What is the tax rate for C corporations?
A flat rate of 21%
List the drawbacks of the C corporation structure.
- Double taxation and the inability of shareholders to deduct corporate losses
- Absence of preferential capital gains tax rates
- Limitation on the deductibility of capital losses
What is the unlimited growth potential advantage of a C corporation?
It can have unlimited shareholders and can sell stock, either common or preferred, and offer employees a stock option plan.
How is a C corporation’s Net Operating Loss (NOL) treated?
NOLs can only be carried forward to offset up to 80% of taxable income. They cannot be carried over between C corporation and S corporation years.
What items are not allowed when figuring a corporation’s NOL?
- Any deduction for foreign-derived international income
- Capital losses in excess of capital gains
- The section 1202 exclusion of gain from qualified small business stock
- Nonbusiness deductions in excess of nonbusiness income
How are capital gains and losses treated for C corporations?
Capital gains are taxed at the same rate as ordinary income. Capital losses can only offset capital gains and can be carried back three years and forward five years.
What is the maximum allowable charitable deduction for a C corporation?
10% of a corporation’s taxable income
What is required for a corporation to deduct a charitable contribution of more than $500 for property other than cash?
A schedule describing the property and the method used to determine its fair market value must be attached to the corporation’s return.
What is the Dividends Received Deduction (DRD) percentage for a corporation owning less than 20% of a dividend-paying company?
50%
What is the Dividends Received Deduction (DRD) percentage for a corporation owning at least 20% but less than 80% of a dividend-paying company?
65%
What is the Dividends Received Deduction (DRD) percentage for a corporation owning 80% or more of a dividend-paying company?
100%
What is the Dividends Received Deduction (DRD) percentage for a corporation with less than 20% stock ownership?
50%
The DRD percentage varies based on the level of ownership in the dividend-distributing corporation.
How is the Dividends Received Deduction (DRD) affected if a corporation has a net operating loss (NOL) for the year?
The 65% (or 50%) of taxable income limit does not apply.
A corporation must first calculate the DRD without the taxable income limit to determine if an NOL applies.
Which entities’ dividends do not qualify for the Dividends Received Deduction (DRD)?
- A real estate investment trust (REIT)
- A tax-exempt corporation
- A corporation whose stock was held less than the specified period around the ex-dividend date
- A corporation if another corporation is obligated to make related payments for similar property
The holding period requirement includes 46 days for common stock and 91 days for preferred stock.
What is a closely-held corporation?
A corporation where more than 50% of the stock value is owned by five or fewer individuals and is not a personal service corporation (PSC).
Ownership can be direct or indirect, including through trusts and private foundations.
What are the two types of controlled groups?
- Parent-Subsidiary Controlled Group
- Brother-Sister Controlled Group
Controlled groups are treated as a single entity for certain tax purposes under federal law.
What is a Parent-Subsidiary Controlled Group?
A group where a parent corporation owns at least 80% of at least one other corporation’s voting power.
Foreign corporations are not considered part of a controlled group.
Define a Brother-Sister Controlled Group.
A group where five or fewer individuals, estates, or trusts own 80% or more of the combined voting power for multiple corporations and have identical ownership of at least 50%.
The focus is on individual ownership and effective control.
What is the effect of related party transactions on loss deductions?
Losses on sales or exchanges of property between related parties are generally disallowed.
This rule applies even if the transaction is bona fide and conducted at fair market value.
How do at-risk rules apply to closely-held corporations?
Losses are deductible only up to the amount at risk of financial loss in connection with an activity.
The amount ‘at-risk’ includes money and the adjusted basis of property contributed and borrowed for the activity.
When can a corporation using the accrual method deduct expenses owed to a related cash-method taxpayer?
Only when the related cash-method taxpayer recognizes the payment as income.
This rule ensures deductions align with the related party’s income recognition.
What is the Dividends Received Deduction (DRD) for corporations?
The DRD allows corporations to deduct a portion of dividends received from other domestic corporations to reduce triple taxation, with the deduction amount based on ownership percentages.
What documentation is required for a charitable contribution exceeding $250?
The donor must obtain a written acknowledgment from the charity that includes the amount of cash or a description of property contributed, and whether the donor received any goods or services in return.
Fill in the blank:
A corporation must obtain a qualified appraisal for most charitable deductions of property claimed in excess of _____.
$5,000
Qualified appraisals are not required for cash, publicly traded securities, or inventory donations.
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Essential Tax Law Figures for Businesses34
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Unit 1: Business Entities and Requirements72
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Unit 2: Accounting Periods and Methods65
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Unit 3: Business Income46
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Unit 4: Business Expenses64
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Unit 5: Employee Compensation and Fringe Benefits78
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Unit 6: Other Business Deductions and Credits72
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Unit 7: Basis of Business Assets31
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Unit 8: Depreciation and Amortization58
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Unit 9: Disposition of Business Assets58
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Unit 10: Partnerships in General43
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Unit 11: Partnership Distributions and Liquidations26
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Unit 12: C Corporations in General46
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Unit 13: Corporate Transactions29
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Unit 14: Corporate Distributions and Liquidations30
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Unit 15: S Corporations48
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Unit 16: Farming Business35
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Unit 17: Tax-Exempt Organizations39
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Unit 18: Retirement Plans for Businesses93
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Unit 19: Trusts and Estates47
