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Accounting Class

Corporate Income Tax

Chapter 3: Corporate Income Tax

Corporate income tax rate

What is a corporation?

  • Separate taxpaying entity
  1. i. flat 21% rate (start of 2018)

            *Previous rates range from 15%-35%

  1. ii. must file annual tax returns

            *Note: must file even no income/loss annually

Choosing calendar or Fiscal year

-Corporation tax year should be similar to accounting period employed for financial accounting reasons

  1. Calendar Year– 12-month period ending on December 31st
  2. Fiscal Year – 12-month period

                                                *Any month, except December


Short Tax Period

-Not covering full 12-month period



Restriction on Tax Year

Type of Corporation


S Corporation

Must employ calendar year

*Affiliation entities should file same tax year as parent corp

Personal Service Corporation

Must employ calendar year in its tax year

 *restricts PSC to distribute huge portion of income from Feb-Dec of 2021


Determining Corporate Tax Liability: The General Rule

Gross Income – Losses and Deductions

Taxable income (before sp. Deductions) – Special deductions

Taxable income X corporate tax rate (21%)

Tax (before taxes and other credits)- Applicable tax credit

+  Personal holding company tax , Accumulated earning tax + special taxes

*note= only if applicable

Total Tax liability – Approximate tax payments

Net Tax due/refund


Corporate and Individual Income

Prior to 2018, no alternative minimum tax for:

  1. Income Tax
  2. Accumulated earnings tax
  3. Personal holding company tax

Corporate Income vs Individual

  1. Gross Income

                        -generally similar

  1. Deductions

                        -Corp. have ↑ and itemized deductions and exemptions

  1. Taxable Income:

                        Gross Income – Deductions

Property Dispositions for Corporations

Capital Gains

No special Rates

Capital Loss

Deduct capital loss on capital gains

·       Carryback (3 yrs)

·       Carryforward (5 yrs)

Section 291 recapture

20% of depreciation/ gain on real property


Organizational and Startup expenses

Type of Cost


Organizational Cost

1. Legal and accounting expense

2. Director fees (temporary)

3. Meeting costs

Startup Cost

1. Expense for business acquisition/ investigate creation


  • Should be capitalized unless:
  1. Election to deduct under the ff:
  2. Sec. 248 (org)
  3. Sec. 195 (startup)
  4. Election =automatic

            *Elect out of

  1. Deduction or Amortization remainder over 180 mos
  2. Less $5000 however reduce if

                                    *exceeds $50000, remainder amortized in 180 mos





Charitable expenses

Limitation (at 10% adjusted taxable income)

      *for taxable income

                no deduction for:

  1. Charity donations
  2. Cap loss carrybacks
  3. Dividend collected deductions

                 Has deduction for

  1. nol carryforward


            If there is election

  1. 2020-2021 contributions

                                    -no 10% limit


                        -restricted to 25% on adjusted taxable income over every charitable donation




Donation (Property)

            General Rule : FMV deduction (for LTCG prop)

                        Basic deduction for others:

  1. can deduct basis less half excess/ basis

                                                *not exceed 1x ab

                        Deduction limited to basis only if satisfied:

  1. IP (intellectual property)
  2. Tangible personal property (not related to charity org. purpose)

Dividends received deduction

            DRD in 2018:

  1. 50% – own (<20%)
  2. 65% – own (20 to <80%)

                        iii. 100% (own 80% or ↑)      


                        -same percentage (taxable income = DRD)

                        *before DRD, cap loss carryback, after donation deductions, NOL carryover



If 50% and 60% dividends receive, then:

  1. 65% is computed 1ST
  2. Less taxable income by 65% DRD, then:

                                                -compute for 50% DRD

Chapter 4 – Non-Liquidating Distribution of Corporations

Types of NLD:

  1. Distribution of property or cash

                        *Not used for stock exchange

  1. Distribution of stocks of the corporation (dividend stock)
  2. Distribution of property or cash (exchange to stock redemption)


            Dividents à corp. extent in profit and earning (E&P)

  • non-corporate taxpayer ( 20% tax = capl. gain rate)

            Exceeding (E&P)

  • capital return
  • capital gain



Earning and Profits (E&P)

Taxable Income (sex. 312)

+ Tax exempt income [1]

Depreciation [2]

Plus dividends [3]

Plus carryovers [4]

Minus Fed income tax

Minus Charity donation/ Cap loss limit & Actual donation / cap loss

Minus non-deductable expense [5]


[1] life insurance proceed, tax exempt interest

[2] plus or minus of (E&P and Tax)

[3] org expense deduction, dividends collected deductions

[4] NOL, charity, cap loss

[5] tax exempt expense, keyman life ins, pol. vontributions, penalties

E&P Distribution

  • Made fist out of recent E&P then amassed E&P
  • If corporation has +CEP
    • Divided to CEP extend even if:

*aEP is deficit (applies to nimble dividend rule)

  • Distribution reduce E&P
    • Not below to zero, and or;
    • Increase deficit
    • AEP end of year = aep prior year +CEP – dividend value

Ordering rules multiple distributions

  • ceP = proportionally allocated based on distributions
  • aEP = chronological allocation
    • note: same day distribution
  • should be allocated using E&P rule

Property Distribution



Recognize gain (NOT loss)

-treat as sold for FMV

– gain E&P

Distribution (property FMV)

-less liability of shareholder (not below zero)

FMV dist. not < property FMV

Less liability from shareholder (not below zero)

Basis of prop. distributed

-less liability assumed

Reduce E&P using prop. FMV

-no reduction from liability of shareholder

-if prop. loss (less from AB)

After distribution marks holding period



Non-taxable stock dividends

  1. Total amount of basis should be allocated before
  2. distribution of new and old shared

                                                and if dividend is different stock class

                                                            *should be allocated as to FMV

  1. Holding period is tacked
  2. No impact with corp

                        – NO GAIN/LOSS

                        – NO E&P IMPACT

Taxable Dividends

  • Only taxable if shareholder proportionate interest
    • Can elect to take prop. or stock
    • Some shareholders receive stock/property
    • Some shareholders receive preferred/ common
    • Distribution on pref. stock
      • Not OF
    • Distribution OF pref. stock convertible




Rules of Attribution

  • Own constructively stock by means of:
    • Spouse
    • Child
    • No double attribution in family
    • Grandchild
    • Parent

*not : grandparents, brothers, sisters

Rules of Attribution (Entity)

  • Attribute stock by estate to partner proportinally
  • Attribute stock by C Corp to SH

*ONLY            if SH owns >50%                     

Susbstantially Disproportionate

  1. Vote <50%
  2. Voting stock <80%
  3. Common Owned <80%

Absolute Termination

  1. Use attribution rules, waive if:

            – No interest attained except being creditor

            – IRS file written aggreement notifies any acquired interest

            – 10 years after redemption cant be acquired besides inheritance

                        In 10 years:

  • Stock is not acquired by redeemed SH
  • No stock is attributable to the stock of redeemed SH
  • No tax purpose make it non-applicable

NEED (Not essentially equivalent to dividend)

  • Should be meaninful reduction (earnings, liquidation, earnings)
  • Circumstances and facts
  • Davis case
  • No control
  • Application of attribution rules
  • Lose control = NEED

Partial Liquidation

  • Discontinued line of business
  • Should be bonafide business contraction
  • At corporate level (not essentially equivalent with dividend)
  • Only applicable in shareholders who are non-corporate

Redemption Analysis

  1. Is redemption present? If yes, use option 2
  2. Does redemption applies any categoris for exchange? If no, distribution rules is applied. If yes, sale rules are used, requirements:
  • Disproportionate on substantial leve
  • Absolute termination
  • Not equal to dividend (essentially)
  • Liquidation should be partial

Tax Treatment (Redemption)







Received amount-adj. basis= cap gain

Reduce E&P by proportionate stock redeemed

Amount received allocated to corp. extent, cap gain, return basis

Reduce E&P by FMV on dividend amount






Chapter 6: Liquidating Distributions of Corporation

Motivator for Liquidation

  1. Tax reason (principal motivation)
  2. Business reason

Liquidation is conducted if:

  1. assets are resulting to losses

            -SH prefer to hold in incorporated form and reduce to personal tax return


  1. Passive activity
  2. At-risk
  3. Excess business loss
  4. corporate earnings taxed once under the income tax of corporation
  5. when earnings are distributed as dividends
  6. when SH exchanges stock for gain

    *the act of liquidation = assets held to unincorporated form = avoid double tax

iii. Additionally, may claim 20% reduction for qualified business income

  1. Reduce tax rate below effective tax rate on the income of the corporation


Complete Liquidation

Under Reg. Sec. 1.332-2 (c)

  • Distributions under liquidation corp. must redeem all stocks or cancel
  • One or more distribution, corporation should be:
  1. liquidating status
  2. distribution should be under the plan
  • Distribution before plan of liqidation = taxed to SH through dividends/ redeemed stocks


  • Legal phrase that organization undertaken dissolution
  • Cannot happen if corporation retains charter for name of corporation acquired by another
  • Corporation can settle for tax reasons without undertaking dissolution


  • Reg. 1.332-2(c) – Corporation termination concern and interests
  • winding up its activities
  • debt payment
  • shareholder property distribution




Liquidation General Rules

  1. Effect to Shareholders

Amount of Loss or Gain

-Under Sec. 331 (a):

            -liquidation distribution transferred to shareholder = full payment for SH stock

            – if SH acquire liabilities, then:

                        – these liabilities reduce value realized by SH



  1. Accounting Method Impact

            -Accounting method, if Accrual:

  1. Shareholder acknowledge loss or gain

*Cash method

  1. Sharehoder report loss/gain when actual liquidating upon distribution receipt acceptance
  2. Stock Acquisition

            -SH may have acquire stock in different time/ amount

                        -SH must compute G/L separately

  1. Recognized Gain or Loss Character

            -Corporation stock liquidation (Capital Asset for Shareholder)

                        Two exemptions:

  1. Loss recognized by individual SH under sec. 1244

                                                *Where stock is within limits, considered ordinary loss

  1. Loss recognized by corp. SH on the subsidiary stock worthlessness

                                                **where stock is considered ordinary loss under sec. 165 (g) (3)




Holding Period of Property and Its basis

            -Under Sec. 334 (a)

                        -Basis of SH’s property received is:

  1. FMV on distribution date
  2. property distribution upon date of distribution


Liquidation for Shareholder (Non-Subsidiary)

Under Sec. 331 (Shareholder):

  • loss/ gain as if traded stock
  • liabilities are assume less realized value (not under ZERO)
  • Basis adjusted(Property received) = FMV (under Sec. 334 (a))
  • After liquidation marks holding period date

Corporation Liquidation

Two Key questions:

  1. What is the character and amount of recognized loss/gain?
  2. What happens to tax attributies prior to liquidation?



Liquidation for Corporation (Non-Subsidiary)

Under Sec. 336 (Corporation):

  • loss/ gain as if sold property (meant for FMV)
  • liabilities assumed ≠ fmv property distributed
  • Attributes of tax (e.g., carryovers, E&P, NOLS) vanish

Corporation Liquidation limitation related person (Non-subsidiary)

No loss permitted if:

  • distribution to related person satisfies:

à 50% of family and shareholder attribution

                                                *Under sec. 267, this includes

  1. Sisters
  2. Brothers
  3. Lineal relatives
  4. Ancestors,
  • and or;
  1. non-pro rata distribution of property loss across shareholder, and or;
  2. Sec.351 acquired property/ capt’l contribution are distributed in 5 yrs


Tax Avoidance purpose, Corporation Loss limitation (Non-subsidiary Liquidation)

Tax Avoidance purpose

            -property acquired to take liquidation loss

-determination of loss

                        * basis reduced to FMV (prior to collection on exchange, distb’n, or sale, if:

  • Acquired , given that it is:

*w/in 2 years of liquidation plan)

  • not if asset is employed in either:

* business or trade

  • not if disposed

*on the first 2 years of the existence of corporation

Liquidation (Subsidiary)

Corporate shareholder

            -has 100% vote

            -subsidiary amount of corporation




Under Sec. 332 (Shareholder):

  • NO loss/ gain
  • basis in assets = carryover (under sec. 334 (b))
  • Subsidiary stock basis (recedes)
  • After liquidation marks holding period date

Under Sec. 337 (Corporation):

  • NO loss/ gain
  • Attributes of tax to shareholders + recapture depreciation

Hybrid Liquidation

  • Corporate shareholder (and other SH, either individual or corporate) plus 80%


  • 80% + NO loss/ gain acknowledged
  • other SH acknowledge loss/gain on sold stock
  • basis of asset carryover allocated to 80% plus corp. SH (basis of FMV to another)


  • NO loss/ gain acknowledged for allocated Assets + corp. Shareholder
  • Asset Gain if allocated to another Shareholder
  • No Loss on allocation of any asset to ANY Shareholder

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