1. ©2008 Prentice Hall, Inc.

2. CORPORATIONS (1 of 3) Definition of a corporation
Similarities and differences between corporations and individuals
Specific rules applicable to corporations
Computation of tax
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3. CORPORATIONS (2 of 3) Transfers of property to controlled corporations
Corporate Capital Structure
Earnings and profits
Nonmoney distributions
Stock redemptions
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4. CORPORATIONS (3 of 3) Corporate distributions in complete liquidation
Tax planning considerations
Compliance and procedural considerations
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5. Definition of a Corporation Organization Forms Available
Sole proprietorships
Partnerships
Corporations
C Corporations
S Corporations
Limited liability companies (LLCs)
Limited liability partnerships (LLPs)
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6. Definition of a Corporation Flow-Through Entities
Earnings not taxed at entity level
Flow-through directly to owners
Sole proprietorships
Partnerships
S Corporations
LLCs
LLPs
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7. Definition of a Corporation C Corporation (1 of 2)
C corps only entity that pays tax at entity level
Earnings distributed to owners taxed again at owner level
Business entity w/ ≥ 2 owners classified as either a corporation or a partnership
Business entity w/ 1 owner classified as a corporation or a sole proprietorship
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8. Definition of a Corporation C Corporation (2 of 2)
A business entity is a corporation if organized under federal or state statute that refers to the entity as incorporated or as a corporation
If a business entity incorporates, it is a corporation
LLCs and LLPs can elect to be taxed as a corporation or partnership
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9. Similarities and Differences Between Corps & Individuals (1 of 3)
Similar computation of taxable income as for sole proprietorship
Allowed to deduct ordinary and necessary business expenses
Can deduct interest and depreciation
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10. Similarities and Differences Between Corps & Individuals (2 of 3)
AGI only applies to individuals
Corps cannot deduct personal expenses
Corps cannot use standard deduction, or personal and dependency exemptions
Only corps get dividends received deduction
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11. Similarities and Differences Between Corps & Individuals (3 of 3)
Differences (continued)
Corp charitable contributions 10% of TI
Individuals 50% of AGI
Compensation deduction limitation for Publicly Held Corporations
No preferential tax rate on net LTCG for corps
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12. Specific Rules Applicable to Corporations
Capital gains and losses
Dividends-received deduction
Net operating losses
Charitable contributions
Compensation deduction limitation for publicly held corporations
Deduction for U.S. production activities
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13. Capital Gains and Losses
Computation same as for individuals
See Chapter I13
Corporate capital loss limitations
Cannot deduct net LTCL or net STCL
Carryback net capital loss back 3 years and forward 5 years
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14. Dividends-Received Deduction (1 of 2)
Corps owning < 20% of a domestic corporation deduct lesser of
70% of Dividends Received or
70% of taxable income before NOL, capital loss carryback or DRD
Exception to taxable income limitation
If 70% of dividend received creates an NOL, then the full DRD is deductible
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15. Dividends-Received Deduction (2 of 2)
Corps owning  20% and < 80% of a domestic corp
80% deduction instead of 70%
Corps owning  80% of a domestic corp
100% deduction
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16. Net Operating Losses
Deductions exceed gross income for the year before NOL carrybacks
NOL may be carried back 2 yrs & then forward 20 yrs
Corp may elect to forgo carryback & only carry NOL forward 20 yrs
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17. Charitable Contributions (1 of 2)
Some restrictions imposed on individuals apply to corps
Timing of deduction
Deducted in the year paid
Accrual basis corps may elect to include payment made w/in 2-1/2 months following the end of tax year
Board of directors must have authorized contribution during year it was accrued
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18. Charitable Contributions (2 of 2)
Non-cash property
Increased contribution for certain property
Max deduction is 10% of “adjusted taxable income” (ATI)
ATI is taxable income before NOL carryback, capital loss carryback, dividend received deduction or charitable contribution
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19. Compensation Deduction Limitation for Publicly Held Corporations
Limitation for CEO and its four highest compensated officers
Cash and non-cash compensation in excess of $1M for each officer not deductible
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20. Deduction for U.S. Production Activities (1 of 2)
Deduction is lesser of a % times
Qualified production activities income OR
Taxable income before the U.S. production activities deduction
Phased-in percentages
3% for 2005 & 2006
6% for
9% for 2010 and thereafter
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21. Deduction for U.S. Production Activities (2 of 2)
Qualified production activities income
Domestic production gross receipts from lease, rental, sale, or exchange, of tangible property manufactured in the U.S. LESS
Expenses related to qualified income including CoGS, & indirect allocable expenses
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22. Computation of Tax Computation of regular tax
Computation of the corporate alternative minimum tax
Penalty taxes
Computation of tax for controlled groups
Consolidated returns
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23. Computation of Regular Tax (1 of 3)
Gross Income
- Deductions and Losses
- Special Deductions
Taxable Income
x Appropriate Rate(s) 15%-39%
Regular Tax Liability before credits
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24. Computation of Regular Tax (2 of 3)
Regular Tax Liability before credits
- Foreign tax credit
- Other Credits
+ Credit recapture
Regular tax liability
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25. Computation of Regular Tax (3 of 3)
Regular Tax Liability
+ AMT Liability
+ Special Taxes (if any)
- Estimated Payments
Refund or tax due
Large corps (TI>$18.3M) taxed at flat 35%
PSCs taxed at flat 35%
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26. Computation of Corporate AMT Tax Computation (1 of 3)
Taxable income before NOL
+ Tax preference items
+/- Adjustments to taxable income other then ACE adjustment and AMT NOL deduction
Pre-adjustment AMTI
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27. Computation of Corporate AMT Tax Computation (2 of 3)
Pre-adjustment AMTI
+/- 75% of difference between pre- adjustment AMTI and ACE
- AMT NOL deduction
AMTI
- Statutory exemption
Tax base
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28. Computation of Corporate AMT Tax Computation (3 of 3)
Tax base
x 20% tax rate
Tentative min tax before credits
- AMT FTC
Tentative minimum tax (TMT)
- Regular income tax liability
AMT due (if any)
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29. Computation of Corporate AMT AMT Exemption
Statutory exemption amount
$40,000
Reduced by 25% x (AMTI - $150,000)
Fully phased out when AMTI ≥ $310,000
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30. Computation of Corporate AMT Small Business Exception
Initial year: all corps exempt
2nd year: exempt if first year gross receipts  $5M
3rd year: exempt if avg. of yr1 and yr 2 gross receipts  $7.5M
Subsequent years: exempt if avg. of prior 3 yrs’ gross receipts  $7.5M
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31. Penalty Taxes Accumulated Earnings Tax
Penalty tax to compel corps to distribute profits not needed for conduct of its business
Tax at highest individual tax rate on dividends (15%)
S/h must have tax-avoidance motive to avoid receipt of dividends
Usually applies to closely held corps
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32. Penalty Taxes Personal Holding Company Tax
Prevents closely held C corps from sheltering passive income from higher individual tax rates
Applies if ≤ 5shareholders who own
50% of outstanding stock at any time during last 6 months of corp’s tax year
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33. Computation of Tax for Controlled Groups (1 of 3)
Two or more corps owned directly or indirectly by same shareholder or group of shareholders
Must allocate lower corp tax rates among all related corporations
Otherwise taxpayers could split one corp into 2 or more corps to achieve tax savings
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34. Computation of Tax for Controlled Groups (2 of 3)
Types of controlled groups
Brother-sister
80%-50% definition
Five or fewer individuals, trusts or estates own:
At least 80% of voting power or at least 80% of value of stock of two or more corporations AND
> 50% of the voting power or value is held by identical owners
50%-only definition is 2nd test above
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35. Computation of Tax for Controlled Groups (3 of 3)
Types of controlled groups (continued)
Parent-subsidiary
One corp owns ≥ 80% of stock of subsidiary corp
Combined
Three or more corps meet following criteria:
Each corporation is a member of a parent-subsidiary or brother-sister group, AND
At least one is both a parent, and a member of a brother-sister group
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36. Consolidated Returns
Corps that are members of a parent-subsidiary affiliated group eligible to file a consolidated tax return
Capital losses offset capital gains from other group members
Operating losses reduce operating income from other group members
Transactions between two members treated as taking place w/in same entity
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37. Transfers of Property to Controlled Corporations
§351 nonrecognition requirements
Basis considerations
Treatment of liabilities
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38. §351 Nonrecognition Requirements
No gain or loss recognized if:
PROPERTY transferred in exchange for stock and
Transferors have control (80%) of corp immediately after the exchange
Transfers may be for new or existing corps
Gain recognized lesser of gain realized or FMV of boot received
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39. Basis Considerations Basis of Stock Received by Transferors
Substituted basis in stock received
Basis formula
Basis of property transferred to corp
+ Gain recognized by transferor
- Money & FMV of property received
- Liabilities transferred to corp
Basis of stock received
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40. Basis Considerations Basis of Property Received by Corporation
Carryover basis in property received
Basis formula
Basis of property in hands of transferors
+ Gain recognized by transferor
Basis of property received by corp
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41. Treatment of Liabilities
Assumption of liabilities by transferee corporation does not trigger gain recognition to transferors
Shareholders must reduce basis by amount of liabilities transferred
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42. Corporate Capital Structure
Debt has two main tax advantages:
Interest payments deductible
Principal repayments tax-free return of capital
If corp too thinly capitalized IRS may classify part or all of debt as equity
Deductible interest payments become non-deductible dividends
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43. Earnings and Profits (E&P) Calculation of E&P (1 of 2)
Generally E&P based on corp’s economic ability to pay dividends income instead of taxable income
Adjustments to taxable income for permanent & timing differences including use of different depreciation methods
Distribution a dividend to extent of E&P
Excess distribution a return of capital
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44. Earnings and Profits (E&P) Calculation of E&P (2 of 2)
Taxable income
+ Excluded taxable income
+ Taxable inc deferred to another year
+/- Inc & deduct recomp under E&P rules
+ Deductions disallowed for E&P
- Nondeductible items that reduce E&P
= Current E&P (or current E&P deficit)
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45. Earnings and Profits (E&P) Current vs. accumulated E&P
Current E&P (CE&P) computed on last day of the corp’s tax year
Distributions first from CE&P
Distributions greater than CE&P
CE&P allocated to distributions pro rata regardless of payment date
Then AE&P (only if positive) allocated to distributions in chronological order
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46. Nonmoney Distributions Tax Consequences to the Shareholders
Amount distributed = FMV of property
Reduced by liabilities
Treated as taxable dividend if corp has sufficient E&P
Basis of distributed property = FMV
W/o reduction for liabilities
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47. Nonmoney Distributions Tax Consequences to the Distributing Corporation
Generally corps recognize no gain or loss upon distribution to shareholders
Appreciated property distributed to shareholders treated as if property sold for FMV immediately before distribution
Corporation recognizes realized gain, but not realized loss
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48. Stock Redemptions (1 of 2)
Redemption treated as a taxable dividend (E&P) unless distribution meets one of the following criteria
Substantially disproportionate rule
Not essentially equivalent to a dividend
Results in a complete termination of shareholders’ interest
Is made in partial liquidation of corp
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49. Stock Redemptions (2 of 2)
If not a dividend, redemption treated as an exchange
Resulting in capital gain or loss by shareholder
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50. Corporate Distributions in Complete Liquidation
Tax consequences to the liquidating corporation
Tax consequences to the shareholders
Section 332: Liquidation of a subsidiary corporation
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51. Tax Consequences to the Liquidating Corporation (1 of 2)
Gains & losses recognized on asset dispositions
Exception for certain losses
No loss recognition on liquidation of subsidiary to minority shareholders
No loss when property distributed to a related party
§351 contributions of loss property for tax avoidance
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52. Tax Consequences to the Liquidating Corporation (2 of 2)
Tax attributes of distributed property disappear
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53. Tax Consequences to the Shareholders
Shareholder assumed to have sold stock for FMV of net assets received
Basis of assets received is FMV
FMV of assets - liabilities received
- Basis of stock surrendered
= Amount of gain (loss) recognized
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54. Section 332: Liquidation of a Subsidiary Corporation
Neither parent nor subsidiary recognizes gain or loss of an 80%-owned corporation
Property must be distributed to parent in one or a series of distributions in complete liquidation
Basis carries over to parent
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55. Tax Planning Considerations
Capital structure and Section 1244
Dividend policy
Use of losses
Charitable contributions
Dividends-received deductions
Reduced taxes on taxpayer stock sales
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56. Compliance and Procedural Considerations
Filing requirements
Corporation must file Form 1120
Not based on gross income
Due date is one month earlier than individual returns
Due date for estimated tax installment also one month earlier
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57. ©2008 Prentice Hall, Inc.