Agenda BA128A-1 4/12

1
Agenda BA128A-1 4/12

• Return exams
• Go over exam
• Projects
• Review - Chapter C2
• Assignment - C2-30,33,40
• Additional - C2- 38,39

2
Forms of organizations

• Sole Proprietorship
• report all business income/loss on individual tax
  return
• adv - no double taxation, loss can offset other
  source of income, withdraw/put without tax
  consequences
• disadv - income flow through, self employment
  taxes, no tax-exempt fringe fringe benefits
• Partnerships
• tax reporting entity
• adv/disadv similar to sole proprietorship
• additional adv - partnership basis increase by
  share of income - ie reduce gain recognized if
  sold later

3
Corporations

• C-corp, S-corp
• C-corp
• tax rate 15- 35
• SH not taxed on earnings but on distributions
• Dividends taxed at ordinary rate
• Capital gains taxed at disposal
• Adv - lower tax rate?, not taxed if earnings not
  distributed (accumulated earnings tax
  limitation), can deduct salary payments, tax free
  fringe benefits, use of fiscal year vs. calendar
  year, disposal of qualified small business stock
  can exclude half of the capital gain
• Disadv- double taxation, put or withdraw may
  have tax consequences, no NOL/capital loss
  benefit in current year

4
S-corp

• Flow through entity
• SH taxed like partnership for fed income tax
  partnership but enjoy other advantages of
  corporations like limited liability
• adv - exempt from corporate tax, losses flow
  through to SH to offset other income, SH
  contribute/withdraw without tax consequences,
  SH basis increase when income is recognized
• disadv - lots of restrictions e.g. number of SH,
  cant choose fiscal year, no tax free fringe
  benefits, all income taxed to SH

5
Check the box regulations

• Before this rule, entities are taxed as corp if
  possessed 3 of the 4 characteristics, limitied
  liability, centralized management, free
  transferability, continuityof life
• Emergence of LLC and LLP, taxed as partnership
  but with limited liability
• Check the box regulations - allow unincorporated
  business to elect to be taxed as partnership/sole
  proprietorship or corporation
• Default rules - if doesnt elect, taxed as
  partnerships (2 or more) and sole proprietorship
  (1 person)

6
Legal requirements of forming corporations

• Minimum amount of capital
• State incorporation - corporate charter by state
• Articles of incorporation - purpose, name, type
  of stock, board members,
• Issuance of stock
• Annual franchise fee and incorporation fee

7
Tax considerations in forming corporations

• Tax free and taxable transfer of property
• Section 351 - allows the deferral of gains and
  loss upon incorporation, apply to new and
  existing corporation
• Requirements -
• for stock
• transfer in control immediately after exchange
  (no prearranged plan to sell)
• Property must be transferred
• Control - gt 80 of total voting stock and gt80
  of each class of nonvoting stock
• Property - money, A/R, inventory, equipment,
  intangibles and etc.
• Exclusions - services, indebtedness with no
  security

8
Other 351 considerations

• Transfer of both prop and services
• all stock count towards 80 control if property
  gt10 of property transferred
• disproportionate transfer, basis may be adjusted
• Non simultaneous exchange OK, but transactions
  should be executed expeditiously and orderly
• Preferred stock that is not qualified
• stock redemption provisions
• dividend rates varies with interest rate or price
  indices
• stock rights and warrants not qualified

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Receipt of Boot

• SH receives cash, notes
• SH recognized gain up to lesser of realized gain
  or FMV of boot
• Character of gain depends on asset received
• SH basis adjusted basis of property transfer
  gain recognized - (boot received, cash received
  or liability assumed by transferee (ie corp))
• SH holding period - include propertys holding
  period

10
Transferree Corps Recognition

• No recognition if transfer stock even if 351 is
  not applied
• If transfer appreciated property as part of
  section 351- recognized gain but not loss
• Transferee corp basis transferors adjusted
  basis for property gain recognized by
  transferor
• Holding period includes holding period of
  transferor any depreciation recapture potential

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Choice of capital

• Debt
• adv - deductibility of interest, no recognition
  of income upon repayment
• disadv - transfer of property at FMV
• scrutinized by IRS - nature of debt may look like
  equity
• Equity
• adv - 70 - 100 dividend received reduction
• section 351 - allow transfer at basis
• stock dividend distribution is tax free
• section 1244 allows recognition of ordinary loss
  if small stock becomes worthless
• exclusion of half of capital gain for disposal
  qualified small business stock
• disadv, cash dividends taxed at ordinary income,
  redemption of stock is taxed as dividend

12
Capital contribution by SH

• Voluntary
• no gain/loss recognized by corp
• SH basis of stock increased
• Basis of property basis of property contributed
  gain recognized by SH
• Involuntary contribution
• regard as an exchange transaction
• SH must recognized G/L of property

13
Capital contributions by non SH

• Basis of property of corp is zero
• prevent company from claiming additional
  depreciation
• If contribute cash, and cash used to buy
  property, basis of property needs to be reduced,
  if not spent in 12 months, reduce basis of
  other property- order - depreciable prop, amort.
  Prop, depletable prop and all others

14
Worthless security

• Capital loss on last day of tax year where
  worthless occur
• include stock, bond and the right to
  subscribe/receive a share of stock
• Ordinary loss - securities that are not capital
  assets, affiliated corp (80), section 1244
  qualified small business stock (limited to
  50,000 a year for single)

15
Unsecured debt obligations

• Unpaid loan not evidenced by a security
• Non-business bad debt - investments - STCL
• Business bad debt - deducted as ordinary business
  deductions - in connection with trade or
  business, loan to keep employment