R3: C Corporations

cash vs. accrual for C corporations

*cash basis is used vast majority of the time except in these situations (then use accrual):

1. accounting for purchases/sales of inventory when the business has > than $31 million avg. annual gross receipts for 3 years

2. tax shelters

3. certain farming corporations meeting the $31 million rule

4. C corps, trusts w/ unrelated trade or business income, & partnerships meeting the $31 million rule

trade or business deductions

all of the “ordinary & necessary” expenses paid or incurred throughout the taxable year in carrying on a business are deductible

executive compensation

• can’t deduct more than $1 mil paid to top 5 highly compensated officers

• entertainment expenses for officers only deductible to the extent they are included in gross income

• any “excessive salary” is treated as a dividend to the officer and taxed at different rates

bonuses

deductible if both conditions met:

1. all events have occurred that establish a liability w/ reasonable accuracy

2. paid within 2.5 months of YE

bad debts

not deductible for tax purposes unless in the case of an uncollectible check that has been deposited & recorded as income

business interest expense

if avg. annual gross receipts are more than $31 million for the the prior 3 taxable years, interest expense deduction is limited to the sum of:

1. business interest income

2. 30% adjusted taxable income (ATI)

3. floor plan financing interest expense

prepaid interest expense

must be allocated to the proper period to which it is related

charitable contributions

• allowed a maximum deduction of 10% of taxable income

• any excess carry forward for 5 years

• must be paid within 3.5 months of taxable YE to be deductible

business/casualty losses

• partially destroyed → take lesser of:

  • decline in value of property

  • adj. basis of property immediately before loss

• fully destroyed → loss is adj. basis of the property

organizational & start-up costs

• can deduct first $5,000 of start-up & first $5,000 of organizational costs

• anything over $50,000 will reduce allowance amount dollar-for-dollar

amortization

goodwill, covenants not to compete, franchises, trademarks, & tradenames must be amortized on a SL basis over 15 years (180 months)

life insurance premiums

• corporation as beneficiary → not deductible

• employee as beneficiary → deductible

business gifts

deductible up to a maximum of $25 per recipient per year

business meals

50% deductible

business entertainment

not deductible

penalties & illegal activities

not deductible

payments made related to sexual harassment or sexual abuse

not deductible if payment is subject to an NDA

deductible taxes

• state, local, & federal payroll taxes are deductible

• federal income tax not deductible

lobbying & political expenditures

not deductible

capital loss deduction

• $3,000 loss is for individuals only

• for C corps can only deduct cap losses to the extent of cap gains

dividends-received-deduction (DRD) percentages

0-20% ownership → 50% exclusion

20-80% ownership → 65% exclusion

>80% ownership → 100% exclusion

DRD calculation

DRD equals the lesser of:

• DRD % x dividends received

• DRD % x taxable income

unless:

• taking the full DRD causes an NOL, then you would take the greater of the 2 (the one that caused the NOL)

entities not eligible for DRD

1. personal service corporations

2. personal holding companies

3. (personally taxed) S corporations

companies receiving 100% DRD

• affiliated corporations

• small business investment corporations (SBICs)

Schedules M-1 and M-3

• reconciliation book/tax differences

• M-3 must be used if total assets of company are >$10 million

C corporation filing requirements

• due April 15th, 6-month extension available

• quarterly payments due, can be unequal if using the annualized income method

large corporations vs. non-large corporations

• large corporation → corporation for which taxable income was $1 million or more in any of its 3 preceding tax years

  • must pay 100% of tax as shown on current year return

• corporations not classified as large → required to pay the lesser of:

  • 100% of tax shown on current year return

  • 100% of tax shown on return for prior year

flat tax rate for corporations

21%

general business tax credit

consists of a combination of any of the following:

• investment credit

• work opportunity tax credit

• alternative fuels credits

• R&D credit

• low-income housing credit

• small employer pension plan start-up costs credit

• other infrequent credits

---

• credit may not exceed (net income tax minus 25% of net regular tax liability) above $25k

• carryback 1 year, carryforward 20 years

R&D tax credit (part of general business credit)

• calculated as 20% of the increase in qualified research expenditures over a defined base amount

foreign tax credit

• corporation can annually choose to take either a credit or a deduction for eligible foreign taxes paid or accrued

• carryback 1 year, carryforward 10 years

Credit is the lesser of:

• given qualified foreign income taxes paid

• 2 calculations multiplied together

  • (A): worldwide taxable income x tax rate

  • (B) foreign income/worldwide taxable income

potential tax in addition to flat corporate rate

C corps may have to pay:

1. accumulated earnings tax OR

2. personal holding company tax

(but never both!)

accumulated earnings tax

• penalty tax imposed on C corps whose RE is in excess of $250k if earnings are considered to be improperly retained instead of distributed as a dividend

• flat 20% rate

• this tax is not imposed on personal holding companies, tax-exempt corporations, or passive foreign investment corporations

• IRS-assessed tax as a result of an audit

personal holding companies (PHCs)

corporations set up by high tax bracket taxpayers to channel their investment income into a corporation & shelter that income through the lower tax rate

• PHC defined as a corporation more than 50% owned by 5 or fewer individuals & having 60% of adj. ordinary gross income consisting of the following passive income items:

  • Net rent (if <50% of ordinary gross income)

  • Interest that is taxable

  • Royalties

  • Dividends from an unrelated domestic corporation

*bonuses are not PHC income

personal holding company tax

• an additional 20% on personal holding company net income not distributed

• if net income is distributed, then no penalty

• a self-assessed tax, fill out Schedule 1120 PH

NOL table

	Carryforward	Offset future TI
Before 12/31/17	20 years	100%
Between 1/1/18-12/31/20	Indefinitely	100% thru 2020, 80% after 2020
After 12/31/20	Indefinitely	Up to 80%

capital losses for C corporations

a C corp can only use capital losses to offset capital gains

C corp net capital losses

• can only offset capital losses to the extent of capital gains

• carryback 3 years, carryforward 5 years

difference between net capital loss & net operating loss

• net capital loss: overall loss on capital sales (capital loss exceeded capital gains)

  • carryback 3 years, forward 5

  • can only offset cap losses to the extent of cap gains

• net operating loss: overall loss for the year (expenses exceeded income)

  • carrybacks/carryforwards based on NOL table