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Understanding Corporations and Taxation: A Comprehensive Overview

This chapter provides an in-depth exploration of corporation types, including S-Corporations, C-Corporations, and Limited Liability Companies (LLCs), alongside their operating rules and tax implications. It covers the preparation of relevant tax returns, including Form 1120, Form 1065, and Form 1041, as well as key accounting methods and periods. Readers will learn about corporate tax calculations, capital gains and losses, and the impact of charitable contributions on corporate tax liabilities. A thorough examination of choosing the right corporate form based on tax and non-tax factors is also discussed.

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Understanding Corporations and Taxation: A Comprehensive Overview

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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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