1. 163 J: Business Interest Expense limitation:
Example: Capital Structure: Debt - 98% Equity - 2%
8890 Fedra Form
Why IRS limiting a corporation?
Corporation highly leverage on debt so they pay high interest expense to claim deductions.
2. Sec 78 Gross up:
If parent paid taxes of it's foreign subsidiaries, then the parent Can Claim that tax in us and can pay less tax
Ex. 100$ (CFC) earn & paid 10$ tax & in Us parent must 21% 21$ pay can deduct 10$, must pay only 11$.
line 30 state 50% deduction
line 28 State 100% deduction
$210 $ 10 = $ 11
3. Sub part F:
If Sub part f is an income which is relatively movable from one taxing jurisdiction to another and that is Subject to low rates of foreign tax
- This applies to CFC only.
4. DRD: Dividend Received Deduction
It is a tax deduction available to corporations in the US that receive dividends from other Corporations. The purposes of the DRD are to mitigate the effects of double taxation on corporate earnings.
Eligibility :
Ø Company must be C Corp
Ø Domestic Corporation (from Us)
Ø Must be through taxable entity
limit -
Ø less than 20% ownership - 50% deduction
Ø less than 80% but more than 20% ownership 65% deduction
Ø more than 80% ownership- 100%
deduction
5. Sec 179 Expense: -
It allows businesses to deduct the full purchase price of qualifying equipment and software purchase or finance during the tax year. This is intended to encourage businesses to invest in new equipment’s by providing Immediate tax reliefs.
6. State tax add back: -
State that required taxpayers to add back Certain deductions that they may have taken on their federal tax return when calculating their State taxable income.
7.
If
a taxpayer deducted State & local taxes on federal may require them to
addback that amount back for state tax purposes.
7. Bonus Dep: -
It is a tax incentive in the United States that allow businesses to immediately deduct the percent the cost of qualifying property in the year it is placed in service. This provision is designed to encourage investment in Capital assets & stimulate economic growth
Example: machinery $ 1,000,000 purchase then, $800,000 (80% of cost) can cliam as bonus deduction
8. Sec 1250: -
If you purchase any property & claim depreciation on it over the years & then sold it for gain. The portion of the gain that corresponds to the depreciation taken would be taxed Under sec 1250 rule.
→ It is a sub-type of 1231
9. Sec 1231: (Gain and loss)
Sec 1231 is related to the taxation of gain and losses from the sale business or exchange of certain assets.
Conditions:
Ø Depreciable or Real property
Ø Hold more than 1 year
Ø Use in trade or business
Example: If your sale piece of business equipment for a profit after holding Year as it for more than a year that profit may be classified as a Section 1231 gain. If you also sold another asset at Loss, you would net these amounts to determine your overall tax treatment.
If a profit is more than Gain if loss is more the loss mean's negative adjustment.
10. GILTI:
Global intangible low-taxed income is the income earned by foreign affiliates of us Companies from intangible assets like, Patents, copyrights & trademarks.
To shift income to zero or low tax jurisdictions
11. FDII:
Foreign Derived Intangible Income comes from exporting products like copyrights, trademarks, patents etc by the Us Corporation or the foreign to persons.
- C-Corporation taxed 13.125. This rate is lower than the Standard corporate tax rate.
12. TCJA (Tax cuts & Jobs Act):
Corporate tax rates reduced from 35% to 21% for Individual" Standard deduction $ 12,000 to $24,000 for PTE 20% deduction. was introduced.
Overall TCJA represent one of the most substantial Changes to US Tax code in decades
13. Sch M1:
Reconciliation of Income (loss) per books with income per return.
14. Sch M2:
Analysis of unappropriated
retained earning per books.
All corporation that file form 1120 must file M2
1120 - Retain earning
15. Sch M3: -
Provide a more detailed reconciliation of financial and taxable income for larger corporations (Generally those with total assets of $ 10 million or more)
These schedules help the IRS to understand how companies arrive at their taxable incomes and ensure Compliance with tax laws
16.
a. Combine Return
Ø 50% or more holding in Subs
Ø We add foreign affiliates
Ø No matter for legal Structure
Ø Same type of business
b. Consolidated Return
Ø 80%, or more holding in Subs
Ø No foreign affiliates added
Ø Matter legal structure
17.
Depreciation:
Depreciation is the accounting process of allocating the cost of a tangible
asset over its useful life. It reflects how much of an asset's value has been
used up over time.
Amortization:
It is the process of gradually paying off a debt or the cost of intangible
asset over a Specified period.
Depreciation:
ü Tangible assets
ü Eg. machinery, vehicle
ü Based on the estimated useful life of the asset.
Amortization:
ü Intangible assets
ü eg. Patents, trademarks.
ü Based on the legal or useful life" of the intangible assets.
18. Financial Corporation:
Predominantly deals with Money and moneyed Capital.
19. Financial Institutions:
Any bank banking association trust Company
20. Joyce: Nexus determination is made for each entity level rather than for unitary group (Numerator is zero for all non-nexus entities)
Ex. Alaska, Colorado, Illinois, west Virginia.
Finnigan: Nexus determination is made for unitary group level rather than individual entity level. Ex. AZ.CA, KS, Maine, NY, UT.
21. State filings Methods
Ø Separate company return
Ø Nexus combination return
o Pre-apportionment approach
o Post-apportionment approach
Ø Unitary combined Reporting.
o Worldwide
o Water edge
Ø Consolidated Return.
a. Separate Company Return:
ü Return is filed for each entity.
ü Tax base and A&A is calculated for that entity only.
ü Example: AL, GA, & MS
b. Nexus Combination Return:
v Similar to separate Return methodology
v Include only affiliated with nexus in state
o Pre-apportionment approach
o Post-apportionment approach
c. Unitary Combined Reporting:
o Water's edge: limit the combined group to operations with the United States.
o World-wide: All entities, regardless of location.
d. Consolidated Returns:
Ø Similar to federal consolidated approach
Ø Affiliated corporations that meets a ownership percentage (usually 80%)
Ø State may impose a nexus requirement for the consolidated
Ø 80% group more equity or voting or voting power.
22.
a. Allocation:-
Ø Assignment of non-business income to particular State
Ø Allocate amount to single State based on specific allocation rules.
b. Apportionment:-
The assignment of business income among the States with the help of factors like property payroll & sales (Formula base)
23. PL 86-272: -
If any interstate transaction will take place, then P.L.86-272 will Save the company by paying the double taxation as every state have their own rules & % of tax. Which is very difficult for an e-commerce company
Ex. Tractor store. (Physical present)!
No physical presence No sales Tax.
24. Nexus:
Ø The taxpayer must have some activity like Sales, property or payroll in some or any of the State to become subject to tax.
Ø Nexus standards vary by state & tax type.
Ø Nexus can a taxpayer have one or more states.
Ø Physical Nexus: Having a physical location employee, or inventory in a state.
Economic Nexus: - Meeting certain sales thresholds in a state, often defined by a dollar amount of sales or number of transactions.
This is the idea that if Seller located in one state & make Sale in another state. So, the state where the sale is made that state can collect Sales tax.
25.
a. Physical presence:
Refers to a business having a tangible, physical connection to a state.
Ex. Office, Employees, Property, Inventory
b. Economic Presence:
It allows a State to impose tax obligations based on the economics of a business within the state, even if there no physical presence.
Example:
Ø Sales Threshold ($100,000 in sales or 200 transaction)
Ø Digital goods & services
Ø Affiliate Relationships.
26. Factors presence economic standard in us tax.
Ø Sales Thresholds
Ø location of customers.
Ø Digital Goods & services
Ø Affiliate Relationships
Ø Advertising & Marketing
Ø Participation in Marketplace Platforms like Amazon eBay)
27. Intercompany Transactions:
These are the transactions happen between a corporate group
Ø Sale of Goods
Ø Services (management, IT)
Ø licensing & Royalties
Ø Financing (Loons or capital contribution)
28. NOL: When Income is less than
deduction.
Ex. 125 (deduction) -100 (Income) = 25
NOL
Ø Before 2017 100% deduction allowed
Ø After 2017 80% allowed/No carry back
Ø After 2020 80% allowed
Ø In 2020 100% allowed 15-year carry back
29. Filing dates.
- Individual: April 15 (6 months Extension)
- Partnership: March 15 (6 months Extension)
- S-Corp: March 15 (6 months Extension)
- C-Corp: April 15 (6 months Extension)
30. Withholding Tax:
Each state has it's own income tax rates & rules regarding withholding.
State withholding tax is an essential component of state tax systems, ensuring that taxes are collected systematically & allowing employees to menage their tax liabilities throughout the year
Same as TDS only difference is that withholding tax is only wages of the related to employees & not like interest, rent & fees.
31. PTE & FTE:
Pass through entity & flow through entity are same and main function is to pass the income to the owner or shareholder through K-1, to avoid the double taxation.
32. Feling Requirements:
The basic filing requirement is nexus if we have Nexus in that State we have to file the return.
33. Types of K-1
Ø Form 1065 K-1 (Partnership)
Ø Form 1120 S K-1 (S-Corp)
Ø Form 1041 K-1 (Trust)
Ø RK-1 (Resident)
Ø NR K-1 (Non-Resident)
34. Accumulated Depreciation:- It is the total amount of depreciation that has been recorded against an asset since it acquired.
Ex. Machinery Cost is $1,00,000 Machinery life is 10 years Then, according to straight-line Method it would record $ 10,000 in depreciation each year. After three year it will be $30,000 & the value of that machinery will be $70,000 on balance sheet.
35. Contingent liability: - It is a type of liability which can be arise depending on future event.
Example: Insurance claim for insurance company law-suite for client.
36.
a. Intangible Assets:
o This are non-physical assets that provide value to company.
o Do not have physical presence
o Ex- Patents, trademarks, Copyrights. and trade secrets, Goodwill.
b. Intangible liabilities:
· Intangible liabilities refer to non-physical or debts that a company may have.
· Example: legal obligations
· Warranty Obligation
Note: Contingent liabilities are uncertain & depend on future events whereas intangible liabilities ongoing obligations or risks.
37. Deferred Tax Assets:
Deferred tax assets represent taxes that have been paid or carried forward but will be recognized as tax benefits in future periods.
38. Deferred Tax liability:- When a company has a tax obligation that it will pay in the future due to temporary differences between it's accounting income & taxable income.
- Deferred tax is the tax which is payable in future
39. Accrued Income:- This income/revenue that has been earned by a business but has not yet been received or invoiced.
40. Depletion:- Depletion is an accrual accounting method used to allocate the cost of extracting natural resources (like mineral, oil, etc) over the period the extracted & sold.
· It is similar to depreciation & amortization but specifically applies to the consumption of natural resources.
41. Cost basis:- The cost basis is the original purposes. It is Value used to determine the capital gain or loss when the asset is sold.
Ø Purchase price
Ø Acquisition Cost (Commission, fees, taxes)
Ø Improvements (Cost incurred for enhancements)
42. Adjusted basis: - The adjusted basis is the cost basis modified by various factors that can increase or decrease it's value over time.
It reflects the current value of the asset for tax purposes.
· Deduction: (Depreciation taken to reduce tax)
· Other adjustments: (Events like stock Splits, mergers, can modify the adjusted basis)
· Cost basis →
Reflect initial Invested
Adjusted basis All adjusted amounts have to Consider.
43. Accrual Method:
· Accrual method is an accounting approach where revenues and expenses are recorded when they are earned incurred, regardless of when Cash is actually exchanged.
· Revenue:
Revenue is recognized when goods are Delivered or Services are performed even if payment has not yet been Received
Ø Expense: - Expenses are recorded when are incurred, meaning when goods and services received, even if payment has not yet been made.
· Cash Method:
This is an accounting technique where revenues & expenses are recorded only when cash is actually received or paid.
Ø Revenue is recognized only when cash is received from customers.
Ø Expenses are recognized when cash is paid out for goods and services
Ø This method is straight forward & easier to maintain (Small business & sole proprietorship).
44. COGS: - Cost of Goods Sold refers to the direct costs attributable to the production of the goods that a company sells during Specific period.
· It is important to determine the gross income.
· COGS = (Beginning Inventory) + (Purchase) + (End Inventory
45. Difference:
|
Salaries |
Wages |
Officer Compensation |
|
Fixed annual amount to employee. |
Amount based on the number of hours/day worked.
|
Remuneration paid amount to corporate officer (CEO, CFO's etc). |
|
Fixed salary |
Base on work |
Fixed amount (Bonus, stock, etc) |
46. Retain earning: It is accumulated net income that has not been paid dividends to out as Shareholders. It is reported on the balance Sheet under shareholder’s equity.
Ø Reinvest
Ø Financial Stability
· Tax is paid on the net income of the company before it is retained or distributed
47.
a. Schedule L: - Balance sheet
Ø Assets & liabilities Shareholders equity
b. Schedule K: Partners/shareholder's distributive share items.
Ø Ordinary business income
Ø Net Rental income.
Ø Interest, dividend, Cash Contribution.
Ø Royalties, other deductions.
c. Sch K-1: All partner's separate income loss deduction, Capital & Partner related information.
d. Schedule K-2: International Items
Ø Foreign tax
Ø Foreign tax credit imitation
e. Schedule K-3: Partner's share of Income, deduction, Credits, etc.
Ø International
48. Federal Corp flat tax is 21%. Partnership don’t pay tax
· Highest tax rate:
Minnesota = 9.8%.
PA = 7.99%
NJ = 6.5% to 9% depends on Income
CA 8.84.
· Lowest tax rate:
NC 2.5% (lowest)
CO = 4.4%
FL = 5.5%
UT 2 4.55%
TX = No Tax (Gross Receipts tax)
OH = No Tax 0%
Nevada
= 0% Corporation tax but have highest Salex tax rate
· Individual tax Rate:
CA =13.3%
HI = 11%
NJ = 10.75%
FL = 0% (Tax free)
TX = 0%
49. Guaranteed Payment: It is the Fixed payments to partners regardless of business's profit or loss.
· Treated as Self-employment income for the partner
50. How to calculate tax for the e-commerce company
Ø Determine Nexus if we have nexus then must file return for that state
Ø Collect tax from customers taxable States
Ø Not all items are taxable
Ø Need to file sale's tax Refund
51. Multistate tax Return:
Corp: When business have shop in one state & sell to other State.
Individuals have to file income tax Return if we have State taxable income where he is living but if he is doing job in another State then have to file pay tar there as well.
52. GAAP: Generally accepted accounting principles
53. Franchise tax: This tax is imposed by the State law om business.
· TX-Franchise Corp/Partnership
Ø Not based on income
Ø Based on net worth.
· How many members are requiring?
Ø As per interned two are required
Ø Can we add people after creation
· Con, we do business as a trust?
Ø No Coss basis No profit
Ø or on 50% less profit
Ø Glossary or Stationery
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