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Turbotax military free 10. Turbotax military free   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Turbotax military free Cash method. Turbotax military free Debt acquired from a decedent. Turbotax military free Liquidation. Turbotax military free Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Turbotax military free Introduction You have a bad debt if you cannot collect money owed to you. Turbotax military free A bad debt is either a business bad debt or a nonbusiness bad debt. Turbotax military free This chapter discusses only business bad debts. Turbotax military free Generally, a business bad debt is one that comes from operating your trade or business. Turbotax military free You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Turbotax military free All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Turbotax military free For more information on nonbusiness bad debts, see Publication 550. Turbotax military free Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Turbotax military free S. Turbotax military free Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Turbotax military free Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Turbotax military free A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Turbotax military free Bad debts of a corporation (other than an S corporation) are always business bad debts. Turbotax military free Credit sales. Turbotax military free   Business bad debts are mainly the result of credit sales to customers. Turbotax military free Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Turbotax military free After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Turbotax military free   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Turbotax military free If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Turbotax military free    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Turbotax military free This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Turbotax military free Accrual method. Turbotax military free   If you use the accrual method of accounting, you generally report income as you earn it. Turbotax military free You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Turbotax military free   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Turbotax military free Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Turbotax military free Cash method. Turbotax military free   If you use the cash method of accounting, you generally report income when you receive payment. Turbotax military free You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Turbotax military free For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Turbotax military free Debts from a former business. Turbotax military free   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Turbotax military free If any of these receivables subsequently become worthless, the loss is still a business bad debt. Turbotax military free Debt acquired from a decedent. Turbotax military free   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Turbotax military free The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Turbotax military free Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Turbotax military free Liquidation. Turbotax military free   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Turbotax military free Types of Business Bad Debts Business bad debts may result from the following. Turbotax military free Loans to clients and suppliers. Turbotax military free   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Turbotax military free Debts owed by political parties. Turbotax military free   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Turbotax military free You use the accrual method of accounting. Turbotax military free The debt arose from the sale of goods or services in the ordinary course of your trade or business. Turbotax military free More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Turbotax military free You made substantial and continuing efforts to collect on the debt. Turbotax military free Loan or capital contribution. Turbotax military free   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Turbotax military free Debts of an insolvent partner. Turbotax military free   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Turbotax military free If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Turbotax military free Business loan guarantee. Turbotax military free   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Turbotax military free You made the guarantee in the course of your trade or business. Turbotax military free You have a legal duty to pay the debt. Turbotax military free You made the guarantee before the debt became worthless. Turbotax military free You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Turbotax military free You received reasonable consideration for making the guarantee. Turbotax military free You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Turbotax military free Example. Turbotax military free Jane Zayne owns the Zayne Dress Company. Turbotax military free She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Turbotax military free Elegant Fashions is one of Zayne's largest clients. Turbotax military free Elegant Fashions later defaulted on the loan. Turbotax military free As a result, Ms. Turbotax military free Zayne paid the remaining balance of the loan in full to the bank. Turbotax military free She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Turbotax military free She was motivated by the desire to retain one of her better clients and keep a sales outlet. Turbotax military free Deductible in the year paid. Turbotax military free   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Turbotax military free Rights against a borrower. Turbotax military free   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Turbotax military free The debt is then owed to you. Turbotax military free If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Turbotax military free Joint debtor. Turbotax military free   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Turbotax military free Sale of mortgaged property. Turbotax military free   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Turbotax military free When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Turbotax military free This may occur when the debt is due or prior to that date. Turbotax military free To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Turbotax military free It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Turbotax military free Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Turbotax military free Property received for debt. Turbotax military free   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Turbotax military free You can deduct the remaining debt as a bad debt if and when it becomes worthless. Turbotax military free   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Turbotax military free It is not a recovery of a bad debt. Turbotax military free For information on the sale of an asset, see Publication 544. Turbotax military free How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Turbotax military free The specific charge-off method. Turbotax military free The nonaccrual-experience method. Turbotax military free Generally, you must use the specific charge-off method. Turbotax military free However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Turbotax military free Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Turbotax military free However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Turbotax military free Partly worthless debts. Turbotax military free   You can deduct specific bad debts that become partly uncollectible during the tax year. Turbotax military free Your tax deduction is limited to the amount you charge off on your books during the year. Turbotax military free You do not have to charge off and deduct your partly worthless debts annually. Turbotax military free You can delay the charge off until a later year. Turbotax military free However, you cannot deduct any part of a debt after the year it becomes totally worthless. Turbotax military free Significantly modified debt. Turbotax military free   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Turbotax military free For more information, see Regulations section 1. Turbotax military free 166-3(a)(3). Turbotax military free Deduction disallowed. Turbotax military free   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Turbotax military free If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Turbotax military free The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Turbotax military free Totally worthless debts. Turbotax military free   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Turbotax military free   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Turbotax military free However, you may want to do so. Turbotax military free If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Turbotax military free See Partly worthless debts, earlier. Turbotax military free Filing a claim for refund. Turbotax military free   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Turbotax military free If the bad debt was totally worthless, you must file the claim by the later of the following dates. Turbotax military free 7 years from the date your original return was due (not including extensions). Turbotax military free 2 years from the date you paid the tax. Turbotax military free   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Turbotax military free 3 years from the date you filed your original return. Turbotax military free 2 years from the date you paid the tax. Turbotax military free You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Turbotax military free Such an impairment requires proof of existence. Turbotax military free   For details and more information about filing a claim, see Publication 556. Turbotax military free Use one of the following forms to file a claim. Turbotax military free For more information, see the instructions for the applicable form. Turbotax military free Table 10-1. Turbotax military free Forms Used To File a Claim IF you filed as a. Turbotax military free . Turbotax military free . Turbotax military free THEN file. Turbotax military free . Turbotax military free . Turbotax military free Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Turbotax military free Under this method, you do not accrue service related income you expect to be uncollectible. Turbotax military free Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Turbotax military free Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Turbotax military free Service related income. Turbotax military free   You can use the nonaccrual-experience method only for amounts earned by performing services. Turbotax military free You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Turbotax military free Gross receipts test. Turbotax military free   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Turbotax military free If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Turbotax military free   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Turbotax military free For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Turbotax military free Interest or penalty charged. Turbotax military free   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Turbotax military free However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Turbotax military free You otherwise accrue the full amount due as gross income at the time you provide the services. Turbotax military free You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Turbotax military free Change in accounting method. Turbotax military free   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Turbotax military free See Form 3115 and the Instructions for Form 3115 for more information. Turbotax military free Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Turbotax military free The amount you include is limited to the amount you actually deducted. Turbotax military free However, you can exclude the amount deducted that did not reduce your tax. Turbotax military free Report the recovery as “Other income” on the appropriate business form or schedule. Turbotax military free See Recoveries in Publication 525 for more information. Turbotax military free Net operating loss (NOL) carryover. Turbotax military free   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Turbotax military free A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Turbotax military free For more information about NOLs, see Publication 536. Turbotax military free Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 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Turbotax military free Publication 542 - Main Content Table of Contents Businesses Taxed as CorporationsPersonal services. Turbotax military free Employee-owners. Turbotax military free Other rules. Turbotax military free Other rules. Turbotax military free Property Exchanged for StockNonqualified preferred stock. Turbotax military free Liabilities. Turbotax military free Election to reduce basis. Turbotax military free Capital Contributions Filing and Paying Income TaxesIncome Tax Return Penalties Estimated Tax U. Turbotax military free S. Turbotax military free Real Property Interest Accounting MethodsSection 481(a) adjustment. Turbotax military free Accounting Periods Recordkeeping Income, Deductions, and Special ProvisionsCosts of Going Into Business Related Persons Income From Qualifying Shipping Activities Election to Expense Qualified Refinery Property Deduction to Comply With EPA Sulfur Regulations Energy-Efficient Commercial Building Property Deduction Corporate Preference Items Dividends-Received Deduction Extraordinary Dividends Below-Market Loans Charitable Contributions Capital Losses Net Operating Losses At-Risk Limits Passive Activity Limits Figuring TaxTax Rate Schedule Alternative Minimum Tax (AMT) Credits Recapture Taxes Accumulated Earnings Tax Distributions to ShareholdersMoney or Property Distributions Distributions of Stock or Stock Rights Constructive Distributions Reporting Dividends and Other Distributions How To Get Tax Help Businesses Taxed as Corporations The rules you must use to determine whether a business is taxed as a corporation changed for businesses formed after 1996. Turbotax military free Business formed before 1997. Turbotax military free   A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as a corporation. Turbotax military free Business formed after 1996. Turbotax military free   The following businesses formed after 1996 are taxed as corporations. Turbotax military free A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic. Turbotax military free A business formed under a state law that refers to it as a joint-stock company or joint-stock association. Turbotax military free An insurance company. Turbotax military free Certain banks. Turbotax military free A business wholly owned by a state or local government. Turbotax military free A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Turbotax military free Certain foreign businesses. Turbotax military free Any other business that elects to be taxed as a corporation. Turbotax military free For example, a limited liability company (LLC) can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. Turbotax military free For more information about LLCs, see Publication 3402, Taxation of Limited Liability Companies. Turbotax military free S corporations. Turbotax military free   Some corporations may meet the qualifications for electing to be S corporations. Turbotax military free For information on S corporations, see the instructions for Form 1120S, U. Turbotax military free S. Turbotax military free Income Tax Return for an S Corporation. Turbotax military free Personal service corporations. Turbotax military free   A corporation is a personal service corporation if it meets all of the following requirements. Turbotax military free Its principal activity during the “testing period” is performing personal services (defined later). Turbotax military free Generally, the testing period for any tax year is the prior tax year. Turbotax military free If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: The last day of its tax year, or The last day of the calendar year in which its tax year begins. Turbotax military free Its employee-owners substantially perform the services in (1), above. Turbotax military free This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners. Turbotax military free Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period. Turbotax military free Personal services. Turbotax military free   Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. Turbotax military free Employee-owners. Turbotax military free   A person is an employee-owner of a personal service corporation if both of the following apply. Turbotax military free He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he or she is an independent contractor for other purposes) on any day of the testing period. Turbotax military free He or she owns any stock in the corporation at any time during the testing period. Turbotax military free Other rules. Turbotax military free   For other rules that apply to personal service corporations see Accounting Periods, later. Turbotax military free Closely held corporations. Turbotax military free   A corporation is closely held if all of the following apply. Turbotax military free It is not a personal service corporation. Turbotax military free At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is, directly or indirectly, owned by or for five or fewer individuals. Turbotax military free “Individual” includes certain trusts and private foundations. Turbotax military free Other rules. Turbotax military free   For the at-risk rules that apply to closely held corporations, seeAt-Risk Limits, later. Turbotax military free Property Exchanged for Stock If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. Turbotax military free This rule applies both to individuals and to groups who transfer property to a corporation. Turbotax military free It also applies whether the corporation is being formed or is already operating. Turbotax military free It does not apply in the following situations. Turbotax military free The corporation is an investment company. Turbotax military free You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors. Turbotax military free The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt. Turbotax military free Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange. Turbotax military free For more information, see section 1. Turbotax military free 351-3 of the Regulations. Turbotax military free Control of a corporation. Turbotax military free   To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock. Turbotax military free Example 1. Turbotax military free You and Bill Jones buy property for $100,000. Turbotax military free You both organize a corporation when the property has a fair market value of $300,000. Turbotax military free You transfer the property to the corporation for all its authorized capital stock, which has a par value of $300,000. Turbotax military free No gain is recognized by you, Bill, or the corporation. Turbotax military free Example 2. Turbotax military free You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value of $300,000. Turbotax military free This represents only 75% of each class of stock of the corporation. Turbotax military free The other 25% was already issued to someone else. Turbotax military free You and Bill recognize a taxable gain of $200,000 on the transaction. Turbotax military free Services rendered. Turbotax military free   The term property does not include services rendered or to be rendered to the issuing corporation. Turbotax military free The value of stock received for services is income to the recipient. Turbotax military free Example. Turbotax military free You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. Turbotax military free Right after the exchange, you own 85% of the outstanding stock. Turbotax military free No gain is recognized on the exchange of property. Turbotax military free However, you recognize ordinary income of $3,000 as payment for services you rendered to the corporation. Turbotax military free Property of relatively small value. Turbotax military free   The term property does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors. Turbotax military free   Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor. Turbotax military free Stock received in disproportion to property transferred. Turbotax military free   If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in proportion to his or her interest in the property transferred. Turbotax military free If a disproportionate transfer takes place, it will be treated for tax purposes in accordance with its true nature. Turbotax military free It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations. Turbotax military free Money or other property received. Turbotax military free   If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other than stock, you may have to recognize gain. Turbotax military free You must recognize gain only up to the amount of money plus the fair market value of the other property you receive. Turbotax military free The rules for figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed in Publication 544 under Like-Kind Exchanges. Turbotax military free If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary income from depreciation. Turbotax military free See chapter 3 of Publication 544. Turbotax military free No loss is recognized. Turbotax military free Nonqualified preferred stock. Turbotax military free   Nonqualified preferred stock is treated as property other than stock. Turbotax military free Generally, it is preferred stock with any of the following features. Turbotax military free The holder has the right to require the issuer or a related person to redeem or buy the stock. Turbotax military free The issuer or a related person is required to redeem or buy the stock. Turbotax military free The issuer or a related person has the right to redeem or buy the stock and, on the issue date, it is more likely than not that the right will be exercised. Turbotax military free The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices. Turbotax military free For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code. Turbotax military free Liabilities. Turbotax military free   If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. Turbotax military free There are two exceptions to this treatment. Turbotax military free If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized up to the difference. Turbotax military free However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized. Turbotax military free If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange is to avoid federal income tax, the assumption is treated as if you received money in the amount of the liabilities. Turbotax military free For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. Turbotax military free Example. Turbotax military free You transfer property to a corporation for stock. Turbotax military free Immediately after the transfer, you control the corporation. Turbotax military free You also receive $10,000 in the exchange. Turbotax military free Your adjusted basis in the transferred property is $20,000. Turbotax military free The stock you receive has a fair market value (FMV) of $16,000. Turbotax military free The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. Turbotax military free Gain is realized as follows. Turbotax military free FMV of stock received $16,000 Cash received 10,000 Liability assumed by corporation 5,000 Total received $31,000 Minus: Adjusted basis of property transferred 20,000 Realized gain $11,000   The liability assumed is not treated as money or other property. Turbotax military free The recognized gain is limited to $10,000, the cash received. Turbotax military free Loss on exchange. Turbotax military free   If you have a loss from an exchange and own, directly or indirectly, more than 50% of the corporation's stock, you cannot deduct the loss. Turbotax military free For more information, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Turbotax military free Basis of stock or other property received. Turbotax military free   The basis of the stock you receive is generally the adjusted basis of the property you transfer. Turbotax military free Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Turbotax military free Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Turbotax military free Also decrease this amount by the amount of any liability the corporation or another party to the exchange assumed from you, unless payment of the liability gives rise to a deduction when paid. Turbotax military free    Further decreases may be required when the corporation or another party to the exchange assumes from you a liability that gives rise to a deduction when paid, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange. Turbotax military free This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or the trade or business with which the liability is associated. Turbotax military free The basis of any other property you receive is its fair market value on the date of the trade. Turbotax military free Basis of property transferred. Turbotax military free   A corporation that receives property from you in exchange for its stock generally has the same basis you had in the property, increased by any gain you recognized on the exchange. Turbotax military free However, the increase for the gain recognized may be limited. Turbotax military free For more information, see section 362 of the Internal Revenue Code. Turbotax military free Election to reduce basis. Turbotax military free   In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market value, the transferor and transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal to the fair market value of the property transferred. Turbotax military free The transferor and transferee make this election by attaching a statement to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. Turbotax military free However, if the transferor makes the election by including the certification provided in Notice 2005-70, 2005-41, I. Turbotax military free R. Turbotax military free B. Turbotax military free 694, on or with its tax return filed by the due date (including extensions), then no election need be made by the transferee. Turbotax military free    For more information on making this election, see section 362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70. Turbotax military free Capital Contributions This section explains the tax treatment of contributions from shareholders and nonshareholders. Turbotax military free Paid-in capital. Turbotax military free   Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. Turbotax military free These contributions are not taxable to the corporation. Turbotax military free Basis. Turbotax military free   The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. Turbotax military free However, the increase for the gain recognized may be limited. Turbotax military free For more information, see Basis of property transferred, above, and section 362 of the Internal Revenue Code. Turbotax military free   The basis of property contributed to capital by a person other than a shareholder is zero. Turbotax military free   If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce the basis of any property acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount of the contribution. Turbotax military free If the amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other properties held by the corporation on the last day of the 12-month period in the following order. Turbotax military free Depreciable property. Turbotax military free Amortizable property. Turbotax military free Property subject to cost depletion but not to percentage depletion. Turbotax military free All other remaining properties. Turbotax military free   Reduce the basis of property in each category to zero before going on to the next category. Turbotax military free   There may be more than one piece of property in each category. Turbotax military free Base the reduction of the basis of each property on the following ratio:   Basis of each piece of property   Bases of all properties (within that category) If the corporation wishes to make this adjustment in some other way, it must get IRS approval. Turbotax military free The corporation files a request for approval with its income tax return for the tax year in which it receives the contribution. Turbotax military free Filing and Paying Income Taxes The federal income tax is a pay-as-you-go tax. Turbotax military free A corporation generally must make estimated tax payments as it earns or receives income during its tax year. Turbotax military free After the end of the year, the corporation must file an income tax return. Turbotax military free This section will help you determine when and how to pay and file corporate income taxes. Turbotax military free For certain corporations affected by Presidentially declared disasters such as hurricanes, the due dates for filing returns, paying taxes, and performing other time-sensitive acts may be extended. Turbotax military free The IRS may also forgive the interest and penalties on any underpaid tax for the length of any extension. Turbotax military free For more information, visit www. Turbotax military free irs. Turbotax military free gov/newsroom/article/0,,id=108362. Turbotax military free 00. Turbotax military free Income Tax Return This section will help you determine when and how to report a corporation's income tax. Turbotax military free Who must file. Turbotax military free   Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a tax year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. Turbotax military free Which form to file. Turbotax military free   A corporation generally must file Form 1120, U. Turbotax military free S. Turbotax military free Corporation Income Tax Return, to report its income, gains, losses, deductions, credits, and to figure its income tax liability. Turbotax military free Certain organizations and entities must file special returns. Turbotax military free For more information, see Special Returns for Certain Organizations, in the Instructions for Form 1120. Turbotax military free Electronic filing. Turbotax military free   Corporations can generally electronically file (e-file) Form 1120 and certain related forms, schedules, and attachments. Turbotax military free Certain corporations with total assets of $10 million or more, that file at least 250 returns a year must e-file Form 1120. Turbotax military free However, in certain instances, these corporations can request a waiver. Turbotax military free For more information regarding electronic filing, visit www. Turbotax military free irs. Turbotax military free gov/efile. Turbotax military free When to file. Turbotax military free   Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. Turbotax military free A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. Turbotax military free A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved. Turbotax military free Example 1. Turbotax military free A corporation's tax year ends December 31. Turbotax military free It must file its income tax return by March 15th. Turbotax military free Example 2. Turbotax military free A corporation's tax year ends June 30. Turbotax military free It must file its income tax return by September 15th. Turbotax military free   If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. Turbotax military free Extension of time to file. Turbotax military free   File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, to request an extension of time to file a corporation income tax return. Turbotax military free The IRS will grant the extension if you complete the form properly, file it, and pay any tax due by the original due date for the return. Turbotax military free   Form 7004 does not extend the time for paying the tax due on the return. Turbotax military free Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. Turbotax military free The interest is figured from the original due date of the return to the date of payment. Turbotax military free   For more information, see the instructions for Form 7004. Turbotax military free How to pay your taxes. Turbotax military free   A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year. Turbotax military free Electronic Federal Tax Payment System (EFTPS). Turbotax military free   Corporations generally must use EFTPS to make deposits of all tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes). Turbotax military free For more information on EFTPS and enrollment, visit www. Turbotax military free eftps. Turbotax military free gov or call 1-800-555-4477. Turbotax military free Also see Publication 966, The Secure Way to Pay Your Federal Taxes. Turbotax military free Note. Turbotax military free Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used to make federal tax deposits. Turbotax military free Penalties Generally, if the corporation receives a notice about interest and penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. Turbotax military free Do not attach an explanation when the corporation's return is filed. Turbotax military free See the instructions for your income tax return. Turbotax military free Late filing of return. Turbotax military free    A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. Turbotax military free If the corporation is charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. Turbotax military free The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. Turbotax military free The penalty will not be imposed if the corporation can show the failure to file on time was due to a reasonable cause. Turbotax military free Late payment of tax. Turbotax military free    A corporation that does not pay the tax when due may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. Turbotax military free The penalty will not be imposed if the corporation can show that the failure to pay on time was due to a reasonable cause. Turbotax military free Trust fund recovery penalty. Turbotax military free   If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Turbotax military free The penalty is the full amount of the unpaid trust fund tax. Turbotax military free This penalty may apply to you if these unpaid taxes cannot be immediately collected from the business. Turbotax military free   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying these taxes, and who acted willfully in not doing so. Turbotax military free   A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee. Turbotax military free A responsible person also may include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds. Turbotax military free   Willfully means voluntarily, consciously, and intentionally. Turbotax military free A responsible person acts willfully if the person knows the required actions are not taking place. Turbotax military free   For more information on withholding and paying these taxes, see Publication 15 (Circular E), Employer's Tax Guide, and Publication 51, (Circular A), Agricultural Employer's Tax Guide. Turbotax military free Other penalties. Turbotax military free   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. Turbotax military free See sections 6662, 6662A, and 6663 of the Internal Revenue Code. Turbotax military free Estimated Tax Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. Turbotax military free If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. Turbotax military free This section will explain how to avoid this penalty. Turbotax military free When to pay estimated tax. Turbotax military free   Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. Turbotax military free Example 1. Turbotax military free Your corporation's tax year ends December 31. Turbotax military free Installment payments are due on April 15, June 15, September 15, and December 15. Turbotax military free Example 2. Turbotax military free Your corporation's tax year ends June 30. Turbotax military free Installment payments are due on October 15, December 15, March 15, and June 15. Turbotax military free   If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day. Turbotax military free How to figure each required installment. Turbotax military free   Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure each required installment of estimated tax. Turbotax military free You will generally use one of the following two methods to figure each required installment. Turbotax military free You should use the method that yields the smallest installment payments. Turbotax military free Note. Turbotax military free In these discussions, “return” generally refers to the corporation's original return. Turbotax military free However, an amended return is considered the original return if it is filed by the due date (including extensions) of the original return. Turbotax military free Method 1. Turbotax military free   Each required installment is 25% of the income tax the corporation will show on its return for the current year. Turbotax military free Method 2. Turbotax military free   Each required installment is 25% of the income tax shown on the corporation's return for the previous year. Turbotax military free   To use Method 2: The corporation must have filed a return for the previous year, The return must have been for a full 12 months, and The return must have shown a positive tax liability (not zero). Turbotax military free Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only. Turbotax military free   See the Instructions for Form 1120-W, for the definition of a large corporation and other special rules for large corporations. Turbotax military free Other methods. Turbotax military free   If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may be able to lower the amount of one or more required installments by using one or both of the following methods. Turbotax military free The annualized income installment method. Turbotax military free The adjusted seasonal installment method. Turbotax military free Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any required installments. Turbotax military free Refiguring required installments. Turbotax military free   If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will be more or less than originally estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. Turbotax military free An immediate catchup payment should be made to reduce any penalty resulting from the underpayment of any earlier installments. Turbotax military free Underpayment penalty. Turbotax military free   If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. Turbotax military free The penalty is figured separately for each installment due date. Turbotax military free The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. Turbotax military free This is true even if the corporation is due a refund when its return is filed. Turbotax military free Form 2220. Turbotax military free   Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and to figure the amount of the penalty. Turbotax military free   If the corporation is charged a penalty, the amount of the penalty depends on the following three factors. Turbotax military free The amount of the underpayment. Turbotax military free The period during which the underpayment was due and unpaid. Turbotax military free The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin. Turbotax military free   A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any penalty and bill the corporation. Turbotax military free However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax return if any of the following apply. Turbotax military free The annualized income installment method was used to figure any required installment. Turbotax military free The adjusted seasonal installment method was used to figure any required installment. Turbotax military free The corporation is a large corporation figuring its first required installment based on the prior year's tax. Turbotax military free How to pay estimated tax. Turbotax military free   A corporation is generally required to use EFTPS to pay its taxes. Turbotax military free See Electronic Federal Tax Payment System (EFTPS), earlier. Turbotax military free Also see the Instructions for Form 1120-W. Turbotax military free Quick refund of overpayments. Turbotax military free   A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Turbotax military free Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to apply for a quick refund of an overpayment of estimated tax. Turbotax military free A corporation can apply for a quick refund if the overpayment is: At least 10% of its expected tax liability, and At least $500. Turbotax military free Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax. Turbotax military free File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income tax return. Turbotax military free Do not file Form 4466 before the end of the corporation's tax year. Turbotax military free An extension of time to file the corporation's income tax return will not extend the time for filing Form 4466. Turbotax military free The IRS will act on the form within 45 days from the date you file it. Turbotax military free U. Turbotax military free S. Turbotax military free Real Property Interest If a domestic corporation acquires a U. Turbotax military free S. Turbotax military free real property interest from a foreign person or firm, the corporation may have to withhold tax on the amount it pays for the property. Turbotax military free The amount paid includes cash, the fair market value of other property, and any assumed liability. Turbotax military free If a domestic corporation distributes a U. Turbotax military free S. Turbotax military free real property interest to a foreign person or firm, it may have to withhold tax on the fair market value of the property. Turbotax military free A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. Turbotax military free For more information, see section 1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288, U. Turbotax military free S. Turbotax military free Withholding Tax Return for Dispositions by Foreign Persons of U. Turbotax military free S. Turbotax military free Real Property Interests; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U. Turbotax military free S. Turbotax military free Real Property Interests. Turbotax military free Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Turbotax military free Taxable income should be determined using the method of accounting regularly used in keeping the corporation's books and records. Turbotax military free In all cases, the method used must clearly show taxable income. Turbotax military free Generally, permissible methods include: Cash, Accrual, or Any other method authorized by the Internal Revenue Code. Turbotax military free Accrual method. Turbotax military free   Generally, a corporation (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. Turbotax military free A corporation engaged in farming operations also must use the accrual method. Turbotax military free   If inventories are required, the accrual method generally must be used for sales and purchases of merchandise. Turbotax military free However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method for eligible trades or businesses and may account for inventoriable items as materials and supplies that are not incidental. Turbotax military free   Under the accrual method, an amount is includable in income when: All the events have occurred that fix the right to receive the income, which is the earliest of the date: The required performance takes place, Payment is due, or Payment is received; and The amount can be determined with reasonable accuracy. Turbotax military free   Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when: All events that determine the liability have occurred, The amount of the liability can be figured with reasonable accuracy, and Economic performance takes place with respect to the expense. Turbotax military free   There are exceptions to the economic performance rule for certain items, including recurring expenses. Turbotax military free See section 461(h) of the Internal Revenue Code and the related regulations for the rules for determining when economic performance takes place. Turbotax military free Nonaccrual experience method. Turbotax military free   Accrual method corporations are not required to maintain accruals for certain amounts from the performance of services that, on the basis of their experience, will not be collected, if: The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; or The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million. Turbotax military free   This provision does not apply if interest is required to be paid on the amount or if there is any penalty for failure to pay the amount timely. Turbotax military free Percentage of completion method. Turbotax military free   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460 of the Internal Revenue Code. Turbotax military free Mark-to-market accounting method. Turbotax military free   Generally, dealers in securities must use the mark-to-market accounting method described in section 475 of the Internal Revenue Code. Turbotax military free Under this method any security held by a dealer as inventory must be included in inventory at its FMV. Turbotax military free Any security not held as inventory at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Turbotax military free Any gain or loss must be taken into account in determining gross income. Turbotax military free The gain or loss taken into account is treated as ordinary gain or loss. Turbotax military free   Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. Turbotax military free Change in accounting method. Turbotax military free   A corporation can change its method of accounting used to report taxable income (for income as a whole or for the treatment of any material item). Turbotax military free The corporation must file Form 3115, Application for Change in Accounting Method. Turbotax military free For more information, see Form 3115 and Publication 538. Turbotax military free Section 481(a) adjustment. Turbotax military free   The corporation may have to make an adjustment under section 481(a) of the Internal Revenue Code to prevent amounts of income or expense from being duplicated or omitted. Turbotax military free The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. Turbotax military free However, a corporation can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. Turbotax military free The corporation must complete the appropriate lines of Form 3115 to make the election. Turbotax military free See the Instructions for Form 3115. Turbotax military free Accounting Periods A corporation must figure its taxable income on the basis of a tax year. Turbotax military free A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Turbotax military free Generally, corporations can use either a calendar year or a fiscal year as its tax year. Turbotax military free Unless special rules apply, a corporation generally adopts a tax year by filing its first federal income tax return using that tax year. Turbotax military free For more information, see Publication 538. Turbotax military free Personal service corporation. Turbotax military free   A personal service corporation must use a calendar year as its tax year unless: It elects to use a 52–53 week tax year that ends with reference to the calendar year; It can establish a business purpose for a different tax year and obtains approval of the IRS. Turbotax military free See Form 1128, Application To Adopt, Change, or Retain a Tax Year, and Publication 538; or It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. Turbotax military free Use Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, to make the election. Turbotax military free   If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners may be limited. Turbotax military free See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction. Turbotax military free Change of tax year. Turbotax military free   Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. Turbotax military free However, under certain conditions, a corporation can change its tax year without getting the consent. Turbotax military free For more information, see Form 1128 and Publication 538. Turbotax military free Recordkeeping A corporation should keep its records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Turbotax military free Usually records that support items of income, deductions, or credits on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Turbotax military free Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property. Turbotax military free The corporation should keep copies of all filed returns. Turbotax military free They help in preparing future and amended returns and in the calculation of earnings and profits. Turbotax military free Income, Deductions, and Special Provisions Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. Turbotax military free However, the following special provisions apply only to corporations. Turbotax military free Costs of Going Into Business When you go into business, treat all costs you incur to get your business started as capital expenses. Turbotax military free However, a corporation can elect to deduct a limited amount of start-up or organizational costs. Turbotax military free Any costs not deducted can be amortized. Turbotax military free Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Turbotax military free Organizational costs are the direct costs of creating the corporation. Turbotax military free For more information on deducting or amortizing start-up and organizational costs, see the instructions for your income tax return. Turbotax military free Also see, Publication 535, chapter 7, Costs You Can Deduct or Capitalize, and chapter 8, Amortization. Turbotax military free Related Persons A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income. Turbotax military free Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Turbotax military free If a deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the expense or interest is includible in the gross income of that person. Turbotax military free These rules also deny the deduction of losses on the sale or exchange of property between related persons. Turbotax military free Related persons. Turbotax military free   For purposes of this rule, the following persons are related to a corporation. Turbotax military free Another corporation, that is a member of the same controlled group (as defined in section 267(f) of the Internal Revenue Code). Turbotax military free An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Turbotax military free A trust fiduciary, when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Turbotax military free An S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Turbotax military free A partnership, if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Turbotax military free Any employee-owner, if the corporation is a personal service corporation (see Personal service corporation, earlier), regardless of the amount of stock owned by the employee-owner. Turbotax military free Ownership of stock. Turbotax military free   To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following apply. Turbotax military free Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries. Turbotax military free An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. Turbotax military free Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants. Turbotax military free Any individual owning (other than by applying (2), above) stock in a corporation, is treated as also owning the stock owned directly or indirectly by that individual's partner. Turbotax military free To apply (1), (2), or (3), above, stock constructively owned by a person under (1) is treated as actually owned by that person. Turbotax military free But stock constructively owned by an individual under (2) or (3) is not treated as actually owned by the individual for applying either (2) or (3) to make another person the constructive owner of that stock. Turbotax military free Reallocation of income and deductions. Turbotax military free   Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions, credits, or allowances between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests. Turbotax military free Complete liquidations. Turbotax military free   The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating distributions. Turbotax military free More information. Turbotax military free   For more information about the related person rules, see Publication 544. Turbotax military free Income From Qualifying Shipping Activities A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. Turbotax military free If a corporation makes this election it may exclude income from qualifying shipping activities from gross income. Turbotax military free Also if the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. Turbotax military free A corporation making this election may also elect to defer gain on the disposition of a qualifying vessel. Turbotax military free A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative tax. Turbotax military free For more information regarding the election, see Form 8902. Turbotax military free Election to Expense Qualified Refinery Property A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50% of the cost of qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed in service before January 1, 2014. Turbotax military free The deduction is allowed for the year in which the property is placed in service. Turbotax military free A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate this deduction to its owners based on their ownership interest. Turbotax military free For more information, see section 179C of the Internal Revenue Code and the related Regulations. Turbotax military free Deduction to Comply With EPA Sulfur Regulations A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct up to 75% of qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency (EPA). Turbotax military free A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to allocate the deduction to its owners based on their ownership interest. Turbotax military free For more information, see sections 45H and 179B of the Internal Revenue Code and the related Regulations. Turbotax military free Energy-Efficient Commercial Building Property Deduction A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service before January 1, 2014. Turbotax military free In order to qualify for the deduction: The costs must be associated with depreciable or amortizable property in a Standard 90. Turbotax military free 1-2001 domestic building; The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system, or the building envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50% or more. Turbotax military free The deduction is limited to $1. Turbotax military free 80 per square foot of the building less the total amount of deductions taken for this property in prior tax years. Turbotax military free Other rules and limitations apply. Turbotax military free The corporation must reduce the basis of any property by any deduction taken. Turbotax military free The deduction is subject to recapture if the corporation fails to fully implement an energy savings plan. Turbotax military free For more information, see section 179D of the Internal Revenue Code. Turbotax military free Also see Notice 2006-52, 2006-26 I. Turbotax military free R. Turbotax military free B. Turbotax military free 1175, clarified and amplified by Notice 2008-40, 2008-14 I. Turbotax military free R. Turbotax military free B. Turbotax military free 725, and any successor. Turbotax military free Corporate Preference Items A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. Turbotax military free These items are known as corporate preference items and they include the following. Turbotax military free Gain on the disposition of section 1250 property. Turbotax military free For more information, see section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Turbotax military free Percentage depletion for iron ore and coal (including lignite). Turbotax military free For more information, see Mines and Geothermal Deposits under Mineral Property in chapter 9 of Publication 535. Turbotax military free Amortization of pollution control facilities. Turbotax military free For more information, see Pollution Control Facilities in chapter 8 of Publication 535 and section 291(a)(5) of the Internal Revenue Code. Turbotax military free Mineral exploration and development costs. Turbotax military free For more information, see Exploration Costs and Development Costs in chapter 7 of Publication 535. Turbotax military free For more information on corporate preference items, see section 291 of the Internal Revenue Code. Turbotax military free Dividends-Received Deduction A corporation can deduct a percentage of certain dividends received during its tax year. Turbotax military free This section discusses the general rules that apply. Turbotax military free The deduction is figured on Form 1120, Schedule C, or the applicable schedule of your income tax return. Turbotax military free For more information, see the Instructions for Form 1120, or the instructions for your applicable income tax return. Turbotax military free Dividends from domestic corporations. Turbotax military free   A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. Turbotax military free If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 80% of the dividends received. Turbotax military free Ownership. Turbotax military free   Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other than certain preferred stock) the receiving corporation owns. Turbotax military free Small business investment companies. Turbotax military free   Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations. Turbotax military free Dividends from regulated investment companies. Turbotax military free   Regulated investment company dividends received are subject to certain limits. Turbotax military free Capital gain dividends received from a regulated investment company do not qualify for the deduction. Turbotax military free For more information, see section 854 of the Internal Revenue Code. Turbotax military free No deduction allowed for certain dividends. Turbotax military free   Corporations cannot take a deduction for dividends received from the following entities. Turbotax military free A real estate investment trust (REIT). Turbotax military free A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution or the preceding tax year. Turbotax military free A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend with respect to the dividend. Turbotax military free Ex-dividend means the holder has no rights to the dividend. Turbotax military free A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock became ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 366 days. Turbotax military free Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Turbotax military free Dividends on deposits. Turbotax military free   Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative banks, and similar organizations are interest, not dividends. Turbotax military free They do not qualify for this deduction. Turbotax military free Limit on deduction for dividends. Turbotax military free   The total deduction for dividends received or accrued is generally limited (in the following order) to: 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20%-owned corporations, then 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations). Turbotax military free Figuring the limit. Turbotax military free   In figuring the limit, determine taxable income without the following items. Turbotax military free The net operating loss deduction. Turbotax military free The domestic production activities deduction. Turbotax military free The deduction for dividends received. Turbotax military free Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below). Turbotax military free Any capital loss carryback to the tax year. Turbotax military free Effect of net operating loss. Turbotax military free   If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not apply. Turbotax military free To determine whether a corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit. Turbotax military free Example 1. Turbotax military free A corporation loses $25,000 from operations. Turbotax military free It receives $100,000 in dividends from a 20%-owned corporation. Turbotax military free Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. Turbotax military free If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Turbotax military free Therefore, the 80% of taxable income limit does not apply. Turbotax military free The corporation can deduct the full $80,000. Turbotax military free Example 2. Turbotax military free Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. Turbotax military free Its taxable income is $85,000 before the deduction for dividends received. Turbotax military free After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable income is $5,000. Turbotax military free Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received deduction is limited to 80% of its taxable income, or $68,000 ($85,000 × 80%). Turbotax military free Extraordinary Dividends If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it generally must reduce its basis in the stock by the nontaxed part of the dividend. Turbotax military free The nontaxed part is any dividends-received deduction allowable for the dividends. Turbotax military free Extraordinary dividend. Turbotax military free   An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's adjusted basis in the stock. Turbotax military free The percentages are: 5% for stock preferred as to dividends, or 10% for other stock. Turbotax military free Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. Turbotax military free Treat all dividends received that have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds 20% of the corporation's adjusted basis in the stock. Turbotax military free Disqualified preferred stock. Turbotax military free   Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time the corporation held the stock. Turbotax military free   Disqualified preferred stock is any stock preferred as to dividends if any of the following apply. Turbotax military free The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future. Turbotax military free The issue price of the stock exceeds its liquidation rights or stated redemption price. Turbotax military free The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce tax through a combination of dividends-received deductions and loss on the disposition of the stock. Turbotax military free   These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect on that date, and thereafter, before the issuance of the stock. Turbotax military free More information. Turbotax military free   For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code. Turbotax military free Below-Market Loans If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest. Turbotax military free A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Turbotax military free A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following: A loan in exchange for a note that requires payment of interest at the applicable federal rate, and An additional payment in an amount equal to the forgone interest. Turbotax military free Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Turbotax military free Foregone interest. Turbotax military free   For any period, forgone interest is equal to: The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Turbotax military free See Below-market loans, in chapter 4 of Publication 535 for more information. Turbotax military free Charitable Contributions A corporation can claim a limited deduction for charitable contributions made in cash or other property. Turbotax military free The contribution is deductible if made to, or for the use of, a qualified organization. Turbotax military free For more information on qualified organizations, see Publication 526, Charitable Contributions. Turbotax military free Also see, Exempt Organizations Select Check (EO Select Check) at www. Turbotax military free irs. Turbotax military free gov/charities, the on-line search tool for finding information on organizations eligible to receive tax-deductible contributions. Turbotax military free Note. Turbotax military free You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual. Turbotax military free Cash method corporation. Turbotax military free   A corporation using the cash method of accounting deducts contributions in the tax year paid. Turbotax military free Accrual method corporation. Turbotax military free   A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Turbotax military free Make the choice by reporting the contribution on the corporation's return for the tax year. Turbotax military free A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. Turbotax military free The declaration must include the date the resolution was adopted. Turbotax military free Limitations on deduction. Turbotax military free   A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Turbotax military free Figure taxable income for this purpose without the following. Turbotax military free The deduction for charitable contributions. Turbotax military free The dividends-received deduction. Turbotax military free The deduction allowed under section 249 of the Internal Revenue Code. Turbotax military free The domestic production activities deduction. Turbotax military free Any net operating loss carryback to the tax year. Turbotax military free Any capital loss carryback to the tax year. Turbotax military free Farmers and ranchers. Turbotax military free    Corporations that are farmers and ranchers should see section 170(b)(2) of the Internal Revenue Code for special rules that may affect the deduction limit. Turbotax military free Carryover of excess contributions. Turbotax military free   You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. Turbotax military free You lose any excess not used within that period. Turbotax military free For example, if a corporation has a carryover of excess contributions paid in 2010 and it does not use all the excess on its return for 2011, it can carry any excess over to 2012, 2013, 2014, and 2015, if applicable. Turbotax military free Any excess not used in 2015 is lost. Turbotax military free Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). Turbotax military free You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover. Turbotax military free Cash contributions. Turbotax military free   A corporation must maintain a record of any contribution of cash, check, or other monetary contribution, regardless of the amount. Turbotax military free The record can be a bank record, receipt, letter, or other written communication from the donee indicating the name of the organization, the date of the contribution, and the amount of the contribution. Turbotax military free Keep the record of the contribution with the other corporate records. Turbotax military free Do not attach the records to the corporation's return. Turbotax military free For more information on cash contributions, see Publication 526. Turbotax military free Gifts of $250 or more. Turbotax military free   Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. Turbotax military free The acknowledgement should show the amount of cash contributed, a description of the property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. Turbotax military free The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. Turbotax military free Keep the acknowledgement with other corporate records. Turbotax military free Do not attach the acknowledgement to the return. Turbotax military free Contributions of property other than cash. Turbotax military free   If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. Turbotax military free In addition the corporation should keep a record of: The approximate date and manner of acquisition of the donated property and The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution. Turbotax military free   Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. Turbotax military free For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return. Turbotax military free   A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. Turbotax military free A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. Turbotax military free The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work. Turbotax military free   See Form 8283 for more information. Turbotax military free Qualified conservation contributions. Turbotax military free   If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. Turbotax military free For more information, see section 170(h) of the Internal Revenue Code. Turbotax military free Contributions of used vehicles. Turbotax military free   A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. Turbotax military free The deduction is limited, and other special rules apply. Turbotax military free For more information, see Publication 526. Turbotax military free Reduction for contributions of certain property. Turbotax military free   For a charitable contribution of property, the corporation must reduce the contribution by the sum of: The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV. Turbotax military free   The reduction for the long-term capital gain applies to: Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption; Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property. Turbotax military free Larger deduction. Turbotax military free   A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. Turbotax military free This deduction may be allowed for certain contributions of: Certain inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants. Turbotax military free Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. Turbotax military free The property must be donated to a qualified organization and its original use must be by the donee for research, experimentation, or research training within the United States in the area of physical or biological science. Turbotax military free Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial completion of construction to an educational organization for educational purposes within the United States. Turbotax military free Contributions to organizations conducting lobbying activities. Turbotax military free   Contributions made to an organization that conducts lobbying activities are not deductible if: The lobbying activities relate to matters of direct financial interest to the donor's trade or business and The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor. Turbotax military free More information. Turbotax military free   For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 of the Internal Revenue Code, the related regulations, and Publication 526. Turbotax military free Capital Losses A corporation can deduct capital losses only up to the amount of its capital gains. Turbotax military free In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Turbotax military free Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years. Turbotax military free A capital loss is carried to other years in the following order. Turbotax military free 3 years prior to the loss year. Turbotax military free 2 years prior to the loss year. Turbotax military free 1 year prior to the loss year. Turbotax military free Any loss remaining is carried forward for 5 years. Turbotax military free When you carry a net capital loss to another tax year, treat it as a short-term loss. Turbotax military free It does not retain its original identity as long term or short term. Turbotax military free Example. Turbotax military free A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. Turbotax military free The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. Turbotax military free The corporation treats this $6,000 as a short-term loss when carried back or forward. Turbotax military free The corporation carries the $6,000 short-term loss back 3 years. Turbotax military free In year 1, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. Turbotax military free It subtracts the $6,000 short-term loss first from the net short-term gain. Turbotax military free This results in a net capital gain for year 1 of $7,000. Turbotax military free This consists of a net short-term capital gain of $2,000 ($8,000 − $6,000) and a net long-term capital gain of $5,000. Turbotax military free S corporation status. Turbotax military free   A corporation may not carry a capital loss from, or to, a year for which it is an S corporation. Turbotax military free Rules for carryover and carryback. Turbotax military free   When carrying a capital loss from one year to another, the following rules apply. Turbotax military free When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. Turbotax military free In other words, you can carry capital losses only to years that would otherwise have a total net capital gain. Turbotax military free If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first. Turbotax military free You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back. Turbotax military free Refunds. Turbotax military free   When you carry back a capital loss to an earlier tax year, refigure your tax for that year. Turbotax military free If your corrected tax is less than the tax you originally owed, use either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U. Turbotax military free S. Turbotax military free Corporation Income Tax Return, to apply for a refund. Turbotax military free Form 1139. Turbotax military free    A corporation can get a refund faster by using Form 1139. Turbotax military free It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss. Turbotax military free Form 1120X. Turbotax military free   If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. Turbotax military free The corporation must file the Form 1120X within 3 years of the due date, includin