BA128A Agenda 4/19

• Questions from lecture

• Project

• Review C3

• Assignment - C3-38,51,58

• Additional - C3-40,43,45

Accounting methods and calendar year of corporations

• Cash

• Accrual

• Hybrid

• Fiscal year vs. calendar year

• limitations on Personal Service Corporations and S-corps - prevents deferral of income

Deductions and losses - a comparison to individual rules

• No itemized deductions• No hobby losses or net investment interest deduction

limitations• No personal exemption• No section 212 production of income expense deduction• No non-bus bad debts, alimony, IRA contribution• Casualty losses are fully deductible• No deduction for interest expenses incurred to borrow

tax-exempt securities

Capital Gains and Losses

• Same process of netting LTCG, LTCL; STCG, STCL

• Additional 20% depreciation recapture for section 1250 property

• No $3000 capital loss offset against ordinary income; carry back 3 and forward 5

• No capital gain rate preferential; same treatment as ordinary income

Organization and start up expenditures• Capitalized and amortized for a period of >= 60 months• Election must be made• Organization expenditures

– expenses incurred for the creation of corp– legal and accounting services– fees paid for incorporation– expenses for temporary directors and organization meetings– exclude : expenses incurred in issuing and selling stock or transfer of assets to corporation

• Start up expenditures– expenses to investigate the creation or acquisition of trade/business– expenses to create an active trade/business e.g. survey of potential markets, analysis of

available facilities, advertisements for opening of business, training of new employees and etc.

– if business is discontinued or disposed of before amortization period, can deduct as a loss

Charitable Contributions• 10% of adjusted taxable income

• adjusted taxable income excludes charitable contribution deduction, NOL carryback, capital loss carryback, dividends-received deduction but INCLUDEs NOL carryover

• timing of deduction: for accrual method taxpayers, can deduct in the year Board of Directors authorizes the contribution and that the contribution is paid on or before the 15th day of the 3rd month following the end of the accrual year

• Similar rules regarding ordinary income and capital gain property

– Ordinary income property - at FMV -minus ordinary gain ie adjusted basis, exceptions: inventory, scientific research property and computer technology related property - at FMV- (0.5*ordinary gain)

– Capital gain property - at FMV exception: unrelated use property and appreciated property to private nonoperating foundations

Special deduction - Dividends-received deduction

• Include dividends in Gross Income

• receive dividends deduction <20% - 70% deduction, >=20% but < 80% - 80% deduction

• limitation - lesser of 70%(80%) of dividends or 70%(80%) of taxable income without regard to any NOL deduction, capital loss carryback or dividends-received deduction itself

• Does not apply if an NOL results after the deduction is taken into account

• If ownership >=80% - receive full 100% dividends deduction with no limitations - members of affiliated group

Restrictions on dividend-received deduction

• Dividends received from foreign corp - not deductible

• Stock held for 45 days or less - prevent corporate taxpayers from buying stock, receiving dividends deduction and at the same time able to deduct capital loss at the time of sale

• Debt-financed stock - prevent corporate taxpayers from borrowing $ to buy stock where both interest expense and dividends are deductible

Net Operating Loss

• Carry back 2 (earliest of the 2 first) and forward 20 (first preceding year)

• May elect not to carry back, once elected for the year, irrevocable

• Deduction sequence– Charitable Contribution (include NOL carryover)

– Dividends received deduction (not include NOL carryover)

– NOL

Corporate Income Tax Liability• $0-$50000 15%• Amount over

– $50000 - $75000 25%– $75000 - $100000 34%– $100000 - $335000 39% - phase out– $335000 - $10m 34% - flat 34%– $10m - $15m 35%– $15m - $18.33 38% - phase out– >$18.33m 35% - flat 35%

• PSC taxed at 35% regardless of income

Transactions between controlling SH and corporation

• Defined as >50% of stock ownership• constructive ownership rules applies• gain on sale/exchange transaction - selling of

depreciable property between controlling SH and corporation is treated as ordinary income

• no deduction for losses on sale of property• different accounting methods -defers deduction for

accrued expenses and interests until income is recognized by the other party

Controlled group of corps• Parent-subsidiary controlled groups• Brother-sister controlled groups• Combined controlled groups• prevent corporation from breaking into smaller corporations to enjoy lower tax rates• share progressive tax rate schedule

– treat as one corporation when calculating tax rates• required allocation on

– section 179 depreciation– business tax credits– AMT statutory exemption

• Other limitations - sale of depreciable property between the corps in the same group - subject to ordinary income, no early accrual of expenses and interests if accounting methods are different between the corps, deferral of loss of sale transactions between corps until a sale outside the group

Consolidated return

• File one income tax return• Usually apply to the parent-subsidiary group of corps and

members of an affiliated group• Adv - profit of one corp and offset losses of another, profit

from intercompany transaction can be deferred until a sale to outside the group occurs

• Disadv- loss on intercompany transaction is deferred, section 1231 loss of one corp needs to be netted against 1231 gain of another corp, losses on an unprofitable member may reduce deduction limitation of the group, additional administrative costs