What are the two primary choices a C corporation has for its profits?
- Retain the profits as retained earnings
- Distribute them to shareholders as dividends
How does issuing stock affect a corporation’s taxable income?
Issuing stock does not affect a corporation’s taxable income because it is considered an equity transaction, not gross income.
Are dividends deductible for C corporations?
No
What are the most common types of corporate distributions?
- Ordinary dividends (cash or property)
- Capital gain distributions
- Nondividend distributions
- Distributions of stock or stock rights
How is the shareholder’s basis in distributed property determined?
The shareholder’s basis in the distributed property is equal to its fair market value (FMV) at the time of distribution.
When must a corporation issue Form 1099-DIV to shareholders?
A corporation must furnish Form 1099-DIV to each shareholder who receives a dividend of $10 or more by January 31.
What increases a C corporation’s earnings and profits (E&P)?
- Long-term contracts reported on the completed contract method
- Intangible drilling costs
- Dividends-received deduction (DRD)
- Nontaxable life insurance proceeds
- Federal income tax refunds
- Deferred gain on installment sales
- Tax-exempt income
What reduces a C corporation’s earnings and profits (E&P)?
- Corporate federal income taxes
- Life insurance policy premiums on a corporate officer
- Excess charitable contributions
- Expenses relating to tax-exempt income
- Excess of capital losses over capital gains
- Corporate dividends and other distributions
- Nondeductible fines and penalties
- Nondeductible portion of meals
What is a nondividend distribution?
A return of capital that reduces the shareholder’s stock basis. It is not taxable until the basis is reduced to zero; any excess is treated as a capital gain.
What happens if nondividend distributions exceed the shareholder’s stock basis?
The excess distribution is treated as a gain from the sale or exchange of property and is taxable as a capital gain.
How is a gain recognized on the distribution of property by a corporation?
A corporation recognizes a gain if the FMV of the distributed property is more than the property’s adjusted basis.
In what situations might stock distributions be taxable?
- Shareholder has the choice to receive cash instead of stock
- Distribution gives cash to some shareholders and stock to others
- Distribution is in convertible preferred stock
- Distribution gives preferred stock to some and common stock to others
- Distribution is based on ownership of preferred stock
Are expenses for issuing stock deductible for a corporation?
No, a corporation must capitalize, rather than deduct, expenses of issuing stock.
What must a corporation do with expenses related to issuing stock?
Capitalize the expenses rather than deduct them.
Expenses include fees for attorneys, accountants, underwriting costs, and any fees for listing on stock exchanges.
How are constructive distributions treated for tax purposes?
They are treated as actual distributions and are taxable to the shareholder.
Constructive distributions often occur when a corporation confers a personal benefit upon a shareholder.
What is a stock redemption?
When a corporation buys back its own stock from a shareholder in exchange for cash or property.
The stock acquired may then be canceled, retired, or held as Treasury stock.
When is a stock redemption treated as a dividend?
Generally, stock redemptions are treated as dividend distributions unless they meet the requirements for sale or exchange treatment, such as a substantial reduction in ownership or a complete termination of the shareholder’s interest.
Non-dividend treatment includes situations where the shareholder’s proportionate interest and voting power in the corporation has been substantially reduced.
What happens in a corporate liquidation at the shareholder level?
Shareholders recognize gain or loss based on the difference between the FMV of received assets and the adjusted basis of the surrendered stock.
A corporate liquidation occurs when a corporation ceases to be a going concern and distributes remaining assets to shareholders.
What is Form 966, Corporate Dissolution or Liquidation, used for?
Corporations must file Form 966 to report a resolution or plan to dissolve or liquidate, and it must be filed within 30 days after the resolution is adopted.
What is the tax effect to a corporation when property is distributed in a stock redemption?
The corporation must recognize gain (but not loss) as if the property were sold at FMV, and redemption-related expenses are not deductible.
True or False:
A corporation can recognize a loss on a distribution of non-cash assets during liquidation to related parties.
False
A corporation cannot recognize a loss on the distribution of non-cash assets to related parties, such as shareholders owning more than 50% of the corporation.
When can a shareholder recognize a capital loss on a liquidating distribution?
Only after the final distribution is received.
A shareholder cannot take a loss until the final distribution is received, even if earlier distributions have been made.
What must a corporation do in regard to tax returns when it goes out of business?
It must file a final Form 1120 (or 1120-S) for the year it ceases, even if there is no income, and check the “final return” box. A dissolving corporation must also file Form 966 within 30 days of adopting the resolution to dissolve.
The final tax return is due on the fifteenth day of the fourth month following the close of its short tax year if the dissolution is effective on any day other than the last day of the corporation’s tax year.
How is a gain or loss adjusted when a dissolving corporation distributes property encumbered by a liability?
The liability is treated as money received by the shareholder, and the corporation’s gain or loss is adjusted accordingly.
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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
