1 Chapter 13 Corporate Operations Howard Godfrey, Ph.D., CPA UNC Charlotte Copyright © 2015, Dr. Howard Godfrey Edited December 7, T15F-Chp-13-1B-Corporte-Operations-2015

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4  Corporate Tax Rates  15% on first $50,000  25% on $50,001 - $75,000  34% on $75,001 - $100,000  39% (34% + 5% surtax) on $100,001 - $335,000  34% on $335,001 - $10,000,000  35% on $10,000,001 - $15,000,000  38% (35% + 3%) on $15,000,001 - $18,333,333  35% on over $18,333,333

5 PSC Personal service corporation is a corporation – that provides service in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or performing arts and – is substantially owned by its employees A flat 35% tax rate applies to its entire taxable income The PSC provisions encourage owner- employees to take earnings out as salary

Corporation Taxable income is determined at the corporate level under the general formula Exceptions: – Net capital losses are not deductible – Corporations must recapture additional depreciation for Sec property = 20% of straight-line depreciation taken

Corporation – Passive activity losses Corporations are not subject to the passive activity rules – Personal service corporations must follow them – Closely-held corporations may use passive losses to offset active income but not portfolio income – Charitable contributions are limited to 10% of taxable income Before dividend-received deductions and any carryovers Excess contributions may be carried forward 5 years

Corporation Net operating loss incurred in current year cannot be used in the current year or distributed to shareholders May be carried back 2 years and forward 20 until used May elect to forego the carry back

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Stock Options Companies recognize compensation cost for options using the fair value method. They compute total compensation expense based on the fair value of the options expected to vest on the date they grant the options to the employee(s) (i.e., the grant date). …In general, a company recognizes compensation expense in the periods in which its employees perform the service-the service period. Company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees' services.

Employee is taxed upon exercising the option and receiving shares if two conditions are met. First, the shares must be transferred to the employee. Second, they must be substantially vested in the employee. If both conditions are met, the employee must recognize income in the amount by which the shares' fair market value exceeds the exercise price paid. I.R.C. §83(a). The employer is allowed a deduction equal to the amount of income recognized by the employer at exercise (or later at vesting).

On Jan. 1, year 1, ABC issued 5,000 Non-qualified stock options with a value of $10 per option. Each option entitles owner to buy one share of ABC stock for $25 a share (per share price of ABC stock on Jan. 1, year 1). Options do not vest at all until year 3 when they vest 100%. All 5,000 stock options were exercised in year 3 when the ABC stock was valued at $31 per share. What is: (1) amount of compensation deduction in year 3, related to the options and (2) the amount of GAAP compensation expense recognized over the 3 year vesting period?

Company will never receive a tax deduction related to the issuance of incentive stock options

14 Capital Losses- Baker Baker Corp., had taxable income of $36,000 business operations in Year 1. Baker also had the following: Short term capital gain$8,600 Short term capital loss(9,600) Long term capital gain1,500 Long term capital loss(3,500) What is taxable income for Year 1? a. $35,000 b. $33,000 c. $36,000 d. $35,500 CPA - Nov. 1995

15 Capital Losses-Baker Baker Corp., had taxable income of $36,000 business operations in Year-1. Baker also had the following: Short term capital gain$8,600 Short term capital loss(9,600) Long term capital gain1,500 Long term capital loss(3,500) What is taxable income for Year-1? $36,000

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17 Corporate Income Tax – Problem - 2

18 Corporate Income Tax – Solution-3

Charitable Contributions - 1 Overall limit 10% of taxable income before – Charitable contribution deduction – Dividend received deduction – NOL or capital loss carryback. §170(b)(2), (c) Excess carried forward up to 5 years. §170(d)(2) Accrual basis corporation can deduct contributions in year accrued if – Payment authorized by board before year end – Payment made by 15 th day of 3 rd month after close of tax year in which accrued. §170(a)(2)

20 Charity –Code (b)(2) Corporations. In the case of a corporation, the total deductions under subsection (a) for any taxable year shall not exceed 10 percent of the taxpayer's taxable income computed without regard to (A) this section, (B) part VIII (except section 248), (C) any net operating loss carryback to the taxable year under section 172, and (D) any capital loss carryback to the taxable year under section 1212(a)(1).

21 Cable-Charity Deductions-3 In 2015, Cable Corp., contributed $80,000 to charities. Cable also had carryover contributions of $10,000 from Cable's 2015 taxable income (after a $40,000 DRD [(Div. Rec. Deduction)- owned 25% of stock] but before Charity deduction was $820,000. Cable’s 2015 charity deduction is? a. $80,000 b. $82,000 c. $86,000 d. $90,000 CPANov1995

22 Cable-Charity Deductions-4 In 2015, Cable Corp., contributed $80,000 to charities. Cable also had carryover contributions of $10,000 from Cable's 2013 taxable income (after a $40,000 DRD) before charity deductions was $820,000. Cable’s 2015 charity deduction is? $86,000 (Charity limit is computed before DRD)

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26 Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 1, Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During 2015, South earned $80,000 and paid dividends of $50,000. What amount of income should Grant include in its 2015 Federal income tax return as a result of the investment? a. $15,000 b. $24,000 c. $35,000 d. $50,000 e. $80,000 CPA Nov

27 Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 1, Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During 2015, South earned $80,000 and paid dividends of $50,000. What amount of income should Grant include in its 2015 Federal income tax return as a result of the investment? This company will use equity method for GAAP and cost method for Tax Return.

28 Div. Received- Green - 1 Green Corp. owns 25% of Cande Corp. This year, Green received $10,000 dividends on the Cande stock. Assuming no other limit applies, Green’s dividends-received deduction is: a. $7,000. b. $8,000. c. $2,000. d. $ (IRS-2003)

29 Div. Received- Green – 1 2 Green Corp. owns 25% of Cande Corp. This year, Green received $10,000 dividends on the Cande stock. Assuming no other limit applies, Green’s dividends-received deduction is: a. $7,000. b. $8,000. c. $2,000. d. $ (IRS-2003)

39 Spring Corp has income from business of $500,000 & expenses of $750,000. Spring also received dividends from the Acme Corp. of $100,000. Spring owns 25% Acme. What is Spring’s NOL for the year? a. ($150,000) b. ($0). c. ($220,000) d. ($230,000). (IRS Exam 2003)

42 Spring Corp’s has income from business of $500,000 & expenses of $750,000. Spring also received dividends from the Acme Corp. of $100,000. Spring owns 25% Acme. What is Spring’s NOL for the year? ($230,000)

43 This year, Pack Corp. had gross income from operations of $350,000 and operating expenses of $400,000. Pack received dividends of $100,000 from Smith Inc., of which Pack is a 20% owner. The NOL carryover from last year is $20,000. What is Pack's NOL for the current year? a. $50,000 b. $30,000 c. $20,000 d. $10,000 IRS-1995

44 This year, Pack Corp. had gross income from operations of $350,000 and operating expenses of $400,000. Pack received dividends of $100,000 from Smith Inc., of which Pack is a 20% owner. The NOL carryover from last year is $20,000. What is Pack's NOL for the current year? $30,000

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