When you have completed this chapter, you should understand the following learning objectives: Describe corporate formation and fi ling requirements, calculate corporate and shareholder basis, determine corporate taxable income and tax liability, explain the tax rules for transactions with shareholders. | Chapter 15 Corporate Taxation “Corporations don’t pay taxes, they collect them.” -- Paul H. O’Neill 1 LO #1 Corporate Formation and Filing Requirements Corporations are legal entities formed under the laws of a state. Corporations can use the cash-basis of accounting if average gross receipts <= $5 million or if inventory is not a material factor. 2 Corporations are separate legal entities and are subject to taxation. Corporations can choose to use the cash-basis of accounting if they meet certain criteria. LO #1 Corporate Formation and Filing Requirements Corporations are not limited to a calendar year fiscal year. They can choose any fiscal year in their first year of operation. Corporations file a Form 1120. Tax returns are due months after the fiscal year-end Can obtain an automatic 6-month extension. 3 Corporations can choose a fiscal year or a calendar year. The election is made with the first tax return filed. Corporate tax returns, a Form 1120, is due 2 ½ months after the end of the fiscal year. An automatic 6-month extension can be obtained, similar to an individual return or a partnership return. LO # 2 - Basis On formation of a corporation, transferors are exchanging cash and/or property for stock. Generally, on corporate formation, no gain is recognized by the transerors if, immediately after the transfer, the transferors control 80% or more of the corporation. 4 It is important to understand how tax basis is determined, both the basis of the stock in the hands of the shareholder and also the basis of the property contributed in the hands of the corporation. This is the same concept as “inside basis / outside basis” discussed in Chapter 14 for partnerships. Generally, there is no gain on the formation of a corporation if the transferors control 80% or more of the corporation immediately after formation. There are some exceptions noted on the next few slides. LO # 2 - Basis Two cases in which gain may be recognized by the transferor(s): 1. If . | Chapter 15 Corporate Taxation “Corporations don’t pay taxes, they collect them.” -- Paul H. O’Neill 1 LO #1 Corporate Formation and Filing Requirements Corporations are legal entities formed under the laws of a state. Corporations can use the cash-basis of accounting if average gross receipts <= $5 million or if inventory is not a material factor. 2 Corporations are separate legal entities and are subject to taxation. Corporations can choose to use the cash-basis of accounting if they meet certain criteria. LO #1 Corporate Formation and Filing Requirements Corporations are not limited to a calendar year fiscal year. They can choose any fiscal year in their first year of operation. Corporations file a Form 1120. Tax returns are due months after the fiscal year-end Can obtain an automatic 6-month extension. 3 Corporations can choose a fiscal year or a calendar year. The election is made with the first tax return filed. Corporate tax returns, a Form 1120, is due 2 ½ months after the
