R3: C Corporations
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general rule of tax consequences on the formation, reacquistion, and resale of c corps
There is no gain or loss to the corporation issuing stock in exchange for property.
basis of property that a C Corp receives
the basis of the property received from the transferor/shareholder is the greater of:
adjusted basis (NBV) of the transferor/shareholder (plus any gain recognized by the transferor/shareholder)
debt assumed by corporation (transferor may recognize gain to prevent a negative basis)
exception to the general rule of basis of property received by a corporation
if the NBV of property contributed exceeds the FMV in a tax-free incorporation, the corproation's basis is limited to the FMV of the property. This prevents the transfer or property with built-in losses.
The shareholder contributing property (not services) in
exchange for corporation common stock has no gain or loss if the following two
conditions are met
1. 80% Control Immediately after the transaction the s/h involved must own at least 80% of the voting AND non-voting stock.
2. boot not received i.e. cash withdrawn or receipt of debt securities.
**Note: cancellation of debt where liabilties > NBV transferred to corp. is not boot per se but does generate gain.
basis of common stock to share shareholder
=basis of common stock
- +FMV of services rendered
- + gain recognized by s/h (debt>adjusted basis)
- -cash received
- -cancellation of debt
- -FMV of non-money boot received
gaap vs tax: temporary income differences
- 1. interest income received in advance
- 2. rental income received in advance
- 3. royalty income received in advance
gaap vs tax: permanent income differences
- 1. interest income from municipal or state obligations/bonds
- 2. proceeds from life insurance on the life of an officer ("key person" policy) where the corporation is the beneficiary
- 3. federal income taxes are not deductible on tax return
trade or business deductions
all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a business are deductible.
domestice production deduction
a business may deduct a specific percentage of their qualified production activities
limit: 50% of W-2 wages paid for the year.
calculation of domestic production deduction
The deduction is 9% of the lesser of:
- 1. Qualified production activities income (QPAI)
- 2. Taxable income (disregarding the QPAI deduction)
- domestic production gross receipts
- -other directly allocalbe expenses or losses
- - proper share of other deductions
QPAI: qualified production activities income
domestic production gross receipts defined & list of 7
gross receipts derived in significant part within the US from any disposition of qualified production property that is:
- 1. manufactured
- 2. produced
- 3. grown
- 4. extracted
- 5. constructed
- 6. engineering services
- 7. architectural services
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