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10-1
Taxation of Regular (C) Corporations
Distinguishing tax feature relative to other business entities: double taxation Corporate income is taxed at the entity level
and to shareholders when distributedLegal characteristics of the corporate form
Limited LiabilityContinuity of LifeFree Transferability of InterestsCentralization of Management
10-2
Corporate Taxable Income
Taxable gross income minus allowable business deductions (Chapters 5 & 6)
Taxable net gains on property dispositions - net capital losses not currently deductible (Chapter 7)
Special corporate considerations:Charitable contribution limitationDividends received deduction
10-3
Special Corporate Issues
Corporate deduction for charitable contributions may not exceed 10% of taxable income before charitable contributions
Dividends Received DeductionException to double taxation for corporate
shareholdersDRD = 70% of dividends received from
less than 20%-owned corporations, 80% for greater than 20%-owned corporations and 100% for affiliated groups
10-4
Corporate Issues continued
Page 1 of corporate tax return reports taxable income
Balance sheet reported in corporate tax return is typically book (GAAP) basis
Schedule M-1 of corporate tax return requires reconciliation from book (GAAP) income to taxable income before DRD and NOL deductions
10-5
Corporate Issues continued
Consolidated Tax ReturnsAffiliated group may elect to file one returnAn affiliated group exists if:
A parent corporation owns at least 80% of the stock of at least one subsidiary, and
At least 80% of the stock of each other corporation is owned by other group members
Advantages:Offset income and gains of one member
against losses of anotherDefer intercompany gains
10-6
Corporate Tax Liability
Regular tax - progressive rate structureCredits against regular tax
Non-refundable, excess may be carried forwardprovide incentive to invest in socially or
economically desirable activities by reducing tax cost (increasing after tax return) from investment
Personal Service CorporationRegular corporation in which performance of
personal services is the principal activity and the services are performed by owner-employees who own more than 10% of the stock
PSCs are taxed at a flat rate of 35%
10-7
Alternative Minimum Tax
Intent: insure that taxpayers with substantial economic income pay some minimum amount of federal income tax
Approach: dual tax system - compute ‘alternative minimum taxable income’ and ‘alternative minimum tax liability’
Exemption: average annual gross receipts less than $7.5M
10-8C om p are Ten ta tive A M T to R eg u la r Tax L iab ility
If g rea te r, excess is A M T L iab ility
Ten ta tive A M T L iab ility
D ed u c t: Tax C red its
B ase t im es Tax R ateE q u a ls G ross A M T L iab ility
E q u a ls : A M T Tax B ase
D ed u c t E xem p tion
E q u a ls A M TI
A d d /su b trac t A d ju s tm en tsA d d P re fe ren ces
D ed u c t A M T N O L
Taxab le in com e b e fo re N O L
Calculating the AMT
10-9
AMT Adjustments
Represent timing differences between regular taxable income and alternative minimum taxable income - will eventually reverse, perhaps over several periods
Examples:Differences between MACRS and ADS
depreciation amountsCompleted-contract methodAmortization of pollution control facilities
10-10
Tax Preferences
Preferences are always positive additions to AMTI
Examples:Tax-exempt interest income from private
activity bonds - municipal bonds issued to fund non-government activities
Percentage depletion in excess of cost basis
10-11
AMT NOL Deduction
AMT NOL amount computed using alternative taxable income approach
Deduction limited to 90% of AMTI before the AMT NOLExample: If AMTI before consideration of
any NOL is $100,000, the maximum allowable AMT NOL deduction is $90,000.
10-12
AMT Exemptions, Tax Rate, Credits and Liability
Corporate exemption amount: $40,000, phased out for AMTI over $150,000
Corporate AMT tax rate: 20% AMT Tax Credits
Foreign tax credit Credit may only offset 90% of tentative AMT
Tentative AMT is compared to regular tax If Tentative AMT > regular tax, then AMT liability =
Tentative AMT - regular tax Total tax liability equals greater of Tentative AMT
or regular tax
10-13
Minimum Tax Credit
A minimum tax credit is generated in any year in which Tentative AMT exceeds regular tax
A minimum tax credit may be carried forward and used in any year in which regular tax exceeds Tentative AMT, to reduce tax liability at most by the amount of such excess
10-14
Tax Planning Implications of the AMT
Generally, the attractiveness of various tax incentives and the after-tax returns of tax-favored activities are reduced for taxpayers subject to AMT
For decision-making purposes, a taxpayer subject to AMT should consider their marginal AMT tax rate, not the marginal regular tax rate
10-15
Payment and Filing Requirements
Return due 3 1/2 months after end of yearautomatic 6 month extension available
Taxes paid in quarterly installments, due 15th day of 4th, 6th, 9th, and 12th months of taxable yearTo avoid underpayment penalties
required installments must equal at least 100% of final tax liability
safe harbor for small corporations (< $1M taxable income): 100% of previous year’s tax
10-16
Distributions to Investors
Payments to corporate creditors Interest element is tax deductible by
corporation, taxable income to creditor recipient
Payments to corporate shareholdersNot deductible by corporationPayments out of corporate earnings and
profits are taxable to shareholder recipientPayments in excess of corporate earnings
and profits generally treated as nontaxable return of investment to shareholder recipient