Please address the following: 1. Please research the IRS website and provide inf
ID: 2405034 • Letter: P
Question
Please address the following: 1. Please research the IRS website and provide information on a closely held corporation, a personal holding company, and a personal service corporation. Please provide an example of a type of business that would be suitable for each of business organizations noted above (provide a different example for each type). 2. Citradoria Corporation is a regular corporation that contributes $35,000 cash to qualified charitable organizations during the current tax year. The corporation has net operating income of $140,000, before deducting the contributions, and dividends received from domestic corporations (ownership in all corporations is less than 20 percent) in the amount of $20,000. What is the amount of Citradoria Corporation's allowable deduction for charitable contributions for the current year? What may the corporation do with any excess amount of contributions?Explanation / Answer
Answer to 1
Closely held corporation
A closely held corporation is a corporation that:
- Has more than 50% of the value of its outstanding stock owned (directly or indirectly) by 5 or fewer individuals at any time during the last half of the tax year; and
- Isn't a personal service corporation
A closely held corportation is subject to additional limitations in the tax treatment of items such as passive activity losses, at-risk rules, and compensation paid to corporate officers
Personal holding company
A corporation will be considered a personal holding company if it meets both the Income Test and Stock ownership test
- Income test states that at least 60% of the corporation's adjusted ordinary gross income for the tax year is from certain dividends, interest, rent, royalties and annuities
- Stock ownership test states that at any time during the last half year of the tax year, 5 or fewer individuals must directly or indirectly own more than 50% in value of the corporation's outstanding stock
Personal service corporation
- Its principal activity is performing personal services during the 'testing period'
- Its employee-owners substantially performs the services. A corporation meets this requirement if more than 20% of the corporation's compensation cost for performing personal services is for personal services its employee-owners perform during the testing period
- Its employee-owners own more than 10% of the FMV of its outstanding stock
Answer to 2
Calculation of allowable deduction for charitable contribution
Corporate charitable contribution deduction is limited to 10% of taxable income
Calculation of taxable income:
Net operating income = $ 140000
Add: Dividend received = $ 20000
Total = $ 160000
Less: Deduction @ 70% w.r.t. dividend (as shareholding is less than 20%) = 70% X 20000 = 14000$
Net taxable income = $ 146000
Actual Charitable contribution deduction = $ 35000
Charitable contribution deduction limited to 10% of taxable income
= 10% X146000
=$ 14600
Therefore, allowable deduction for charitable contribution is $ 14600 for current year
Excess amount of contribution can be carried forward for a period of 5 years.
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