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Unformatted text preview: Becker 2009 Edition Chapter 3 Page 1 of 13 Chapter 3 C Corporations, Depreciations, and MACRS FORMATION Corporation tax consequences: No gain/loss recognized when issuing stock in exchange for property when: square4 Formation issuance of common stock square4 Reacquisition repurchase of treasury stock square4 Resale sale of treasury stock Basis of property received by corporation is the basis of property received is the GREATER of: square4 Adjusted net book value of shareholder + any gain recognized by shareholder square4 Debt assumed by corporation square4 EXCEPTION: if the NBV is less than the FMV of the asset, the corporation used the FMV as the basis to avoid built in losses Shareholder tax consequences: No gain/loss recognized when contributing property (not services) for common stock if both conditions are met: square4 If shareholder has 80% control square4 Boot not received: no cash, no cancellation of debt (debt = liabilities exceed NBV on transfer) NBV Assets Liabilities = Excess Liability = Boot Basis of common stock to shareholder square4 Basis of common stock received from corporation will be: o Cash amount contributed o Property adjusted basis at NBV Adjusted basis of property is reduced by any cancellation of debt Event Income Basis Taxable = FMV = FMV Non-taxable = NONE = NBV Detailed alternate computation of basis to shareholder Adjusted basis of transferred property Plus: FMV of services rendered Plus: Gain recognized by shareholder Minus: Cash received Minus: Liabilities assumed by the corporation Minus: FMV of non-money boot received = Basis of common stock Add: taxable boot debt exceeds assets adjusted basis to bring stock basis to zero o Corporation = subtract 100% of all liabilities assumed o Partnership = subtract percentage of liability (depending on the partnership percentage of the partner bringing in the liability) o Services at FMV = Taxable square4 See examples on page R3-4, R3-5 OPERATIONS Book Income vs. Taxable Income (Schedule M-1) barb2right See chart on page R3-6 I Income from continuing operations before taxes D Discontinued operations, net of tax E Extraordinary gain <loss>, net of tax A Accounting adjustment and changes, net of tax (to retained earnings) M-1 Reconciles the permanent and temporary differences between Net Income and Taxable Income Becker 2009 Edition Chapter 3 Page 2 of 13 Gross Income: Cash received in advance of accrual GAAP income is taxes barb2right Temporary differences square4 Interest income received in advance square4 Rental income received in advances (incl. Non-refundable deposits) square4 Royalty income received in advance Some GAAP income items are not includible as taxable income barb2right Permanent differences square4 Interest income from municipal or state obligations/bonds square4 Proceeds from life insurance on officers lives (key person policy) where the corporation is beneficiary...
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