South-western federal taxation corporations partnerships estates trusts 2013 edition

Discuss the purpose of Schedule M Give two examples of an addition and two examples of a subtraction that could be reported on Schedule M Revenues, expenses, gains, and losses of a proprietorship flow through to the proprietor. A single-member LLC is taxed as a proprietorship. Revenues, expenses, gains, and losses of an S corporation flow through to the shareholders. Separately stated items e. Shareholders of a regular C corporation report income from the corporation to the extent of dividends received.

C corporations do not receive preferential tax rate treatment with respect to LTCGs. If Shrike Company is a proprietorship, there is no entity level Federal income tax. Such net capital loss is carried back or forward as a short-term capital loss.

Ellen would net these transactions with all other capital transactions for Stock: this is capital gain property, since a sale of the stock would result in long-term capital gain for Lavender. Land: this is capital gain property, since a sale of the land would result in a long-term capital gain for Lavender. In general, charitable contributions are deductible in the year made. However, in the case of an accrual method corporation, a deduction can be claimed in the current year for a charitable contribution made in the subsequent year if 1 the contribution is approved by the board of directors of the corporation in the current year, and 2 the contribution is made on or before the fifteenth day of the third month of the subsequent year.

The dividends received deduction is not limited to the taxable income limitation because it creates a net operating loss. The key to this question is the relationship between the dividends received deduction and the NOL deduction. The dividends received deduction is limited to a percentage of taxable income of the corporation unless taking the full dividends received deduction would cause or increase an NOL. Under these circumstances, taking the full dividends received deduction would create an NOL.

Expenses related to the printing or selling of stock or other securities do not qualify as organizational expenditures. For certain business entity forms, the entity is not subject to a Federal income tax. This is the case with the sole proprietorship, partnership, and generally S corporation entity forms.

The owners of these three entity forms would benefit from any preferential tax treatment associated with tax-exempt income i. In the case of a partnership including an LLC treated as a partnership or S corporation, tax-exempt interest, qualified dividends, and capital gains would be separately reported items on the entity return and retain their character when reported Schedule K-1 and taxed to the partner or shareholder.

In the case of a regular C corporation, tax-exempt interest, qualified dividends, and capital gains would be reported as such on the corporate tax return Form A corporation would exclude tax-exempt interest from gross income and offset capital gains against capital losses, but corporate taxpayers do not receive any preferential tax rate with respect to qualified dividends or LTCG.

Further, the tax attributes of income do not pass through the corporation to the shareholders. Instead, corporate distributions to shareholders generally are taxed as dividend income. As president of Pigeon Corporation, Adrian can have the corporation pay him a salary. As a creditor, he can have the corporation pay him interest on the loans. As a landlord, he can have the corporation pay him rent.

All of these expenses can be deducted by the corporation. In order to avoid disallowance of any of these deductions at the corporate level, the payments to Adrian must be reasonable in amount. Payments deemed to be unreasonable in amount will be treated as corporate dividends to Adrian and nondeductible by Pigeon.

However, to the extent the payments are reasonable in amount and deductible by Pigeon Corporation, the corporate tax is avoided on such amounts.

The payments received by Adrian would be income i. A C corporation is a separate taxable entity, so its taxable income has no effect on the shareholders until such time a dividend is paid. When dividends are paid, shareholders must report dividend income on their tax returns. On the other hand, the income of a partnership is passed through to and reported by the partners on their tax returns.

Similar to the corporate entity form, a limited liability company is an entity created under the laws of a specific state or the District of the Columbia and, pursuant to such laws, an LLC has the corporate feature of limited liability. This is the primary nontax characteristic that makes LLC status attractive.

Other nontax attributes that are available with the LLC entity form include centralized management, continuity of life, and free transferability of ownership interests. Which of these nontax attributes are allowed will be dependent on the laws of the state of LLC organization. Some exclusions are available to both types of taxpayers e. Nontaxable exchange provisions e.

Some loss disallowance provisions apply to both types of taxpayers e. Certain exclusions apply only to individuals e. Corporations do not have nonbusiness deductions, itemized deductions, standard deductions, personal or dependency exemptions, or adjusted gross income.

Some credits available to individual taxpayers are not available to corporations e. Explain the rules regarding the accounting periods available to corporate taxpayers. In general, a corporate taxpayer may select a calendar year or a fiscal year for tax return reporting purposes. However, certain types of corporate taxpayers are subject to restrictions on their reporting period. In general, personal service corporations PSCs and S corporations are required to use the calendar year for tax reporting.

Exceptions to this rule apply, and a fiscal year can be elected by a PSC or S corporation , under any of the following conditions:. See Chapter As a result, the interest expense on the loan is deductible by Crow in the year it is actually paid to Jessica, or Thus, Crow has no deduction for interest expense on the loan for Briefly describe the accounting methods available for adoption by a C corporation.

In general, a C corporation must adopt the accrual method of accounting. However, there are several exceptions to this rule, and the following C corporations can use the cash method of accounting:. There is a limitation on the use of the cash method by otherwise qualifying corporations that maintain inventories. In general, these corporations must use the accrual method in determining sales and cost of goods sold.

Accrual method corporations are subject to a limitation on the deductibility of an accrued expenditure attributable to a cash method related party e. Briefly describe the charitable contribution deduction rules applicable to C corporations.

Tax year of deduction: In general, a charitable contribution is deductible only in the year the gift is made. Amount of contribution: In addition to cash gifts, property contributions to qualified charitable organizations are also deductible. However, charitable contributions of certain inventory property by corporations can result in an enhanced deduction amount. Mallard should incur all of its organizational expenditures in its first taxable year.

Such expenditures need not be paid in the first year, even if Mallard uses the cash method of accounting. Since Mallard is commencing operations late in the calendar year, the corporation should consider adopting a fiscal year that will close after it has incurred all of its organizational expenditures. A corporation may freely select a fiscal year by filing a timely return. Estimated payments are made quarterly, due on or before the 15th day of the 4th, 6th, 9th, and 12th month of the taxable year.

Schedule M-1 is used to reconcile the differences between net income per books with taxable income before any dividends received deduction and NOL deduction. Examples of items that are additions include Federal income tax expense, excess of capital losses over capital gains, income subject to tax but not recognized for book purposes, book depreciation in excess of tax depreciation, and nondeductible expenditures e.

Examples of items that are subtractions include tax-exempt income e. What is the purpose of Schedule M-3? Which corporations are required to file Schedule M-3? Schedule M-3 was created, in part, in response to financial reporting scandals, such as Enron and WorldCom. Schedule M-3 requires corporations to report much more information regarding the differences between financial net income loss and taxable income than is required of Schedule M The financial figures e. If Form K is not filed, then another financial source, e.

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What is CNOWv2? For purposes of a gift to a museum, the latter requirement is satisfied if the painting is of a type normally retained by such museum, unless Snipe has actual knowledge to the contrary that the painting would be put to an unrelated use.

If the corporation refuses to file a proper return with respect to the contribution, you should consider withdrawing from the engagement. For a recent ruling where the enhanced inventory deduction was disallowed due to inadequate substantiation, see NSAR IF August 15, Domestic production activities deduction DPAD is based on the income from manufacturing activities see Chapter 3 for a detailed discussion.

Corporations do not make adjustments for nonbusiness deductions or for personal exemptions as individuals do. For dividend distributions received from other domestic corporations. Assume the same facts as in the preceding example. Multiply the dividends received by the deduction percentage. Multiply the taxable income by the deduction percentage. If so, the amount derived in Step 1 should be used. This is referred to as the NOL rule Example Periods for which the corporation has diminished its risk of loss on the stock through a short sales do not count towards 45 day requirement Reg.

DRD is reduced to extent of portfolio indebtedness any indebtedness directly attributable to investment in stock. Such expenses may be amortized over a month period starting in the month in which the business begins. In order for a corporation to qualify for this election, expenditures must be incurred before the end of the taxable year in which the corporation begins business.

A corporation may choose to forgo the deemed election by clearly electing to capitalize organizational expenditures for the taxable year in which the business begins. In this case, the organizational expenditures are not deductible until the corporation ceases to do business and liquidates unless the corporate charter limits the life of the corporation.

Startup expenses investigation and operating expenses incurred before the business begins producing income are different from organizational costs. However, the amortization, immediate expensing, and deemed election rules described in a. Final Regulations Reg. Consequently, the tax savings from the lower rates [i. PSC is a corporation substantially owned by employees current, retired, estates thereof, or estate beneficiary and its business activities consist of the performance of services in qualifying fields.

This definition of a PSC also applies for purposes of the limitation on the cash method of accounting outline item As to the function requirement, Temp. A recent case addressing the function requirement is Grutman-Mazler Engineering, Inc.

Similarly, Temp. Summary Opinion Most adjustments and preferences are the same as for individuals, but the rates and exemption amounts are different. See Chapter 3 for a detailed discussion of the AMT. See Examples 32 and 33 Controlled groups are parent-subsidiary corporations, brother-sister groups, combined groups and certain insurance companies. Final regulations on which corporations are included in a controlled group were issued in T.

See Reg. A Long Lost Relative? Thus, Pelican and Seagull are related corporations and members of a controlled group of corporations brother-sister controlled group. If this is the case, then you should advise the client of the error and recommend amended tax returns to correct the error.

Corporations must file a tax return Form or Form S on or before the 15th day of the third month following the close of the tax year. Corporations receive an automatic extension of 6 months by filing Form by the due date of the return. Any shortfall of this payment must be remedied in the second installment payment.

Schedule M Reconciles the net income per financial accounting books with taxable income per the tax return. That is, Schedule M-1 computes the book to tax differences for the year. Taxable income reconciled to net income per books is taxable income before the dividends received deduction and the NOL deduction. Schedule M-2 reconciles unappropriated retained earnings for the year.

Computations for Schedules M-1 and M-2 are illustrated in Examples 35 and This form is a response to the financial scandals. Any income statement restatements or adjustments for the current or past 5 years should be included.

Part II reconciles net income loss of includible corporations with taxable income on the return. Corporations included in the financial reporting group may differ from the tax reporting group. Differences between financial and tax amounts must be classified as being temporary or permanent.

Final Regulation [Reg. See Chapter 14 for a discussion on financial reporting of tax positions. Topic Limitation on fiscal year-end for PSC: business purpose exception Charitable contribution of inventory: enhanced deduction Personal service corporation: application to surveying business Internet activity Internet activity Internet activity. Same as a. No offset if a PSC. Gift land in You should ask questions that will enable you to assess both tax and nontax factors that will affect the entity choice.

Some relevant questions are addressed in the following table, although there are many additional possibilities. This question will provide information that may affect the need for limited liability, ability to raise capital, ease of transferring interests in the business, how long the business will continue, and how the business will be managed.

Dividends from a C corporation must be reported on the tax returns of the shareholders. Any income loss from other sources will also be reported on the returns of the owners. Thus, for planning purposes, it is important to know all sources and types of income loss that the owners will have.

Losses of partnerships, S corporations, and LLCs flow through to the owners and represent potential deductions on their individual returns. Losses of a C corporation do not flow through. Profits of a C corporation must be reported on the tax returns of the shareholders only if such profits are paid out to shareholders as dividends. Thus, in the case of a partnership, S corporation, or LLC, owners must pay tax on profits before plowing funds back into the business.

In the case of a C corporation, the corporation must pay tax on its profits. States assess business taxes e. C corporations are separate taxable entities. Shareholders are required to report income from a C corporation only to the extent of dividends received; thus, Barbara reports no income from Cassowary for An S corporation is a tax reporting entity but generally not a taxable entity.

Instead, its profit loss and separately stated items flow through to the shareholders. Art should consider operating the business as a sole proprietorship or a single-member LLC for the first three years. Therefore, he will be able to deduct the losses against his other income.

When the business becomes profitable, Art should consider incorporating. If he reinvests the profits in the business, the value of the stock should grow accordingly, and he should be able to sell his stock in the corporation for long-term capital gain.

A C corporation is a separate taxable entity, and its taxable income has no effect on the shareholders until such time a dividend is paid. When dividends are paid, shareholders must report dividend income on their tax returns.

Since no dividends were distributed, the shareholders have no tax consequences in the current year with respect to Plover Corporation. Partnerships are tax reporting entities, and the income, gains, deductions, and losses of a partnership are passed through to and reported by the partners on their tax returns.

Long-term capital gains of a partnership retain their character when reported by the partners. Distributions or the lack thereof typically do not affect the tax treatment of partnership activities. Various loss limitation rules e.

If Blue Company is an S corporation: An S corporation is a tax reporting entity Form S , and its income, gains, deductions, and losses are passed through to and reported by the shareholders on their tax returns. Separately stated items, e. If Blue Company is a C corporation: A C corporation is a separate taxable entity, and its taxable income has no effect on the shareholders until such time a dividend is paid.

Corporations can deduct capital losses only to the extent of capital gains. Under the check-the-box Regulations, LLCs are be taxed as follows.

A single-member LLC is taxed as a proprietorship unless an election is made on Form to be taxed as a corporation. An LLC with more than one owner is taxed as a partnership unless an election is made on Form to be taxed as corporation. Entities that are incorporated under state law or required to be taxed as corporations under Federal law e.

The statement is correct. Because no Form was filed, the LLC will be taxed as a partnership, the default classification for multi-member LLCs under the check-the-box Regulations. A Form is required to be filed only if the taxpayer wants to elect to have the entity classified as a corporation for Federal tax purposes.

In general, the statement is correct. That is, corporate taxpayers generally may choose a calendar year or a fiscal year for reporting purposes. However, the use of a fiscal year is restricted for personal service corporations and S corporations.

For such corporations, the calendar year is the required reporting period, subject to a few limited exceptions e. A C corporation is relatively unrestricted as to the choice of accounting periods, and generally may choose either a fiscal year or a calendar year. It is not necessary for a new C corporation to obtain consent of the IRS with regard to its choice of an accounting period.

Thus, Salmon Corporation can elect a March 31 fiscal year-end, but Scarlet Corporation would need to satisfy the business purpose exception to qualify for a March 31 fiscal yearend. In general, a corporation is not allowed to use the cash method of accounting for Federal tax purposes. However, S corporations, qualified personal service corporations, and C corporations engaged in the trade or business of farming or timber are exceptions to this rule.

Thus, Jade satisfies the gross receipts exception and may use the cash method of accounting. Lime Corporation, a PSC, may use the cash method of accounting without regard to its gross receipts. A corporation that uses the accrual method cannot claim a deduction for an expense involving a related party e.

Both corporations and individuals include recognized capital gains in their taxable income. For a corporate taxpayer, there is no preferential tax rate applicable to long-term capital gains. If Osprey is a personal service corporation, it cannot deduct any of the passive loss in the current year.

A personal service corporation cannot offset a passive loss against either active or portfolio income. A closely held corporation that is not a personal service corporation can offset passive losses against active income but not against portfolio income. A closely held C corporation that is not a personal service corporation can offset a passive loss against active income, but not against portfolio income. Example