Exam 1 Notes Ch 2,4,5.docx - Chapter 2 Both corporations and individuals include recognized capital gains in their taxable income For a corporate

Exam 1 Notes Ch 2,4,5.docx - Chapter 2 Both corporations...

This preview shows page 1 - 2 out of 8 pages.

Chapter 2: Both corporations and individuals include recognized capital gains in their taxable income. For a corporate taxpayer, there is no preferential tax rate applicable to long-term capital gains. Instead, the capital gain is taxed at Parrot’s normal tax rate of 25%. The preferential tax rate of 15% would apply to Jeanette’s long- term capital gain. For an individual taxpayer, there is no deprecation recapture under § 1250 with respect to realty placed in service after 1986 and depreciated under the straight-line method. However, under § 291, a C corporation must treat a portion of gain recognized on the disposition of § 1250 property as depreciation recapture (ordinary income). The § 291 ordinary income amount is equal to 20% of the excess of the amount of depreciation recapture that would arise if the property was § 1245 property over the amount of depreciation recapture computed under § 1250 (without regard to § 291). As a result, some of the gain recognized by a C corporation on the sale of the warehouse will be ordinary income (and not § 1231 gain). In order to be deductible by an accrual basis corporation in the year authorized by its board of directors, a charitable contribution must be paid within 3 1/2 months of the end of the year of authorization (April 15, 2018, in this case). Because payment was made within the required time period, the charitable contribution is deductible in 2017. Otter Corporation will be allowed a dividends received deduction equal to 70% of the $15,000 dividend it received from Marmot (subject to taxable income limitation described in Example 26). It will pay tax at the applicable corporate tax rate of 25% on the remaining portion of the dividend. Gerald must include in income the entire $15,000 dividend he received from Marmot, and he will pay tax at the 15% rate applicable to individuals. A corporation that owns stock in another corporation is allowed a dividends received deduction. The deduction percentage is based on the percentage of ownership that the recipient corporation has in the corporation paying the dividend. Currently, with Mustard’s 15% ownership interest in Burgundy, the deduction percentage is 70%. If the stock purchase increases Mustard’s ownership interest in Burgundy to 20% or more, but less than 80%, then the deduction percentage is 80%. If the stock purchase increases Mustard’s ownership interest in Burgundy to 80% or more, then the deduction percentage is 100%. Plum Corporation and Ivory Corporation are members of a controlled group of corporations (related corporations) and subject to a special income tax liability computation. The special computation limits the amount of a controlled group’s taxable income that is taxed at rates lower than 35% to that amount the corporations in the group would have if they were one corporation.
Image of page 1
Image of page 2

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture