Chapter 4- C Corporations 69 Chapter 4- C Corporations For tax years beginning after December 31, 2015 Domestic C Corps due date is on 15th day of 4 month Exception is a 6/30 Year end C Corp IRS confirms extension still for 6 months. Code Sec. 6081(b) still indicates a 5 month extension.

Number of C Filers Has Decreased. 69-70 Number of C Filers Has Decreased. C Corps have fallen to 8.1% Going public you have to be a C Corp PATAP

Number of C Filers Has Decreased. 69-70 Number of C Filers Has Decreased. In 1980 C Corporations represented 52% of all business returns. Currently C Corp’s account for 8.1% of all business returns. Since 1980 Retirement plans that were exclusively PATAP

What is going to Happen With Tax Rates 70-71 What is going to Happen With Tax Rates PATAP

What is going to Happen With Tax Rates 70 What is going to Happen With Tax Rates CBO Found Compared to other G20 countries Effective rate for Corps -18.6% Average statutory rate including state taxes- 39.1% which was 10% higher than average G20. Our effective tax rate is the 4th highest. Our pass through situation is unique- ability to spread taxes over multiple owners. PATAP

Chapter 04 –C Corp(Non-PSC) 71 Chapter 04 –C Corp(Non-PSC) Advantages Tax rate -75K @22% Fiscal Year Better benefits 1202 treatment 1244 loss treatment Passive loss offset Income. Disadvantages Audit Risk > S Corp PSC restrictions NIIT No Capital loss Cap. Gains ordinary rates Double Taxation

Chapter 04 –C Corp(Non-PSC) 71 Chapter 04 –C Corp(Non-PSC) Advantages Tax rate -75K @22% Fiscal Year Better benefits 1202 treatment 1244 loss treatment Passive loss offset Income. Disadvantages Audit Risk > S Corp PSC restrictions NIIT No Capital loss Cap. Gains ordinary rates Double Taxation Let’s take a closer look in our manual at the pros and the cons of C Corporations.

ACME Inc. is announces that for every $100 purchase they will donate $1 to a local charity. During the Year they give $100,000 to the charity. Acme will take a $100,000 charitable deduction on its tax return. Acme cannot deduct the amount because it not a business deduction. Acme should take the $100,000 as an advertising deduction. Answer: See page 77.

82 Schedule M-3 82 For fiscal years end December 31, 2014 and later: Total Assets $10 M but less than $50M File M-1 plus Part 1 of M-3 If assets drop below $10M no requirement to continue following M-3 Note: Corps with total receipts and assets at end of the year below $250K not required to file Sch. L, M-1 and M-2. (Check Line 13 on Schedule K.)

Reincorporate Lease/Sell to Sub Earnings Stripping 83 . US taxes domestically Corps on World Wide Basis. Most other nations on a territorial basis. PATAP

Reincorporate Lease/Sell to Sub Earnings Stripping 83 US only has a Sub that is getting a deduction paid to the parent. Has the parent that gets income from the Sub. PATAP

83 Earnings Stripping IRS is authorized under Code Sec. 385(a) to prescribe regulations. Under prior proposed regulations, IRS was going to reclassify “loans” as capital. However the way they were written it could have been applied to our small corporations. The final regs. provide relief. PATAP

Earnings Stripping 83 F. The final regulations: only apply to domestic corporations issuing debt related parties that are not part of the same consolidated group. The new regs exempt debt issued by S Corporations, REITS and RIC. Also exempt transactions in the ordinary course of business. Update: Treasury Identified these regulations as unduly burdensome/complex and will simplify. PATAP

XI. C CORPS AND PASSIVE ACTIVITIES 80 XI. C CORPS AND PASSIVE ACTIVITIES B. Non Professional Service Corporations B. Closely held means 5 or fewer individuals own more than 50% of the value of the outstanding stock, directly or indirectly. Constructive ownership rules of 465(a)(3) apply. That’s everyone in my world D. PALs can offset passive activity income and active business income but not portfolio income. Page 81 item H to meet Material participation more stick – but think about it you only need to meet material participation if you want to offset against portfolio income. H. Material participation in an activity may be achieved if shareholders owning (directly or indirectly) more than 50% of outstanding stock (by value) materially participate in an activity or if all three conditions are met: 1. During the entire 12-month period ending on the last day of the tax year, at least one full-time employee (owner or non-owner) worked substantially full time in the active management of the activity, 2. During the same period, substantially all the efforts of at least three full-time non-owner employees were devoted to the activity, and 3. The business deductions of the activity for the tax year (IRC Sec. 162 and 404) exceeded 15% of its gross income for that year. PATAP

Tim and Jim both have S Corporations. 80 Tim and Jim both have S Corporations. B. Non Professional Service Corporations B. Closely held means 5 or fewer individuals own more than 50% of the value of the outstanding stock, directly or indirectly. Constructive ownership rules of 465(a)(3) apply. That’s everyone in my world D. PALs can offset passive activity income and active business income but not portfolio income. Page 81 item H to meet Material participation more stick – but think about it you only need to meet material participation if you want to offset against portfolio income. H. Material participation in an activity may be achieved if shareholders owning (directly or indirectly) more than 50% of outstanding stock (by value) materially participate in an activity or if all three conditions are met: 1. During the entire 12-month period ending on the last day of the tax year, at least one full-time employee (owner or non-owner) worked substantially full time in the active management of the activity, 2. During the same period, substantially all the efforts of at least three full-time non-owner employees were devoted to the activity, and 3. The business deductions of the activity for the tax year (IRC Sec. 162 and 404) exceeded 15% of its gross income for that year. PATAP

XI. C CORPS AND PASSIVE ACTIVITIES 80 210 XI. C CORPS AND PASSIVE ACTIVITIES B. Non Professional Service Corporations B. Closely held means 5 or fewer individuals own more than 50% of the value of the outstanding stock, directly or indirectly. Constructive ownership rules of 465(a)(3) apply. That’s everyone in my world D. PALs can offset passive activity income and active business income but not portfolio income. Page 81 item H to meet Material participation more stick – but think about it you only need to meet material participation if you want to offset against portfolio income. H. Material participation in an activity may be achieved if shareholders owning (directly or indirectly) more than 50% of outstanding stock (by value) materially participate in an activity or if all three conditions are met: 1. During the entire 12-month period ending on the last day of the tax year, at least one full-time employee (owner or non-owner) worked substantially full time in the active management of the activity, 2. During the same period, substantially all the efforts of at least three full-time non-owner employees were devoted to the activity, and 3. The business deductions of the activity for the tax year (IRC Sec. 162 and 404) exceeded 15% of its gross income for that year. PATAP

Contrractor Jim use C Corps 80 Lets Pretend the accountant Tim and the Contrractor Jim use C Corps B. Non Professional Service Corporations B. Closely held means 5 or fewer individuals own more than 50% of the value of the outstanding stock, directly or indirectly. Constructive ownership rules of 465(a)(3) apply. That’s everyone in my world D. PALs can offset passive activity income and active business income but not portfolio income. Page 81 item H to meet Material participation more stick – but think about it you only need to meet material participation if you want to offset against portfolio income. H. Material participation in an activity may be achieved if shareholders owning (directly or indirectly) more than 50% of outstanding stock (by value) materially participate in an activity or if all three conditions are met: 1. During the entire 12-month period ending on the last day of the tax year, at least one full-time employee (owner or non-owner) worked substantially full time in the active management of the activity, 2. During the same period, substantially all the efforts of at least three full-time non-owner employees were devoted to the activity, and 3. The business deductions of the activity for the tax year (IRC Sec. 162 and 404) exceeded 15% of its gross income for that year. PATAP

The Coffee Shop