Corporate Tax Rules

economics exam answers

Title 26 in USC

-internal revenue code

 

IRS enforces the code, does not make it

-Congress makes the code

IRS under executive branch

 

3 types of treasury regulations that interpret IRC

Interpretative

-Treasury dpt’s interpretation of what the tax law says

-not enforceable and is not law

Procedural

-how you have to do something

-should follow these

Legislative

-the secretary of the treasury shall regulate as needed to enforce parts of code

 

 

All tax laws start in the House of Reps

House ways and means committee

-Always invite IRS and Treasury people to hear committee

Bill is vote don by committee and then taken to House floor

If approved by 2/3rds of House it goes to Senate

Finance Committee

If approved by senate it gets sent to Conference Committee

-adjust differences in senate and House Bills

Sent to president

Very first income tax came from Lincoln

 

Tax Court

Civil tax cases

Judges from Treasury…

No juries

5 years at most in jail for taxes

Beyond a reasonable doubt

Preponderance of evidence

–          To convince the govt they are wrong

 

United States District court

Federal District Court

 

Choice of Entity

Sole Proprietorship

Schedule C form 1040

Must use calendar year end

Cash method of counting

Sub section A

–          General Rule

  • Always an exception
  • Cash method is mandatory unless inventories are a material income producing factor

Liability is personal and unlimited

 

Partnership- 2 + individuals

File 1065

No income taxes

Flow through entity

Reported to personal income tax forms

General Partnership

-All partners are personally liable for debts

Partners end up suing each other

Limited Partnership

Limited partners not liable for debts

 

LLC

Taxed as a partnership

1065

Can have one partner LLC (SMLLC)

 

Corporations

2 types

C corp

S corp

Corporations are Taxed under sub chapter c (where c corp comes from)

S corp under sub section S

 

C corp

File annual tax return

Rate starts at 15% and goes up to 35%

Dividends are not deductible by corporation

 

S corp

No income taxes

Flow through entity

Shareholders pay their ownership % and pay it on income tax

 

Payroll taxes

 

Class 2

 

G7 Nations

Canada, Germany, France, Italy, UK, USA, Japan

 

How to incorporate?

Filed in state of incorporation

Secretary of State

In Ohio 2 pieces are filed

  1. Articles of Incorporation
    1. Name of the corporation
    2. Address of offices
    3. Purpose clause

i.      Why are they incorporated

  1. Number of shares of stock authorized to issue
  2. Name of the directors of the corporation
  3. Appointment of Agent
    1. Be able to serve as statutory agent

i.      Able to receive legal documents

  1. Name agent
  2. Address of agent
  3. Phone number of agent

 

SoS will send confirmation letter along with charter corporate number to identify

 

All information is available online

 

Now the corporation exists

 

Corporation -à stock certificate | shareholder

Shareholder à $ | Corporation

 

The Majority Shareholder votes controls what the corporation does

 

Shareholders appoint directors

Directors appoint officers

Secretary, president, VP

 

By Laws of a Corporation

–          Functions for all of the officers

 

IRS gives federal ID number for filing taxes

 

Ohio withholding tax and vendor licenses

 

If shareholder contributes property instead of cash, the shareholder has a tax consequence

Section 351 of Internal Revenue Code

 

Shareholder that transfers something of value transferor

Corporation that receives the value is the transferee

ee- receiving something

 

Payment to shareholder is a dividend

 

If shareholder receives salary or bonus from corporation, it is subjected to a limitation

–           Reasonable and Necessary Compensation is deductible from corporation

–          Section 162

–          Extreme third party arm’s length business terms

 

Risk capital – may lose the money

No guarantee that the money will come back from the stocks

 

Loan to corporation

Debit cash

Credit Loan payable to shareholder

 

Secured creditors get paid first in the case of a bankruptcy

Shareholders get paid last

Loans receive promissory note

 

Companies that have to be a corporation

-insurance company

-Federal organized companies

– Publically traded partnership

– entity owned by state or subdivision of state

– if for profit

-Business entity wholly owned by foreign government

1120 is the form filed as a corporation for taxes

 

Corporations that receive dividends from other corporations can exclude 100% of income received from the dividends from income

Fines and penalties not deductible by a corporation

 

Charity deductions up to 50% of income

 

Effective tax rate: Payment/ taxable income

 

 

 

 

 

 

 

 

Personal Service Corporations

Automatic 35% tax rate

448 (d) in IRC

If it meets 2 tests it is a PSC

Substantially all activities involve performing services

–          Health, engineering, architects, accountants, actuaries, performing arts, consultants

Substantially all stock owned by employees performing those services

Code section 7701 has definitions

95% or more of stock is owned by shareholders performing services

By not checking the box on tax form it extends the limitation by 1 year to 4 years

 

—- Slovenia, Greece, Iceland… 20% corporate tax

Canada 15%

 

C corp form 11-20 has to be filed with IRS campuses on the 15th day of the 3rd month at the end of its tax year

–          Can file a form 7004 for an extension, 6 months

–          All domestic corporations have to file regardless of taxable income

 

S corp must file 11 20 s on the 15th day of the 3rd month after end of tax year

-7004 gives 6 month extension

 

Partnership or LLC files 1065 on 15th day of 4th month at end of tax year

-no income means no filing

 

1040’s/individuals file on 15th day on 4th month

4868 form gives 6 month extension

If you are single and under 65 before jan 1st, 2012 and gross 2011 income is 9,500 dollars or less, no 1040 required

-null if self-employment tax liability is 400 dollars and up

65 or older and single has to have 10950 dollars

1041 required if trustee of the trust or executor of state files due on 15th of 4th month

-if 600 dollars or more of gross income

– OR beneficiary is a non-resident alien

 

Controlled Group

Parent c corporation has shareholders of the parent corporation

Parent c corporation may have subsidiary corporations that are separate corporations

Parent corporation owns stock in subsidiary corporation

Wholly owned

 

If parent corporation divided itself up into smaller corporations, the tax liability is divided

Puts you in lower tax brackets

Commonly controlled group as defined by 1563

2 or more corporations owned directly or indirectly by the same shareholders or groups

 

 

3 types of controlled groups (section 1563)

 

Parent-subsidiary group- connected by at least 80% ownership in one or more corporations

Example: parent corporation owning 80% + of subsidiary corporation

First 50,000 of taxable income is taxed at 15% , allocated among group.

Example 2: Parent owns 85% of stock of subsidiary corporation and also owns another parent subsidiary in which it owns 100%

 

Parent owns 85% of stock of subsidiary corporation 1 and also owns another parent subsidiary 1 in which it owns 100%. Sub 2 owns 30% of sub 3. Sub 1 owns 40% of sub 3

Sub 3 is not part of parent-subsidiary group

 

Brother sister control group

2 or more corporations

5 or less individuals, trusts or estates own 80% or more of the stock of each corporation

Same 5 own More than 50% of the stock of each corporation, taking into account commonly owned stock, to each corporation

Example:

 

Shareholders                            North C Corp               South C Corp                   common

______________——————————— —————————————————–

 

Will                                    30%                                        70%                                30%

Gale                                      70%                                      30%                                30%

 

 

Combined control group

3 or more corporations in which each corporation is a member of a parent sub group or a brother sister group

And, one or more of the corporations is both the parent and a member of a brother sister group

 

 

Shareholders      A corp    C corp     B corp

 

Amy                     50%             50%    0%

Ben                      50%               50%    0%

A corp                 0%                 0%      100%

 

 

Consolidated Return: Common parent corp that owns at least 80% of another corp, and one or more of the members owns at least 80% of each other corporation included in the group

 

 

Transferor sends assets to transferee

Stock is sent from transferee to transferor

 

Non-recognition section

Section 351

Even if there is a gain, it is not recognized for tax purposes

 

FMV of building at appraised amount is $100,000

Adjusted basis= cost – depreciation  =  10,000

Realized gain is $90,000

Recognized gain (goes on tax return):

Section 351: if one or more persons transfer property to a corporation and solely in the exchange receive stock from the corporation, no gain or loss shall be recognized by the transferor

Quid pro quot must say basis is 10,000, not 100,000

 

Section 7701 defines a person as individuals, corps, partnerships, trusts…

 

Responses are currently closed, but you can trackback from your own site.

Comments are closed.