Introduction to the Tax Issues Unique to a C-Corporation

National Society of Tax Professionals

presents

Introduction to the Tax Issues Unique to a

C-Corporation

Developed, Written and Instructed By Paul LaMonaca, CPA, MST

NSTP Director of Education

Seminar materials and seminar presentations are intended to stimulate thought and discussion and to provide attendees with useful ideas and guidance in the areas of federal taxation and administration. These materials as well as the comments of the instructors do not constitute and should not be treated as tax advice regarding the use of any particular tax procedure, tax planning technique or device or suggestion or any of the tax consequences associated with them.

Although the author has made every effort to ensure the accuracy of the materials and the seminar presentation, neither the author, the presenter nor the National Society of Tax Professionals assumes any responsibility for any individual's reliance on the written or oral information presented during the presentation. Each attendee should verify independently all statements made in the materials and during the seminar presentation before applying them to a particular fact pattern and should determine independently the tax and other consequences of using any particular device, technique or suggestion before recommending the same to a client or implementing the same on a client's or on his or her own behalf.

Copyright ? Paul LaMonaca 2013

Materials may not be copied or reprinted without prior written permission.

Table of Contents Page

Introduction to the Tax Issues Unique to a C Corporation .......................................... 1 A. Double Taxation...................................................................... 1 B. Reporting Dividends and Other Distributions ........................ 1 C. IRS Form 1099 DIV ............................................................... 1 D. IRS Form 5452 ........................................................................ 2 E. ?312 Earnings and Profits (E&P)........................................... 2 F. Calculating E&P ..................................................................... 2 G. ?312 Additions to Current Year Taxable Income or Loss ..... 3 H. ?312 Subtractions from the Current Year Taxable Income or Loss .......................................................... 3 I. Current Year E&P .................................................................. 5 J. Accumulated E&P .................................................................. 6 K. Summary Schedule of E&P Adjustments .............................. 6 L. Allocating E&P to Distributions ............................................ 9 M. Constructive Dividend Issues................................................ 11 N. Property Distributions ........................................................... 12

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Introduction to the Tax Issues Unique to a Subchapter C-Corporation

A. Double Taxation

1. Double taxation and earnings and profits (E&P) are an important issue for Subchapter C Corporations

2. Corporate profits are taxed at the corporate level at the graduated rates imposed under federal income tax law. When the corporate profits are later distributed to shareholders they are taxed as dividends to the extent that the corporation has earnings and profits (E&P).

3. The current year's earnings and profits is not the same amount as the current year's taxable income or taxable loss.

4. The current year's E&P begins with the corporation's net income or net loss before the Net Operating Loss (NOL) carryforward from prior tax years and has adjustments under ?312 which can increase and decrease current year's taxable income or taxable loss.

B. Reporting Dividends and Other Distributions

1. A corporate distribution to a shareholder is generally treated as a distribution of earnings and profits (E&P).

2. Any part of a distribution from either current or accumulated earnings and profits is reported to the shareholder as a dividend.

3. Any part of a distribution that is not from earnings and profits is applied against and reduces the adjusted basis of the stock in the hands of the shareholder.

4. If the distribution is not from earning and profits and the amount distributed is more than the adjusted basis of the shareholder's stock, then this results in the shareholder having a gain from the sale or exchange of property reportable on Schedule D of Form 1040.

C. Form 1099-DIV.

1. The corporation must file Form 1099-DIV with the IRS for each shareholder to whom it paid dividends and other distributions on stock of $10 or more during a calendar year.

2. A corporation must generally send Forms 1099-DIV to the IRS with Form 1096 by February 28 (March 31 if filing electronically) of the year following the year of the distribution.

3. Generally, the corporation must furnish Forms 1099-DIV to shareholders by February 15 of the year following the close of the calendar year during which the corporation made the distributions.

D. IRS Form 5452.

1. A corporation should file IRS Form 5452 if nondividend distributions were made to shareholders.

2. A calendar tax year corporation must file Form 5452 with its income tax return for the tax year in which the nondividend distributions were made.

3. A fiscal tax year corporation must file Form 5452 with its income tax return due for the first fiscal year ending after the calendar year in which the nondividend distributions were made.

E. ?312 Earnings and Profits (E&P)

1. The tax concept of "earnings and profits" (E&P) is similar in many respects to financial accounting concept of "retained earnings." Both are methods of measuring a corporation's capital balance accumulation.

2. The distinction of E&P is that it is determined using specific provisions under ?312 of the Code.

3. E&P calculates the upper limit on the amount of the distribution by a corporation that a shareholder receives that must be recognized as a "dividend."

4. E&P represents a corporation's ability to pay dividends without infringing on its contributed capital.

F. Calculating E&P

1. ?312 does not provide a definition of E&P but ?312 does provide for a series of adjustments to taxable income that will determine a corporation's "economic income."

2. Accumulated E&P is fixed as of the beginning of the tax year. It is the accumulation of undistributed earnings of a corporation since February 28, 1913.

3. Current E&P is the undistributed earnings of a corporation since the first day of the current taxable year attributable to the current tax year's operations. 2

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