Term
DEFINITION AND ACCOUNTING - General Classification
If no election is made for a newly formed domestic entity, an entity with two or more members will be classified |
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Definition
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Term
DEFINITION AND ACCOUNTING - General Classification
An entity with a single member will
be |
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Definition
| disregarded as an entity separate from the owner |
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Term
DEFINITION AND ACCOUNTING - General Classification
Certain businesses must be classified as corporations for federal tax purposes |
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Definition
ses. Among
the entities treated as corporations are ones incorporated under state or federal law,
associations, joint stock companies, insurance companies, certain banks, state-
owned organizations, certain foreign organizations, and publicly traded partnerships. |
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Term
DEFINITION AND ACCOUNTING - General Classification
An S corporation is a |
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Definition
| a pass-through entity that is not subject to the regular corporate income tax. Qualified corporations that elect subchapter S status are treated similarly to partnerships. |
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Term
DEFINITION AND ACCOUNTING - General Classification
Partnerships, trusts, and estates
are |
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Definition
| are generally not treated as corporations |
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Term
DEFINITION AND ACCOUNTING - General Classification
Publicly traded partnerships are |
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Definition
| are ineligible entities and must generally be taxed as corporations. |
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Term
DEFINITION AND ACCOUNTING - General Classification
Limited Liability Company (LLC) |
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Definition
| Normally, an LLC would elect partnership status to avoid being taxed as a corporation. This election allows for limited liability of the owners while at the same time retaining the single taxation. The owners are allowed to participate in the operations of the business, and there are no restrictions on the type of owners. |
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Term
DEFINITION AND ACCOUNTING - General Classification
Professional Association (PA) |
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Definition
An association of professionals, e.g., accountants, doctors, or lawyers, is treated as a corporation for tax purposes if it is both organized
under a state’s Professional Association Act and operated as a corporation. One individual may be a professional association |
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Term
DEFINITION AND ACCOUNTING - General Classification
Personal Service Corporation (PSC) |
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Definition
| A personal service corporation has two main characteristics: (1) Substantially all of its activities must involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and (2) substantially all of its stock must be owned by employees who perform the services. The taxable income of a personal service corporation is taxed at a flat rate of 35%. |
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Term
DEFINITION AND ACCOUNTING - General Classification
Personal Holding Company (PHC) |
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Definition
| Any nonexempt closely held corporation is classified as a PHC if a significant portion of its income is passive in nature. PHCs are subject to a penalty tax on excess personal holding company income. |
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Term
| DEFINITION AND ACCOUNTING - Check-the-Box |
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Definition
The “check-the-box” regulations apply to business entities other than trusts that are separate for federal tax purposes. The regulations allow an eligible entity to decide whether it will be taxed as a corporation or a partnership. An eligible entity is a
business that is not required to be treated as a corporation under federal tax law. |
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Term
| DEFINITION AND ACCOUNTING - Single vs. Multi-Member Entities |
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Definition
a. An eligible entity with a single member can elect to be taxed as a corporation or disregarded as an entity separate from its owner (sole proprietorship).
b. An eligible entity with two or more members can elect to be taxed as either a partnership or a corporation. |
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Term
| DEFINITION AND ACCOUNTING - Tax Year |
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Definition
| Generally, a corporation may elect either a calendar or fiscal tax year. |
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Term
| DEFINITION AND ACCOUNTING - Tax Year - PSC |
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Definition
A PSC is required to use a calendar tax year.
a) An exception exists for a valid business purpose or a PSC that makes “minimum distributions.” |
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Term
| DEFINITION AND ACCOUNTING - Tax Year Due Date |
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Definition
A corporate tax return is due on or before the 15th day of the 3rd month following the close of the tax year (e.g., March 15 for a calendar year corporation).
a) A corporation that files Form 7004 and pays its estimated unpaid tax liability is allowed an extension of up to 6 months. |
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Term
| DEFINITION AND ACCOUNTING - Accounting Method |
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Definition
a. No formal election is required for the accounting method of a newly incorporated C corporation. Any method allowed by the C corporation may be “elected” by using that method on their initial return. For example, a newly formed C corporation that chooses to use the accrual method must only use this method on its initial return in
order to “elect” the method.
b. The cash method may be used only by PSCs, S corporations, certain farming
corporations, and C corporations that have average annual gross receipts of no more than $5 million in the 3 preceding tax years. Tax shelters may not use the cash method. A newly incorporated C corporation makes its initial accounting method selection simply by using the chosen method on its initial return. |
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Term
| GROSS INCOME OF A CORPORATION - Scope |
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Definition
| Gross income of a corporation, similar to individual taxation, is all income from whatever source derived unless specifically excluded |
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Term
| GROSS INCOME OF A CORPORATION - Excluded Items |
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Definition
| Capital contributions are excluded from a corporation’s gross income |
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Term
| GROSS INCOME OF A CORPORATION - Excluded Items |
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Definition
| Treasury stock No gain or loss is recognized by a corporation on the sale or exchange of its own stock (including treasury stock) |
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Term
| GROSS INCOME OF A CORPORATION - Included Items - Life insurance income |
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Definition
| Life insurance income. Proceeds received due to the death of the insured are generally excluded from gross income. |
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Term
| GROSS INCOME OF A CORPORATION - Included Items - Discharge of debt |
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Definition
Except in stock-for-debt exchanges, income from cancellation of a
corporation’s debt at less than the outstanding carrying amount is excluded to the extent the corporation is insolvent. |
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Term
| GROSS INCOME OF A CORPORATION - Included Items - Bond Repurchase |
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Definition
| Bond repurchase. A corporation’s income includes the issue price of its own bond minus the repurchase price and any premium it has already recognized. |
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Term
| GROSS INCOME OF A CORPORATION - Included Items - Sinking-fund Income |
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Definition
| Sinking-fund income. Interest or other income from property (including money) in a sinking fund to satisfy an obligation is income (even if in the hands of a trustee. |
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Term
| GROSS INCOME OF A CORPORATION - Included Items - Unrestrained claim |
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Definition
| Unrestrained claim. Both cash- and accrual-basis taxpayers must include in gross income, in year of receipt, amounts actually or constructively received if the taxpayer has an unrestrained claim to the amounts (e.g., prepaid rent. |
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Term
| GROSS INCOME OF A CORPORATION - Included Items - Refunds |
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Definition
| Refunds. As with individuals, a refund of state taxes deducted for a prior year is included in income for the current year, to the extent that the deduction in the prior year generated a tax benefit. If the deduction generated no tax benefit, the refund is not included. |
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Term
| DEDUCTIONS OF A CORPORATION - Overview |
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Definition
| Deductions from corporate gross income for ordinary and necessary business expenses are allowed |
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Term
| DEDUCTIONS OF A CORPORATION - Organizational Expense |
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Definition
| Costs of organizing a corporation are properly chargeable to a capital account. They generally are not deductible as a current expense because they benefit more than 1 tax period. |
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Term
| DEDUCTIONS OF A CORPORATION - Qualifying organizational expenditures |
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Definition
| Qualifying organizational expenditures are ones incurred incidental to formation of the corporation and are distinct from start-up costs. Examples are legal fees for drafting the charter, incorporation fees, expenses for temporary directors, and organizational meeting costs |
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Term
| DEDUCTIONS OF A CORPORATION - Charitable Contributions |
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Definition
| A corporation’s charitable contribution is deductible only if it is made to a qualified organization |
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Term
| DEDUCTIONS OF A CORPORATION - Charitable Contributions limit |
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Definition
Deductions are limited to 10% of taxable income (TI) before any:
1) Charitable contributions
2) Dividends-received deduction
3) Dividends-paid deduction
4) NOL carryback
5) Capital loss carryback |
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Term
| DEDUCTIONS OF A CORPORATION - Dividends-Received Deduction (DRD) |
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Definition
Amounts deductible vary with the percentage of the stock of the distributing corporation (by voting and value) owned by the recipient.
Percent of Ownership <20%=70% Deduction
Percent of Ownership <80%=80% Deduction
Percent of Ownership >80%=100% Deduction |
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Term
| DEDUCTIONS OF A CORPORATION - Dividends-Received Deduction (DRD)Limitations |
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Definition
The DRD is limited by the recipient corporation’s adjusted taxable income. The TI limit amount varies with the recipient’s stock ownership of the corporation.
1) To compute the limit, use TI before any of the following:
a) Dividends-received deduction
b) Dividends-paid deduction
c) NOL deduction
d) Capital loss carryback
e) Certain extraordinary dividend adjustments
2) First, compute the limit with respect to 20%-and-more-owned corporate dividends.
3) The TI limit does not apply if a current NOL exists or an NOL results from the DRD. |
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Term
| DEDUCTIONS OF A CORPORATION - Gifts |
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Definition
| Distinguish gifts from charitable contributions, which are made to qualified organizations. A deduction for business gifts is allowable only to the extent of $25 per donee per year. |
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Term
| DEDUCTIONS OF A CORPORATION - Compensation |
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Definition
| Compensation, e.g., salary, wages, or bonuses, is a deductible business expense unless the services are capital in nature. Payments made by March 15 of the succeeding year may be accrued and expensed in a prior year if related to services rendered in that prior year. |
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Term
| DEDUCTIONS OF A CORPORATION - Travel and Meals |
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Definition
| Travel and meals are deductible business expenses. Meals bought while traveling or served on the business premises are deductible by 50% of the amount incurred. |
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Term
| DEDUCTIONS OF A CORPORATION - Insuring an Employee |
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Definition
a. Reasonable amounts of expenditures to promote employee health, goodwill, and welfare are deductible. Reasonable amounts paid or incurred for employee life insurance are included.
b. Key employee. Premiums for life insurance covering an officer or employee are not deductible if the corporation is a direct or indirect beneficiary.
c. A deduction is denied for interest expense incurred with respect to corporate-owned life insurance policies, or endowment or annuity contracts. |
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Term
| DEDUCTIONS OF A CORPORATION - R&E Expenditures |
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Definition
| Qualified research and experimental expenditures may be capitalized, amortized, or currently deducted. |
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Term
| DEDUCTIONS OF A CORPORATION - Fines |
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Definition
| Fines and penalties paid to a governmental entity are not deductible |
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Term
| DEDUCTIONS OF A CORPORATION - Bad Debts |
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Definition
The reserve method is not allowed (except for financial institutions).
1) A corporation must use the direct charge-off method or the nonaccrual-experience method.
2) The nonaccrual-experience method is a procedure for not recognizing income if it is expected to be uncollectible. |
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Term
| DEDUCTIONS OF A CORPORATION - Worthless Securities |
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Definition
| Loss incurred when a security becomes worthless is generally treated as a capital loss subject to the capital loss limitations. Loss incurred when a security of an affiliated corporation becomes worthless may be treated as an ordinary loss |
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Term
| DEDUCTIONS OF A CORPORATION - Stock Redemptions |
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Definition
| Generally, deduction of amounts paid or incurred with respect to a stock redemption or the redemption of the stock of any related person is not allowed. An exception to the general rule is the allowance for deductions for interest paid or accrued within the tax year on indebtedness. |
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Term
| DEDUCTIONS OF A CORPORATION - Interest Expense |
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Definition
| Interest expense incurred on borrowings used to repurchase stock is deductible in the period in which it is paid or incurred. However, other expenses related to a stock purchase on reorganization are generally not deductible. |
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Term
| DEDUCTIONS OF A CORPORATION - Casualty Losses |
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Definition
Casualty losses are deductible. When business property is partially destroyed, the deductible amount is the lesser of the decline in FMV or the property’s adjusted basis (prior to the loss).
1) When business property is completely destroyed, the deductible amount is the
property’s adjusted basis (prior to the loss).
2) There is no $100-per-loss or 10%-of-AGI floor for corporations. |
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Term
| DEDUCTIONS OF A CORPORATION - Taxes |
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Definition
| State income taxes based on gross income are deductible. However, federal income taxes are not. |
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Term
| LOSSES OF A CORPORATION - Net Operating Loss (NOL) |
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Definition
| Applying NOLs as a deduction. Generally, a corporation’s NOL is carried back to each of the 2 preceding tax years and forward to the 20 succeeding tax year |
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Term
| LOSSES OF A CORPORATION - Capital Gain and Loss |
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Definition
| Capital gain net income (CGNI) occurs when net short-term capital gain (net STCG)exceeds net long-term capital loss (net LTCL). A corporation’s capital losses are deductible only to the extent of capital gains, whether they are short- or long-term. |
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Term
| RECONCILING BOOK AND TAXABLE INCOME |
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Definition
| Corporations file federal returns using Form 1120. Reconciliation of income per books of the corporation with income per tax is reported on Schedule M-1. It addresses differences, both permanent and temporary, for general financial reporting and tax accounting. Schedule M-3 is required for corporations with total assets of $10 million or more |
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