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CORPORATIONS

CORPORATIONS . FORMATION AND GENERAL OPERATION. TYPES UNDER DISCUSSION. REGULAR, SUBCHAPTER C IRREGULAR, SUBCHAPTER S. OVERVIEW OBJECTIVES. TO UNDERSTAND BASIC TAX RULES FOR THE FORMATION AND OPERATION OF A CORPORATION TO PREPARE A SIMPLE 1120 RETURN

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CORPORATIONS

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  1. CORPORATIONS FORMATION AND GENERAL OPERATION

  2. TYPES UNDER DISCUSSION • REGULAR, SUBCHAPTER C • IRREGULAR, SUBCHAPTER S

  3. OVERVIEW OBJECTIVES • TO UNDERSTAND BASIC TAX RULES FOR THE FORMATION AND OPERATION OF A CORPORATION • TO PREPARE A SIMPLE 1120 RETURN • TO UNDERSTAND TWO SPECIAL CORPORATE TAXES: ACCUMULATED EARNINGS AND PERSONAL HOLDING COMPANY

  4. CORPORATE TAX RATES • 15% ON FIRST $50,000 TAXABLE INC • 25% ON NEXT $25,000 TAXABLE INC • 34% ON NEXT $25,000 TAXABLE INC • 39% ON NEXT $235,000 TAXABLE INC • 34% ON NEXT $9,665,000 TAXABLE INC • PLEASE REFER TO TABLE MORE

  5. TAXATION ON CAPITAL GAINS • CORPORATIONS MAY CHOOSE FROM TWO ALTERNATIVES: • INCLUDE THE ITEM IN ORDINARY INCOME • CHOOSE AN ALTERNATIVE RATE PROVIDED BY THE SERVICE • REALITY IS THAT GAINS ARE TAXED AS ORDINARY INCOME REGARDLESS

  6. TREATMENT OF CAPITAL LOSSES • CORPORATIONS CANNOT OFFSET CAPITAL LOSSES AGAINST ORDINARY INCOME • USE WINDOW IS 3 YEARS BACK AND 5 YEARS FORWARD • LONG-TERM ITEM IS TREATED AS SHORT-TERM IF CARRIED

  7. SPECIAL DEDUCTIONS • DIVIDENDS RECEIVED DEDUCTION • DEDUCTION FOR ORGANIZATIONAL EXPENDITURES

  8. DIVIDENDS RECEIVED DEDUCTION • CORPORATIONS MAY EXCLUDE A STIPULATED % OF DIVIDENDS RECEIVED AS AN OWNER OF STOCK IN ANOTHER CORPORATION • 70% EXCLUDED IF O/S < 20% • 80% EXCLUDED IF 0/S >20% BUT <80% • 100% EXCLUDED IF O/S >80%

  9. DIVIDEND RECEIVED DEDUCTION CONTINUED • THE DRD IS LIMITED TO THE APPLICABLE DEDUCTION % TIMES THE CORPORATION’S TAXABLE INCOME CALCULATED BEFORE THE DRD, THE NOL DEDUCTION AND THE CAPITAL LOSS CARRYBACKS. • THIS LIMITATION DOES NOT APPLY IF A LOSS EXISTS AFTER THE DRD

  10. ORGANIZATIONAL EXPENDITURES • IF A TIMELY ELECTION IS MADE IN THE ENTITY’S FIRST TAXABLE YEAR, CORPORATIONS MAY AMORTIZE THEIR EXPENSES OVER A PERIOD OF 60 MONTHS OR MORE. • W/O ELECTION, NO WRITE-OFF • ELIGIBLE EXPENSES INCLUDE LICENSE FEES, LEGAL/ACCOUNTING FORMATION FEES AND FEES TO DIRECTORS

  11. CHARITABLE CONTRIBUTIONS • GENERALLY, A DEDUCTION IS ALLOWED IN THE YEAR THE CONTRIBUTION IS MADE BUT AN ACCRUAL ENTITY MAY LAG THE CONTRIBUTION UNTIL 15TH OF THE THIRD MONTH SUBSEQUENT TO YEAR-END

  12. CHARITABLE CONTRIBUTIONS CONTINUED • CC DEDUCTION IS LIMITED TO 10% OF TAXABLE INCOME COMPUTED BEFORE CC DEDUCTION, NOL CARRY BACKS, CAPITAL LOSS CARRY BACKS AND THE DRD. • EXCESS CONTRIBUTIONS CARRIED FORWARD FOR 5 YEARS AND DEDUCTED AFTER CURRENT YEAR’S

  13. M-1 ADJUSTMENTS • PURPOSE IS TO RECONCILE A CORPORATION’S ACCOUNTING INCOME WITH ITS TAXABLE INCOME COMPUTED BEFORE THE NET OPERATING LOSS AND SPECIAL DEDUCTIONS SUCH AS THE DRD

  14. FILING REQUIREMENTS • COMPLETED RETURN DUE ON OR BEFORE THE 15TH DAY OF THE THIRD MONTH FOLLOWING THE CLOSE OF THE TAX YEAR • A 6 MONTH EXTENSION IS AUTOMATIC WITH FILING OF F7004 • ESTIMATED PAYMENTS ARE DUE 15TH OF 4TH,6TH,9TH AND 12TH MONTHS

  15. FORMATION STEPS • FIX CAPITAL • ARTICLES OF INCORPORATION • CORPORATE CHARTER • CAPITAL STOCK • PAY FEES

  16. LOW TAX RATES OWNERS TREATED AS EMPLOYEES CHOICE OF FISCAL YEAR DOUBLE TAXATION WITHDRAWALS WITH TAX CONSEQUENCES LOSS OF IMMEDIATE NOL BENEFIT ADVANTAGES ANDDISADVANTAGES

  17. FORMATION CONTINUED • NO GAIN OR LOSS WHEN • T/P TRANSFERS PROPERTY/$ • TRANSFER IS SOLELY FOR STOCK • TRANSFERORS MUST OWN AT LEAST 80 PERCENT OF STOCK AFTER TRANSFER

  18. CORPORATE FORMATION • USUALLY GOVERNED BY SECTION 351, WHICH STATES THAT NO GAIN OR LOSS WILL BE RECOGNIZED ON THE COMMITMENT OF PROPERTY TO THE CORPORATE ENTITY

  19. GOVERNANCE OF SECTION 351 • NO GAIN OR LOSS TO TRANSFERORS OF PROPERTY SOLELY IN EXCHANGE FOR STOCK IF CONTROL IS POSSESSED IMMEDIATELY AFTER THE TRANSFER

  20. DEFINITION OF PROPERTY • MONEY • ANY OTHER KIND OF PROPERTY

  21. LIABILITIES • GENERALLY, THE ASSUMPTION OF S/H LIABILITIES IS NOT CONSIDERED BOOT. • HOWEVER, WHEN TOTAL LIABILITIES ASSUMED EXCEED THE BASIS OF THE PROPERTY TRANSFERRED, BOOT IS ASSUMED AND A GAIN IS RECOGNIZED

  22. SHAREHOLDER’S STOCK BASIS • BASIS OF PROPERTY TRANSFERRED • -BOOT RECEIVED • +GAIN RECOGNIZED • -LIABILITIES TRANSFERRED

  23. CORPORATION’S BASIS IN PROPERTY CONTRIBUTED • BASIS OF THE PROPERTY TO THE S/H • + ANY GAIN RECOGNIZED BY S/H

  24. CORPORATE ACCUMULATIONS • DESIGNED TO PREVENT SHAREHOLDERS OF A CORPORATION FROM AVOIDING TAX AT THE SHAREHOLDER LEVEL BY RETAINING EARNINGS IN THE CORPORATION ABOVE $250,000 • A 39.6% RATE IS IMPOSED ON CURRENT YEAR ADDITIONS TO R/E

  25. PERSONAL HOLDING CO TAX • SUBJECT TO A 39.6% TAX ON UNDISTRIBUTED EARNINGS

  26. LINGERING QUESTIONS • EFFECT OF BOOT • DOCUMENTATION OF THE HOLDING PERIOD

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