This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
• Calculation generally begins with taxable income, plus or minus certain adjustments – Add previously excluded items and certain
deductions to taxable income including:• Muni bond interest• Excluded life insurance proceeds • Federal income tax refunds• Dividends received deduction• Domestic production activities deduction
• Calculation generally begins with taxable income, plus or minus certain adjustments – Add previously excluded items and certain
deductions to taxable income including:• Muni bond interest• Excluded life insurance proceeds • Federal income tax refunds• Dividends received deduction• Domestic production activities deduction
• Certain E & P adjustments shift effect of transaction from the year of inclusion in or deduction from taxable income to year of economic effect, such as:– Charitable contribution carryovers – NOL carryovers – Capital loss carryovers
• Gains and losses from property transactions – Generally affect E & P only to extent recognized for tax purposes– Thus, gains and losses deferred under the like-kind exchange
provision and deferred involuntary conversion gains do not affect E & P until recognized
• Certain E & P adjustments shift effect of transaction from the year of inclusion in or deduction from taxable income to year of economic effect, such as:– Charitable contribution carryovers – NOL carryovers – Capital loss carryovers
• Gains and losses from property transactions – Generally affect E & P only to extent recognized for tax purposes– Thus, gains and losses deferred under the like-kind exchange
provision and deferred involuntary conversion gains do not affect E & P until recognized
Effect on taxable income for E & P: Transaction Add SubtractTax-exempt income X Life insurance proceeds XDeferred installment gain XExcess charitable contribution XDed. of prior excess contribution XFederal income taxes X
Officer’s life insurance premium X
Accelerated depreciation X
Effect on taxable income for E & P: Transaction Add SubtractTax-exempt income X Life insurance proceeds XDeferred installment gain XExcess charitable contribution XDed. of prior excess contribution XFederal income taxes X
• If accumulated E & P is positive and current E&P is a deficit, net both at date of distribution– If balance is zero or a deficit, distribution is a return of
capital
– If balance is positive, distribution is a dividend to the extent of the balance
– Any current E & P is allocated ratably during the year unless the parties can show otherwise
• If accumulated E & P is positive and current E&P is a deficit, net both at date of distribution– If balance is zero or a deficit, distribution is a return of
capital
– If balance is positive, distribution is a dividend to the extent of the balance
– Any current E & P is allocated ratably during the year unless the parties can show otherwise
Qualifying Dividends (slide 3 of 3)Qualifying Dividends (slide 3 of 3)
• Qualified dividends are not considered investment income for purposes of determining the investment interest expense deduction – An election is available to treat qualified dividends as
ordinary income (taxed at regular rates) and include them in investment interest income
– Thus, taxpayers subject to an investment interest expense limitation must compare relative benefits of low tax on qualifying dividends vs. increased amount of deductible investment interest expense
• Qualified dividends are not considered investment income for purposes of determining the investment interest expense deduction – An election is available to treat qualified dividends as
ordinary income (taxed at regular rates) and include them in investment interest income
– Thus, taxpayers subject to an investment interest expense limitation must compare relative benefits of low tax on qualifying dividends vs. increased amount of deductible investment interest expense
Property Distribution ExampleProperty Distribution Example
Property is distributed (corporation’s basis = $20,000) in each of the following independent situations. Assume Current and Accumulated E & P are both $100,000 in each case:
1 2 3 .Fair market value of distributed property 60,000 10,000 40,000Liability on property -0- -0- 15,000Gain(loss) recognized 40,000 -0- 20,000E&P increased by gain 40,000 -0- 20,000E & P decrease on dist. 60,000 20,000 25,000
Property is distributed (corporation’s basis = $20,000) in each of the following independent situations. Assume Current and Accumulated E & P are both $100,000 in each case:
1 2 3 .Fair market value of distributed property 60,000 10,000 40,000Liability on property -0- -0- 15,000Gain(loss) recognized 40,000 -0- 20,000E&P increased by gain 40,000 -0- 20,000E & P decrease on dist. 60,000 20,000 25,000
• Any economic benefit conveyed to a shareholder may be treated as a dividend for tax purposes, even though not formally declared– Need not be pro rata
• Any economic benefit conveyed to a shareholder may be treated as a dividend for tax purposes, even though not formally declared– Need not be pro rata
• Documentation of the following attributes will help support payments made to an employee-shareholder:– Employee’s qualifications– Comparison of salaries with dividends made in past– Comparable salaries for similar positions in same
industry– Nature and scope of employee’s work– Size and complexity of business– Corporation’s salary policy for other employees
• Documentation of the following attributes will help support payments made to an employee-shareholder:– Employee’s qualifications– Comparison of salaries with dividends made in past– Comparable salaries for similar positions in same
industry– Nature and scope of employee’s work– Size and complexity of business– Corporation’s salary policy for other employees
Stock Rights (slide 2 of 2)Stock Rights (slide 2 of 2)
• If stock rights are nontaxable– If value of rights received < 15% of value of
old stock, basis in rights = 0• Election is available which allows allocation of
some of basis of formerly held stock to rights
– If value of rights is 15% or more of value of old stock, and rights are exercised or sold, must allocate some of basis in formerly held stock to rights
• If stock rights are nontaxable– If value of rights received < 15% of value of
old stock, basis in rights = 0• Election is available which allows allocation of
some of basis of formerly held stock to rights
– If value of rights is 15% or more of value of old stock, and rights are exercised or sold, must allocate some of basis in formerly held stock to rights
• Use mix of techniques to “bail out” corporate earnings such as:– Shareholder loans to corporation – Salaries to shareholder-employee – Rent property to corporation– Pay some dividends
• Overdoing any one technique may attract attention of IRS
• Use mix of techniques to “bail out” corporate earnings such as:– Shareholder loans to corporation – Salaries to shareholder-employee – Rent property to corporation– Pay some dividends
• Overdoing any one technique may attract attention of IRS