Post on 08-Mar-2016
description
7/21/2019 Ch17 - 2015
1/66
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.
Comprehensive Volume
1
Chapter 1!
Corporations"#ntroduction and
$perating Rules
7/21/2019 Ch17 - 2015
2/66
%he &ig 'icture (slide 1 o) 2*
+ a-antha ohnson ons /ylar/ &a/ery.
Currently, the ba/ery is operated as a sole proprietorship
and generates an annual operating pro)it o) 100,000.
+ #n addition, the ba/ery earns annual dividends o)5,000 )ro- investing ecess or/ing capital
%hese stoc/ invest-ents typically are held )or a -ini-u-
o) three to )our -onths.
+ As a result o) inco-e )ro- other business ventures
and invest-ents, a-antha is in the 334 -arginal ta
rate brac/et irrespective o) the ba/ery.
7/21/2019 Ch17 - 2015
3/66
%he &ig 'icture (slide 2 o) 2*
+ #n the past, a-antha has ithdran 50,000annually )ro- the ba/ery he regards this as reasonable pay-ent )or her services.
+a-antha has as/ed you about the ta conseuenceso) conducting the business as a regular (C*corporation. &ased on the given in)or-ation, hat ould be the annual
inco-e ta savings (or cost* o) operating the ba/ery as a
corporation6+ 7or purposes o) this analysis, use the 2018 ta rates and ignore anye-ploy-ent ta or state ta considerations.
+ Read the chapter and )or-ulate your response.
7/21/2019 Ch17 - 2015
4/66
9arious &usiness 7or-s
+ &usiness operations can be conducted in a
nu-ber o) di))erent )or-s including
ole proprietorships
'artnerships
%rusts and estates
corporations (also called ubchapter corps*
Regular corporations (also called C corps*
Li-ited liability co-panies
7/21/2019 Ch17 - 2015
5/66
ole 'roprietorship
+ :ot a separate taable entity
+ #nco-e reported on oner;s ch. C
7/21/2019 Ch17 - 2015
6/66
%he &ig 'icture
7/21/2019 Ch17 - 2015
7/66
'artnership (slide 1 o) 2*
+ eparate entity, but does not pay ta7iles in)or-ation return (7or- 10>5*
+ Most inco-e and epense ite-s areaggregated in co-puting the ordinary businessinco-e (loss* o) the partnershipCertain inco-e and epense ite-s are reported
separately to the partnerse.g., #nterest and dividend inco-e, long ter-
capital gain, charitable contributions andinvest-ent epenses
7/21/2019 Ch17 - 2015
8/66
'artnership (slide 2 o) 2*
+ 'artnership ordinary business inco-e (loss*
and separately reported ite-s are allocated to
partners according to their pro)it and loss
sharing ratios
7/21/2019 Ch17 - 2015
9/66
Corporation
+ eparate entity, only pays special taes (e.g., built=ingains* 7iles in)or-ation return 7or- 1120
+ i-ilar to partnership taation $rdinary business inco-e (loss* )los through to the
shareholders to be reported on their separate returns Certain ite-s )lo through to the shareholders and retain
their separate character hen reported on the shareholders;
returns.+ %he corporation ordinary business inco-e (loss*and the separately reported ite-s are allocated to theshareholders according to their stoc/ onershipinterests
7/21/2019 Ch17 - 2015
10/66
C Corporation
+ C corporations are sub@ect to an entity=level 7ederalinco-e ta hich results in hat is /non as adouble taxatione))ect.
C corporation reports its inco-e and epenses andco-putes ta on the taable inco-e reported on its 7or-1120
+ ses ta rate schedule applicable to corporations
Bhen corporation distributes its inco-e, the corporation;s
shareholders report dividend inco-e on their on tareturns
+ %hus, inco-e that has already been taed at the corporate level isalso taed at the shareholder level
7/21/2019 Ch17 - 2015
11/66
ividends
+ ouble taation ste-s, in part, )ro- the )act thatdividend distributions are not deductible by thecorporation
+ %o alleviate so-e o) the double taation e))ect,Congress reduced the ta rate applicable to dividendinco-e o) individuals )or years a)ter 2002 Denerally, dividends are taed at sa-e -arginal rate
applicable to a net capital gain+ %hus, individuals otherise sub@ect to the 104 or 154 -arginal ta
rate pay 04 ta on uali)ied dividends received
+ #ndividuals sub@ect to the 25, 2E, 33, or 35 percent -arginal ta ratespay a 154 ta on uali)ied dividends
+ #ndividuals sub@ect to the 3F.>4 -arginal ta rate pay a 204 ta on
uali)ied dividends
7/21/2019 Ch17 - 2015
12/66
Medicare urta
+ &eginning in 2013, G 1811 i-poses a 3.E4 Medicare
surta on a tapayer;s net invest-ent inco-e in
ecess o) -odi)ied ad@usted gross inco-e o)
200,000 (250,000 i) -arried )iling @ointly* %hus, )or high=inco-e tapayers, the double taation o)
dividend inco-e is increased by this surta
7/21/2019 Ch17 - 2015
13/66
Corporate #nco-e %a Rates
7/21/2019 Ch17 - 2015
14/66
:onta #ssues in electing
7/21/2019 Ch17 - 2015
15/66
:onta #ssues in electing
7/21/2019 Ch17 - 2015
16/66
:onta #ssues in electing
7/21/2019 Ch17 - 2015
17/66
Li-ited Liability Co-panies (LLC*
+ LLCs have proli)erated since 1FEE hen #R
ruled it ould treat uali)ying LLCs as
partnerships
Ma@or nonta advantage
+ Allos oners to avoid unli-ited liability
Ma@or ta advantage
+ Allos uali)ying business to be treated as apartnership )or ta purposes, thereby avoiding double
taation associated ith C corporations
7/21/2019 Ch17 - 2015
18/66
7/21/2019 Ch17 - 2015
19/66
7/21/2019 Ch17 - 2015
20/66
(slide 1 o) 2*
+ Chec/=the=bo Regulations
Allos tapayer to choose ta status o) entity
ithout regard to corporate or noncorporate
characteristics
7/21/2019 Ch17 - 2015
21/66
(slide 2 o) 2*
+ Chec/=the=bo Regulations (cont;d*
#) no election is -ade, -ulti=oner entities treated
as partnerships, single person businesses treated as
sole proprietorships
7/21/2019 Ch17 - 2015
22/66
Co-parison o) Corporate and #ndividual
%a %reat-ent (slide 1 o) 3*
+ i-ilaritiesDross #nco-e o) a corporation and individual are
very si-ilar
+ #ncludes co-pensation )or services, inco-e )ro- tradeor business, gains )ro- property, interest, dividends, etc.
+ Corp tapayers are alloed )eer eclusions
+ :ontaable echange treat-ent is si-ilar
&usiness deductions o) a corporation andindividual also are very si-ilar
7/21/2019 Ch17 - 2015
23/66
Co-parison o) Corporate and #ndividual %a
%reat-ent(slide 2 o) 3*
+ issi-ilarities
i))erent ta rates apply
All deductions o) corp are business deductions
+ Corp does not calculate AD#
+ Corp does not deduct standard deduction, ite-iHed
deductions, or personal and dependency ee-ptions
+Corp does not reduce casualty and the)t loss by 100statutory )loor and 104 o) AD#
7/21/2019 Ch17 - 2015
24/66
Co-parison o) Corporate and #ndividual %a
%reat-ent(slide 3 o) 3*
7/21/2019 Ch17 - 2015
25/66
peci)ic 'rovisions Co-pared
+ #n co-paring the inco-e taation o) individuals and
corporations the )olloing areas arrant special
discussion"
Accounting periods and -ethods Capital gains and losses
Recapture o) depreciation
'assive losses
Charitable contributions
o-estic production activities deduction
:et operating losses
pecial deductions available only to corporations
7/21/2019 Ch17 - 2015
26/66
Accounting 'eriods and Methods(slide 1 o) 2*
+ Accounting periods
Most C corporations can use calendar year or )iscal
year ending on last day o) a calendar -onth (or 52=
53 ee/ year*
corps and 'ersonal ervice Corporations ('C*
are li-ited in available year ends
7/21/2019 Ch17 - 2015
27/66
Accounting 'eriods and Methods(slide 2 o) 2*
+ Accounting -ethods Cash -ethod can;t be used by C corp. unless"
+ #n )ar-ing or ti-ber business
+ Juali)ied 'C
+ KAve. Annual Dross receipts 5,000,000
As a -atter o) ad-inistrative convenience, the #R illper-it
+
7/21/2019 Ch17 - 2015
28/66
%he &ig 'icture
7/21/2019 Ch17 - 2015
29/66
%he &ig 'icture
7/21/2019 Ch17 - 2015
30/66
Capital Dains and Losses(slide 1 o) 2*
+ #ndividuals
:et capital gains sub@ect to the )olloing
pre)erential ta treat-ent
+ :et short=ter- gains sub@ect to regular ta rates
+ :et long=ter- gains -a ta rate 204
:et capital losses deductible up to 3,000 ith
re-ainder carried to )uture years+ Carryovers do not lose their identity but re-ain either
long ter- or short ter-
7/21/2019 Ch17 - 2015
31/66
Capital Dains and Losses (slide 2 o) 2*
+ Corporations
:o special ta rates apply to capital gains
+
7/21/2019 Ch17 - 2015
32/66
epreciation Recapture
+ #n general, the recapture rules under GG 1285 and1250 are eually applicable to both individual andcorporate tapayers Noever, corporations -ay have -ore depreciation
recapture (ordinary inco-e* on the disposition o) G 1250property than individuals
+ nder G 2F1, a corporation has additional ordinaryinco-e eual to 204 percent o) the ecess o)
epreciation recapture that ould arise i) property asG 1285 property over depreciation recapture co-putedunder G 1250 (ithout regard to G 2F1*
7/21/2019 Ch17 - 2015
33/66
'assive Losses
+ 'assive loss rules apply to"#ndividuals and personal service corps
+ Cannot o))set passive losses against active or port)olio
inco-e corps and partnerships
+ 'assive inco-e and loss )los through to oners andrules applied at oner level
Closely held C corps+ May o))set passive losses against active inco-e, but notport)olio inco-e
7/21/2019 Ch17 - 2015
34/66
Charitable Contributions(slide 1 o) 5*
+ &oth corporate and noncorporate tapayers
-ay deduct charitable contributions in year
paid
7/21/2019 Ch17 - 2015
35/66
Charitable Contributions(slide 2 o) 5*
+ A-ount deductible )or property contributions
depends on type o) property contributed
+ Long=ter- capital gain property deduction P
)air -ar/et value o) property
7/21/2019 Ch17 - 2015
36/66
Charitable Contributions(slide 3 o) 5*
+ Long=ter- capital gain property deduction P
)air -ar/et value o) property (cont;d*
7/21/2019 Ch17 - 2015
37/66
Charitable Contributions(slide 8 o) 5*
+ $rdinary inco-e property deduction P basis in
property
7/21/2019 Ch17 - 2015
38/66
Charitable Contributions(slide 5 o) 5*
+ Corporate charitable contribution deduction is
li-ited to 104 o) taable inco-e be)ore"
Charitable contribution deduction,
:$L or capital loss carrybac/,
ividends received deduction, and
o-estic production activities deduction
+ Contributions in ecess o) 104 li-it can be
carried )orard )or 5 years
7/21/2019 Ch17 - 2015
39/66
o-estic 'roduction
Activities eduction
+ %he A-erican obs Creation Act o) 2008created a ne deduction based on the inco-e)ro- -anu)acturing activities
%he do-estic production activities deduction isbased on the )olloing )or-ula"
+ F4 Q Lesser o) Juali)ied production activities inco-e
%aable (or ad@usted gross* inco-e+ %he deduction cannot eceed 504 o) an e-ployer;s
B2 ages related to uali)ied production activitiesinco-e
7/21/2019 Ch17 - 2015
40/66
:et $perating Loss
+ :et operating losses o) corporations and individuals-ay be" Carried bac/ to years nused portion carried )orard 20 years
+ nli/e individuals, a corporation does not" Ad@ust its ta loss )or capital losses, since a corporation
cannot deduct net capital losses Ma/e ad@ust-ents )or any nonbusiness deductions
+ A corporation is alloed to include the dividendsreceived deduction (discussed belo* in co-putingits :$L
7/21/2019 Ch17 - 2015
41/66
ividends Received eduction(slide 1 o) 3*
#) corporation ons stoc/ in another corporation
and receives dividends, a portion o) dividends -ay
be deducted )ro- inco-e"
7/21/2019 Ch17 - 2015
42/66
ividends Received eduction(slide 2 o) 3*
+ %he dividends received deduction is li-ited to a
percentage o) the taable inco-e o) a corporation
7or this purpose, taable inco-e is co-puted ithout
regard to+ %he :$L deduction+ %he do-estic production activities deduction
+ %he dividends received deduction, and
+ Any capital loss carrybac/ to the current ta year
%he percentage o) taable inco-e li-itation corresponds to
the deduction percentage
Noever, the taable inco-e li-itation does not apply i)
the corporation has an :$L )or the current taable year
7/21/2019 Ch17 - 2015
43/66
ividends Received eduction(slide 3 o) 3*
%he )olloing steps are use)ul in calculating thedividends received deduction
1. Multiply dividends received by deductionpercentage
2. Multiply taable inco-e by deductionpercentage
3. ubtract 1. )ro- taable inco-e=#) entity has inco-e be)ore R, but R creates :$L,
a-ount in 1. is R (the :$L rule*=#) R does not create :$L, deduction is li-ited to lesser
o) 1. or 2.
7/21/2019 Ch17 - 2015
44/66
R
7/21/2019 Ch17 - 2015
45/66
$rganiHational
7/21/2019 Ch17 - 2015
46/66
$rganiHational
7/21/2019 Ch17 - 2015
47/66
$rganiHational
7/21/2019 Ch17 - 2015
48/66
tart=up
7/21/2019 Ch17 - 2015
49/66
tart=up
7/21/2019 Ch17 - 2015
50/66
Corporate %a 7or-ula
Dross inco-e
Less" eductions (ecept charitable, iv. Rec;d, :$L
carrybac/, %CL carrybac/*
%aable inco-e )or charitable li-itationLess" Charitable contributions (T P 104 o) above*
%aable inco-e )or div. rec;d deduction
Less" ividends received deduction
%aable inco-e be)ore carrybac/s
Less" :$L carrybac/ and %CL carrybac/
%AUA&L< #:C$M -onth etensions are available by
)iling 7or- !008
7/21/2019 Ch17 - 2015
56/66
Corporate 7iling Reuire-ents(slide 2 o) 2*
+ Must -a/e esti-ated ta pay-ents eual to
lesser o)"
1004 o) corporation;s ta )or the current year, or
1004 o) ta )or preceding year
+ :o esti-ated ta pay-ents reuired i) ta
liability epected to be less than 500
7/21/2019 Ch17 - 2015
57/66
chedule M=1
+ Corporations -ust reconcile )inancialaccounting inco-e ith taable inco-e onch M=1, 7or- 1120
Co--on reconciling ite-s include"+ 7ederal inco-e ta per boo/s
+ :et capital losses
+ #nco-e reported )or ta but not boo/ inco-e (e.g.,
prepaid inco-e* and vice versa+
7/21/2019 Ch17 - 2015
58/66
chedule M=2
+ Corporations -ust reconcile retained earnings
at beginning o) year ith retained earnings at
end o) year using ch M=2, 7or- 1120
chedule L (balance sheet*, chedules M1 andM2 o) 7or- 1120 are not reuired )or
corporations ith less than 250,000 o) gross
receipts and less than 250,000 in assets
7/21/2019 Ch17 - 2015
59/66
chedule M=3
+ Corporate tapayers ith total assets o) 10 -illion
or -ore are no reuired to report -uch greater
detail regarding di))erences in )inancial accounting
inco-e (loss* and taable inco-e (loss* Reported on chedule M3
+ chedule M3 should
Create greater transparency beteen corporate )inancial
state-ents and ta returns Nelp the #R identi)y corporations that engage in
aggressive ta practices
7/21/2019 Ch17 - 2015
60/66
Consolidated Returns
+ Corporations that are -e-bers o) a parent=
subsidiary a))iliated group -ay be able to )ile
a consolidated inco-e ta return )or a taable
year
7/21/2019 Ch17 - 2015
61/66
Re)ocus $n %he &ig 'icture (slide 1 o) 5*
+ Conducting /ylar/ &a/ery as a corporation ouldsave a-antha F,3!5 in inco-e taes annually,co-puted as )ollos"
Bakery Operated as Sole Proprietorship
$perating pro)it o) 100,000" %a on 100,000 W 334 33,000
ividends o) 5,000"
%a on 5,000 W 154 !50
Bithdraals o) 50,000" :o ta 0
%otal inco-e ta hen operated as sole
proprietorship 33,!50
7/21/2019 Ch17 - 2015
62/66
Re)ocus $n %he &ig 'icture (slide 2 o) 5*
Tax - Bakery Operated as Regular Corporation
Corporate taable inco-e 51,500
%a on 50,000 W 154 !,500%a on 1,500 W 254 3!5
%otal corporate inco-e ta !,E!5
a-antha;s salary o) 50,000"
%a on 50,000 W 334 1>,500%otal inco-e ta hen operated as
C corporation 28,3!5
7/21/2019 Ch17 - 2015
63/66
Re)ocus $n %he &ig 'icture (slide 3 o) 5*
+ Co-putation o) corporate taable inco-e"
$perating pro)it 100,000
ividends 5,000
Less" alary to a-antha (50,000*
ividends rec;d deduction (!04* (3,500*
%aable inco-e 51,500
7/21/2019 Ch17 - 2015
64/66
Re)ocus $n %he &ig 'icture (slide 8 o) 5*
+ %he ea-ple illustrates the ta savings available
hen a high=inco-e individual ta/es advantage o) the
loer -arginal ta rates o) C corporations.
+ Noever, other issues also should be considered,such as
7/21/2019 Ch17 - 2015
65/66
Re)ocus $n %he &ig 'icture (slide 5 o) 5*
+ Bhat i) the ba/ery beco-es a corporation and
generates a 10,000 short=ter- capital loss (%CL*6
Regular corporations can only deduct capital losses against
capital gains.
+ %hus, the 10,000 %CL ould not be deductible currently by the
corporation
+ #nstead, it ould be carried )orard )or up to 5 years.
#) the ba/ery is operated as a sole proprietorship, a-antha
ould report the capital loss on her individual return.+ he could use the 10,000 %CL to o))set any capital gains she
-ay have, and deduct up to 3,000 o) the loss against ordinary
inco-e.
7/21/2019 Ch17 - 2015
66/66
If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact
!r" !onald #" Trippeer, $P%
trippedr@oneonta.eduS&'( )neonta