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Tax- Chapter 5 Part 2 Presentation final

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Anita Nizam

This document discusses the tax treatment of corporate distributions to shareholders. It reviews how earnings and profits (E&P) determine whether distributions are treated as dividends or returns of capital. Current E&P is used first to treat distributions as dividends, then accumulated E&P if needed. Qualified dividends received by individuals are taxed at preferential rates. Property distributions are also discussed, including their tax impact on both the distributing corporation and receiving shareholders. The corporation may recognize gain or loss on property distributions depending on basis, while shareholders treat distributions as dividends or returns of capital based on E&P.

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Anita Sayyed, Thomas Labelle, Sravya Boddu, Brian Reynolds Chapter 5: Taxing Corporate Distributions
Learning Objectives (Review) • LO. 1: Explain the role that earnings and profits play in determining the tax treatment of distributions • LO.3: Determine taxable dividends paid during the year by correctly allocating current and accumulated E & P to corporate distributions
RECAP Accumulated Current E&P E&P •Current 1st pro rata, accumulated chronological as necessary •Netted at the date of distribution •Do NOT net! Dividend income to the extent of current positive balance •No dividend income, results in return of capital or capital gain
Learning Objectives (New) LO.4: Describe the tax treatment of dividends for individual shareholders LO.5: Evaluate the tax impact of property dividends by computing the shareholder’s dividend income, basis in the property received, and the effect on the distributing corporation's E & P and taxable income
LO 4: Tax Treatment of Dividends Corporations: Dividend income for corporations is ordinary income and they receive dividend received deductions. • Ownership less than 20% 70% exempt • Ownership 20%-50% 80% exempt • Ownership more than 50% 100% exempt
Individuals: Individuals are taxed at lower preferential rates for qualified dividends. • Individuals paying tax @ 10-15% 0% • Individuals paying tax @ 39.6% 20% • For any other tax bracket 15% LO 4: Tax Treatment of Dividends
LO 4: Tax Treatment of Dividends Qualified dividends: • Paid by domestic or qualified /approved corp. • Short or long positions do NOT qualify • Stock held more than 60 days during the 121 days period ▫ 60 days begins before the before ex-dividend date ▫Ex-Dividend date: 2 days before the declaration of dividend • Example 2
LO 5: Property Dividends Reasons for Property Distribution: • Shareholders may want a particular property • Company low on cash reserves may want to distribute dividends to shareholders (Property distributions are taxed on the same rates as cash dividend) EFFECT ON SHAREHOLDER: • The amount distributed is the FMV of the property distributed reduced by any liability that the property is subject to or any liability of the corporation that the shareholder assumes. • Example 3
LO 5: Property Dividends EFFECT on CORPORATION: • The distribution of property is treated as sale/exchange of property at its FMV. Corporations recognize gain on distribution (FMV-Basis) • If a loss is realized it will not be recognized on the tax return. (to avoid negative dividend) • Example 4
LO 5: Property Dividends EFFECT ON SHAREHOLDER: • Distribution covered by E&P is treated as dividend and the excess is treated as return of capital. The amount of return greater than shareholder’s basis is taxed as capital gain • The FMV of the property received as dividend will be the basis of the property for the shareholder. • Example 5
LO 5: Property Dividends • If the liability assumed is greater than the corporation’s basis in the property, The FMV is deemed not to be less than the liability. The shareholder’s basis in the property will be the FMV of the liability • Example 6
LO 5: Property Dividends • Corporate distributions reduce the E&P by the amount of money distributed. (assuming enough basis) Or by greater of FMV or adjusted basis of property distributed Less: the amount of any liability assumed • E&P will increase by any gain recognized on distribution of property • Examples 7, 8, 9
LO 5: Property Dividends • A distribution of cash or property cannot generate a deficit or add to a deficit in E&P. Deficits can arise only through corporate losses. • Example 10
RECAP EFFECT ON CORPORATION EFFECT ON SHAREHOLDER FMV > Basis Distribution=FMV Gain is recognized Distribution=FMV Basis=FMV FMV < Basis Distribution= Basis loss is not recognized Distribution =FMV Basis=FMV FMV > Basis Liability is assumed Distribution=FMV - Liab assumed Gain is recognized Distribution=FMV-Liability Basis=FMV Liability>FMV deemed FMV=liability assumed Distribution = greater of FMV or Basis Gain if any is recognized deemed FMV=Liability Distribution=FMV-Liability Basis=FMV

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Tax- Chapter 5 Part 2 Presentation final

  • 1. Anita Sayyed, Thomas Labelle, Sravya Boddu, Brian Reynolds Chapter 5: Taxing Corporate Distributions
  • 2. Learning Objectives (Review) • LO. 1: Explain the role that earnings and profits play in determining the tax treatment of distributions • LO.3: Determine taxable dividends paid during the year by correctly allocating current and accumulated E & P to corporate distributions
  • 3. RECAP Accumulated Current E&P E&P •Current 1st pro rata, accumulated chronological as necessary •Netted at the date of distribution •Do NOT net! Dividend income to the extent of current positive balance •No dividend income, results in return of capital or capital gain
  • 4. Learning Objectives (New) LO.4: Describe the tax treatment of dividends for individual shareholders LO.5: Evaluate the tax impact of property dividends by computing the shareholder’s dividend income, basis in the property received, and the effect on the distributing corporation's E & P and taxable income
  • 5. LO 4: Tax Treatment of Dividends Corporations: Dividend income for corporations is ordinary income and they receive dividend received deductions. • Ownership less than 20% 70% exempt • Ownership 20%-50% 80% exempt • Ownership more than 50% 100% exempt
  • 6. Individuals: Individuals are taxed at lower preferential rates for qualified dividends. • Individuals paying tax @ 10-15% 0% • Individuals paying tax @ 39.6% 20% • For any other tax bracket 15% LO 4: Tax Treatment of Dividends
  • 7. LO 4: Tax Treatment of Dividends Qualified dividends: • Paid by domestic or qualified /approved corp. • Short or long positions do NOT qualify • Stock held more than 60 days during the 121 days period â–« 60 days begins before the before ex-dividend date â–«Ex-Dividend date: 2 days before the declaration of dividend • Example 2
  • 8. LO 5: Property Dividends Reasons for Property Distribution: • Shareholders may want a particular property • Company low on cash reserves may want to distribute dividends to shareholders (Property distributions are taxed on the same rates as cash dividend) EFFECT ON SHAREHOLDER: • The amount distributed is the FMV of the property distributed reduced by any liability that the property is subject to or any liability of the corporation that the shareholder assumes. • Example 3
  • 9. LO 5: Property Dividends EFFECT on CORPORATION: • The distribution of property is treated as sale/exchange of property at its FMV. Corporations recognize gain on distribution (FMV-Basis) • If a loss is realized it will not be recognized on the tax return. (to avoid negative dividend) • Example 4
  • 10. LO 5: Property Dividends EFFECT ON SHAREHOLDER: • Distribution covered by E&P is treated as dividend and the excess is treated as return of capital. The amount of return greater than shareholder’s basis is taxed as capital gain • The FMV of the property received as dividend will be the basis of the property for the shareholder. • Example 5
  • 11. LO 5: Property Dividends • If the liability assumed is greater than the corporation’s basis in the property, The FMV is deemed not to be less than the liability. The shareholder’s basis in the property will be the FMV of the liability • Example 6
  • 12. LO 5: Property Dividends • Corporate distributions reduce the E&P by the amount of money distributed. (assuming enough basis) Or by greater of FMV or adjusted basis of property distributed Less: the amount of any liability assumed • E&P will increase by any gain recognized on distribution of property • Examples 7, 8, 9
  • 13. LO 5: Property Dividends • A distribution of cash or property cannot generate a deficit or add to a deficit in E&P. Deficits can arise only through corporate losses. • Example 10
  • 14. RECAP EFFECT ON CORPORATION EFFECT ON SHAREHOLDER FMV > Basis Distribution=FMV Gain is recognized Distribution=FMV Basis=FMV FMV < Basis Distribution= Basis loss is not recognized Distribution =FMV Basis=FMV FMV > Basis Liability is assumed Distribution=FMV - Liab assumed Gain is recognized Distribution=FMV-Liability Basis=FMV Liability>FMV deemed FMV=liability assumed Distribution = greater of FMV or Basis Gain if any is recognized deemed FMV=Liability Distribution=FMV-Liability Basis=FMV