  13. Corporate Tax Calculation • Formula (OH), Tax Returns (OH) • Similarities to individuals: • GI • Exclusions (Corps fewer) • 1031, 1033 (not 121) • related parties, wash sales

  14. Corporate Tax Calculation(Continued) • 1245, 1250 recapture, plus 291 • Business deductions • bad debts & interest: no nonbus • Credits

  15. Corp Tax - Dissimilaritiesto Indivs • Rates • all deducs = bus; AGI not used • no itemized & standard • no personal & dependent exemptions • casualty losses: no $100, no 10% AGI

  16. Corp Tax - Certain Specific Provisions Accounting periods & methods • period usually choice - calendar or fiscal • PSC & S Corp restricted • PSC - cal yr unless exceps (chap 15) • S Corps (chap 21)

  17. Method • Cash usually not avail to Corp • exceptions: • S Corps, farming & timber, qualified PSC’s, Ave Ann GR  5m (3 prior yrs average) • inventory: accrual req’d for inventory • related party & accrued deduction

  18. Capital Gains & Losses • Capital Asset Definition • L/T v. S/T • Netting • LTCG Rates • individuals: number of rates • Corporations: reg. Tax rate • Losses • individuals: 3000, CF indefinitely • corporations: CB 3, CF 5, STCL

  19. Depreciation Recapture • 1245 - same • 1250 - same plus 291 • 291 - 20% (1245 OI - 1250 OI)

  20. Charitable Contributions • To qualified charitable org. • year paid • or, accrual basis - preceding year • authorized by board • paid by 15th day of 3d m of year

  21. Charitable Contributions(Type of Property) • LTCG property • limited to basis if tangible personal property put to unrelated use • OI property • inventory STCG, recapture • limited to basis usually

  22. Charitable Contributions(Type of Property) • OI property - exception to basis rule (Corps) • add 50% of appreciation (limit: 2 x basis) • inventory, related purp, and care of ill / needy / infants • scientific property to colleges and certain scientific research orgs

  23. Charitable Contributions(% Limit) • Limit = 10% TI • TI w/o charitable contribution w/o NOL CB (per 170(b)(2) v. 246 (b)(1) w/o CL CB w/o DRD • CF 5 yrs, newest 1st

  24. NOL’s • CB2, CF20 • no C/L v. indivs • no non bus deduc. V. indivs • include DRD

  25. Own 20% 20, 80% 80% Deduc - %TI (domestic corp) 70% 80% 100% DRD (Corps only) alleviate triple tax: corp payor, corp payee, shareholder

  26. DRD - TI • TI w/o NOL (CB or CO per 246(b)(1) v. 170(b)(2)) w/o DRD w/o CL CB • % limit may not apply if no NOL • lesser of % x divs or % x TI • unless TI minus (% x divs) = NOL, then use % x divs

  27. ORG Expenses (Corps only) • IRC 248 • Election to Amortize over 60 mos. • Original return and extensions • include legal, accounting, temp director’s fees, org meetings, state incorp fees • not expenses of selling stk or transferring assets • incurred before and year begin business

  28. Corp Tax Rates & Calc 0 - 50,000 15% 50 - 75,000 25% 75 - 100,000 34% 100 - 335,000 39% 335,000 - 10m 34% 10 - 15m 35% 15 - 18,333,333 38% 18,333,333 - 35%

  29. PSC’s • Flat: highest individual rate • substantially ee owned • health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting

  30. AMT • Similar to individuals • rate & exemptions different • ACE

  31. Related Corps • Limit multiple corps (IRC 1561) • special rules - inc tax sur tax exemption, AEC (250 or/5 ok), AMT exemption (40k), 179 • controlled group e.g., 1 surtax exemption (rates lower 35%) • equal allocation unless all members consent to unequal

  32. Controlled Groups • P/S & B/S • P/S = one or more chains of corps connec’d thru a common parent - voting or value - 80% of total voting power of all classes - 80% total value of all shares of all corps, except P, by 1 or more corps

  33. B/S = 2 or more corps owned by 5 or fewer persons (indivs, ests, trusts) • and shareholder group meets • 80% total ownership • 50% common ownership • % of all classes in total or % of each class in each corp • to determine common ownership, count only identical ownership

  34. Combined Group • Each corp member of either P/S or B/S • at least one P of P/S • P also member of B/S

  35. Filing Requirements • TI or not - req’d to file • until cease to do bus and no assets • 1120 (or 1120A, 1120S • 15th day of 3’d month • Form 7004 - automatic ext. - 6 mos

  36. Estimates • Unless  $500 tax • 100% TY, 100% LY (lesser) • Months due – 4, 6, 9, 12 • penalty, exceptions

  37. Reconciliation: BI to TI (M-1) • Schedule M-1 (OH) • start net income per books to TIb4NOL, DRD

  38. Additions (M-1) • Fed inc tax • net CL • income rept’d for tax & not for books eg., prepaid income • expenses deduc’d for bks & not for tax, eg., charitable 10%

  39. Subtractions • Inc. rept’d on books & not for tax eg., tax exempt • exps deduc’d tax & not for books eg., charitable c/o

  40. Reconciliation beg & end R/E (M-2) • schedule M-2 (OH) • per books inc (from M-1)

  41. Planning - Corp v. Non Corp • Double tax & avoiding • debt/equity • unreas salary & rent • accum inc inside corp if 100,000 • character of items • losses locked up in corp • liquidation - tax to corp & sh’s • EE’s & benefits - group term life insur, health insur, meals & lodging

  42. Planning - Operating the Corp • Charitable contributions - authorized b4 yr end • Cap G&L • match L to G • watch c/o L (CB3, CF5) • NOL - elect to forego CB • consider postponed refund • consider higher future profits • consider higher future tax rates • DRD • time to create NOL will give bigger DRD

  43. ORG exps • adopt fiscal year to be sure exps incurred b4 yr end • SH - EE paym of Corp exps • det corp policy on remb b4 beginning of each yr

  44. Corporate ProvisionsEGTTRA `01 • Change in tax rates • Also for accumulated earnings tax and personal holding company tax • Rate for AET and PHC tax • Highest tax rate for indiv t/p • Effective: after `00

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