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REG-3, REG318098, REG310607, REG318948, REG318062, REG318318, REG318619,…

- - - - Pierce Corp., an accrual basis tax payer must recognize income when
      - (1) All events have occurred to fix the right to receive income (TCJA update: Corporations must recognize income for tax purposes no later than the tax year in which the item is recognized as revenue on an applicable financial statement, i.e., all events test is satisfied no later than the year in which the revenue is reconigzed for financial accounting purposes) and
        
        (2) The amount can be determined with reasonable accuracy
      - An exception to this rule, is receipt of advance rental income, which must be recognized as income in the year received rather than in the year earned. . TCJA update: Corporations are allowed to defer the inclusion of advance payment as income to the end of the tax year following the tax year of receipt if the income is also deferred for financial statement purpose. In this case assuming the corporation does not defer the income and recognizing it in the same year as recepit, the income is recognized in 20X6.
      - Additionally, lease cancellation payments must be recognized as income in the year received.
      - Therefore, Pierce Corp. should report both advance rental payments of $250,000 and lease cancellation payment of $100,000 for a total of $350,000 as gross income on the 20X6 tax return.
- - - - In case of C Corporations, dividends received from domestic corporations are eligible for a dividend received deduction (DRD) based on conditions.
      - The purpose of this deduction is to avoid triple (and not double) taxation on dividends. The first level of tax is when Corporation A that pays out the dividend pays income tax on its income before dividend payout; the second level of tax being Corporation B receiving the dividend needs to pay tax on the dividend income; this level of tax is avoided by 50% - 100% via the DRD; and the third level of tax being when Corporation B pays out the dividend to individual stockholders, it is taxable as dividend income on their Form 1040. DRD avoids triple taxation by reducing the second level taxation on dividends. Thus, Statement I is incorrect.
      - The conditions to apply the DRD are:
      - Only available to C-Corporations; not LLCs, S-Corporations, or individuals. Thus, statement II is correct.
      - Stock must be held for more than 46 days during the 91-day period beginning on the date 45 days before the ex-dividend date.
      - Does not apply to preferred stock.
      - Stock must not be debt-financed.
      - The % of DRD which generally applies to amount of dividend income (except in exception cases):
      - For less-than-20% ownership (small investment) - 50% DRD as per Tax Cuts and Jobs Act of 2017 (TCJA) [70% under the prior law].
      - 20%-or-more-ownership (large investment) - 65% DRD per TCJA [80% under the prior law].
      - 80%-or-more ownership = Consolidated tax returns (if filed) eliminate intercompany dividends (whereby intercompany dividends are not even included as income) i.e. 100% deduction is available.Thus, Statement III is incorrect.
- - - - A Controlled Foreign Corporation (CFC) is a foreign corporation that is a corporation that is more than 50% owned by one / more US shareholders (i.e. taxpayer plus all other US shareholders).
      - A Specified Foreign Corporation (SFC) is foreign corporations and includes:
      - All CFCs and
      - Any foreign corporation which has a US corporate shareholder (US shareholder is a US person who owns 10% or more of the total combined voting power of all classes of stock of a foreign corporation).
      - US shareholders (i.e. those who hold more than 10% stock) of Aria is Criteria corporation which holds 46%. Thus, Aria is an SFC. However, even though John Smith, Criteria And Along Corp together hold more than 50%, Along and John Smith are not US shareholders (i.e,. they do not hold more than 10% ) and Aria is not a CFC.
- - - - Corporations are required to make quarterly estimated tax payments if they expect their federal tax liability to be $500 or more. In order to avoid penalty on the underpayment of estimated taxes, the total estimates paid should be the least of:
      - (1) 100% of current year tax, which can be determined either on the basis of actual or annualized income or
      - (2) 100% of preceding year's tax liability provided it was a full 12 month year.
      - Blink Corp. must determine the basis of estimated tax payments for year 2. The corporation had a NOL in its previous year (Year1) leading to a zero tax liability; therefore, it can only make estimates using 100% of current year liability on actual income or annualized income, to avoid underpayment penalty for the current year.
      - TCJA Update: As per the Tax Cuts and Jobs Act, Corporations generated losses after December 31, 2017, can no longer carryback the NOL. The NOL can be carried forward indefinitely and the deduction for the NOL is limited to the lesser of
      - (1) the aggregate of net operating loss carryovers to such year, plus the net operating loss carryback to such year, or
      - (2) 80% of taxable income computed without regard to deduction allowable. Note, this provision does not apply to farming losses and insurance companies (other than life insurance), who can still use the old rules.
- - - - Corporations are required to make quarterly estimated tax payments by April 15, June 15, Sept 15 and Dec 15 of each year to avoid penalties and interest. Estimated payments are required if the total tax liability is expected to be $500 or more. The estimated payments must be equal to the lesser of
      - (1) 100% of the tax shown on the preceding year tax return, or
      - (2) 100% of the tax shown on the current year tax return (the current year tax may be determined on the basis of actual income or annualized income).
      - If timely estimated tax payments are not made, a corporation is subject to the following:
      - a) Underpayment penalty - This applies if the tax is not paid as required over the course of the year.
      - b) Tax delinquency penalty - This is charged if the amount of tax paid (through withholdings, estimated tax payments, or payments made with an extension request) by the original due date of the return is less than 90% of the tax shown on the return.
      - c) Interest - This is computed on both the underpayment penalty and the tax delinquency penalty from the original due date of the tax return, until paid.
      - Here, J Corp will be subject to an underpayment tax penalty (liability >$500) as it did not make timely estimated tax payments during the course of the year; instead a part payment was done on the original due date of the tax return along with extension to file. J Corp will also be liable for a tax delinquency penalty because the amount of tax paid by the original due date of April 15, Year 2 was less than 90% of the total tax liability [$900 < 90% of $1,117]. Finally an interest on the differential tax payment of $217 is calculated from the original due date until the date of payment, which in this case is September 13, Year 2.
- - - - Accumulated Earnings & Profit (E&P) at the end of the year is Accumulated E&P at the beginning of the year plus or minus current E&P for the tax year. Begins with the corporation's taxable income and make adjustments to arrive at Current E&P.
      - In this scenario, Cable's accumulated E&P at the beginning of the year and taxable income is given. Year-end Accumulated E&P is computed as follows:
      - Description
      - Amount
      - Accumulated E&P beginning of the year
      - $100,000
      - Taxable income
      - $50,000
      - Less: Federal income tax
      - ($5,000)
      - Add: Charitable contribution carryovers that reduced current year's taxable income
      - $1,000
      - Add: Capital loss carryover that reduced current year taxable income
      - $2,000
      - Accumulated E&P at the end of the year
      - $148,000
- - - - The above stock sale relates to Section 1244 stock. Sec 1244 allow an ordinary loss deduction on sale or worthlessness of stock in certain corporations. The ordinary loss deduction is limited to $50,000 ($100,000 for joint return) and any excess is treated as capital loss. For a stock to qualify as Sec 1244 stock, it must meet the following requirements:
      - (i) The stock must be issued by a domestic corporation
      - (ii) The stock must be issued to an individual or to a partnership.
      - (iii) The stock must be issued for money or property (other than stock and securities) and can be common or preferred, voting or non-voting.
      - (iv) The issuer at the time of issue must be a small business corporation
      - (v) During the preceding five years (or shorter period if corporation has not been existence for five years), the issuer must have had no net income and derived more than 50% of its aggregate gross receipts from sources other than royalties, rents, dividends, interest, annuities, and gains from the sale or exchange of stocks or securities.
      - Joe's holding in Jet Inc. meets all the criteria of Sec 1244 stock and therefore, Joe's ordinary loss on his stock sale would be $95,000 [$85,000 ($200,000 stock basis x 90%)] for Year 6 and $15,000 [$5,000 ($200,000 stock basis x 10%)] for Year 7. By structuring the sale of stock over two years, Joe is able to avoid the annual cap to ordinary loss deduction of $100,000 for married filing joint tax return. Therefore, in total he can claim $110,000 ($95,000 in Year 5 + $15,000 in Year 6) ordinary losses. There will be no capital loss deduction in both years.
- - - - The Tax Cuts and Jobs Act of 2017 (TCJA) has brought about changes in certain deductible expenses for businesses. These include:
      - Lobbying expenses before local government bodies - are no longer deductible [were deductible earlier as per prior law].
      - Business entertainment expenses (including membership dues) – are no longer deductible [were 50% deductible earlier as per prior law].
      - Meals provided in employer-operated eating facility - now only 50% deductible [were fully deductible as per prior law].
      - Transportation benefits to employees (for travel between employee residence and place of employment; e.g., transit passes, parking fees) – are no longer deductible unless incurred to ensure the safety of the employee [was deductible subject to limits as per prior law].
      - Moving expense reimbursements - still deductible by employer but is now taxable income to employees except for members of Armed forces [was a non-taxable fringe benefit for employees as per prior law].
      - While federal taxes are not allowable for computation of taxable income, federal payroll taxes are a fully deductible expense.
      - Business travel is fully deductible including meals, lodging, transportation, incidental expenses etc.
      - Allowance for bad debts is not allowed for tax purposes, however, bad debts written off are allowed.
      - State income taxes are fully deductible in the federal income tax return. Federal taxes are not deductible.
      - Sales tax is collected from the customers on sales and is paid to the authorities. It is neither included in income nor deducted as an expense.