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by: Zoie Hoeger

Participation THE 100

Zoie Hoeger
GPA 3.98


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Class Notes
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This 5 page Class Notes was uploaded by Zoie Hoeger on Wednesday October 28, 2015. The Class Notes belongs to THE 100 at Wake Forest University taught by Staff in Fall. Since its upload, it has received 16 views. For similar materials see /class/230709/the-100-wake-forest-university in Theatre at Wake Forest University.


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Date Created: 10/28/15
Accounting 331 Course Outline Fall 2004 Chapter 2 Introduction to Income Taxation of Corporations Differences and similarities to individual income taxation Corporation has no deduction for itemized deductions as all of its expenses are business deductions plus there is no standard deduction 0r personaldependency exemption Corporate income tax model is much more straightforward Gross Income generally apply to all business entities Trade or Business Deductions generally apply to all business entities Taxable Income before NOL and Special Dividends Received Deductions NOL amp Dividends Received Deductions Taxable Income Note No AGI for Corporations Accounting Periods and Methods C Corporations may choose a calendar year or a scal year for reporting purposes but S corporations and personal service corporations are subject to restrictions on the choice of a scal year Consequently S amp PSC normally choose a calendar year The cash method is often not available to C corporations S Corporations and quali ed PSC s are excluded from this rule C corporations with average gross receipts 5 million or less for the past three years are also excluded IRS Notice 200176 permits quali ed service providers with average annual gross receipts of not more than 10 million for the most recent three year period to use the cash method This applies even if the taxpayer is buying anal selling inventory DoQ213 Comparison of a proprietorship owthrough entity with a corporation Proprietorship pro ts subject to SE tax no salary for the proprietor C corporations taxed on the net income and the shareholders taxed on the dividends received Shareholders of C corporations can be subject to treatment of part of their salaries as dividends under the doctrine of unreasonable compensation 0 267 Related party issuesian accrual basis taxpayer cannot claim a deduction for an accrual owed to a related party until the recipient reports that amount as income Capital gains and Losses Comparison with Individuals Net capital gains for corporations are not subject to lower rates as are gains for individuals Corporate capital losses may only offset capital gains Excess capital losses are carried back three years and forward ve years to offset capital gains while capital gains for individuals are carried forward inde nitely Further for corporations capital loss carry backs or carryovers become short term capital losses For individuals they retain their original status as short term and long term Do F 239 40 Passive Activity Losses Passive Loss Limitations apply to closely held C corporations gt50 ownership 5 or fewer individuals and to PSC s but do not apply to regular C corporations Closely held C corporations may offset passive losses against active income Do Q 218 Charitable Contributions General ObservationsiRules parallel to a large extent those for individuals For long term capital gain property the amount of the deduction is the fair market value on the date of the donation A contribution of tangible personal property that is put to an unrelated use by the charity is limited to the adjusted basis at the date of donation For contributions of ordinary incomeproducing property the deduction is limited to the lower of adjusted basis or fair market value Corporate contributions of ordinary income property to charities that use the property in a manner related to the exempt purpose and solely for the care of the ill needy or infants or where the property is used for research purposes under special rules 1 The deduction is measured by the adjusted basis of the property plus half of the appreciation of the property 2 However the deduction cannot exceed twice the basis of the property A corporate taxpayer is limited to 10 or taxable income computed without regard to the charitable contribution deduction any net operating loss carryback and the dividends received deduction Any contribution in excess of the 10 limitation may be carried forward for five succeeding tax years For accrual basis corporations there is an exception to the rule that deductions for charitable contributions are allowed only for the year in which payment is made A corporation may deduct a charitable contribution in the year preceding payment if the contribution is authorized by the board of directors by the end of that year and is paid on or before the 15Lh day of the third month of the next year Review Problems 242 43 44 Net Operating Losses A net operating loss of a corporation is not subject to the adjustments required for individual taxpayers capital gainslosses amp nonbusiness income A corporation is allowed to include a dividends received deduction in computing its net operating loss See White Corporation example in P 2 47 Generally NOL s are carried back 2 years and forward 20 years The corporation may also elect to forgo the carry back and simply carry forward Deductions Available Only to CorporationsiDividends Received Deduction A corporation is allowed a dividendsreceived deduction for distributions received from other domestic corporations The amount is limited as follows page 2 18 The dividends received deduction is limited to a percent of taxable income of the corporation computed without regard to the net operating loss the dividends received deduction and any capital loss carry back for the current tax year The percentage of taxable income corresponds to the deduction percentage The taxable income limitation does not apply if the corporate shareholder has a NOL for the current year Review Problems 246 amp 47 Organization and Stalt Up Expenses Qualifying expenses under 248 Legal services incident to organization Necessary accounting services Expenses of temporary directors and organizational meetings of directors or shareholders Fees paid to the state of incorporation Such expenses may be amortized over a 60 month or greater period To qualify for the election must be incurred before the end of the taxable year in which the corporation begins business If a timely election is not made the organizational expenses cannot be deducted until the corporation ceases to do business and liquidates The election is made in a statement attached to the corporation s return for its rst taxable year A cash basis corporation can include cost that incurred although unpaid as long as the liability arises in the rst year Under 195 start up costs can also be amortized over a period of 60 months These costs include investigation expense involved in entering a new business as well as operating expenses incurred before the corporation actually begins producing gross income e g rent payroll travel market surveys fmancial audits legal fees Review Problem 248 49 Corporate Income Tax Rates Corporations compute their Federal income tax liability using the rate structure contained in 11b Tax savings at lower rates favors small businesses PSC rate is 35 we will use 34 for most illustrations Tax Liability of Related Corporations Related corporations are subject to special rules for computing the income tax the accumulated earnings credit and the AMT exemption Without these rules the shareholders of corporations could gain signi cant tax advantages by splitting a single corporation into multiple corporations Hamburgers York Road 41 TC 78 1964 and examples 30 amp 31 page 222 give illustrations To preclude the advantages that could be gained by the use of multiple corporations the tax law requires special treatment for controlled groups of corporations To eliminate the advantages of using multiple corporations to achieve lower rates the law limits a controlled group s taxable income in the tax brackets below 35 As a group they are limited to the amount they would have if they were one corporation The allocation of the lower brackets is equal unless all members consent to an apportionment Controlled Groups Controlled groups are generally parent subsidiary or brother sister groups A parent subsialiary group exists if stock possessing at least 80 ofthe total combined voting power of all classes of stock or at least 80 of the total value of shares of all classes of stock in each of the corporations except the common parent is owned by one or more of the other corporations and


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