Transcript [EN]: Enrolled Agent Exam Prep Course, Part 2, Video 6/9, 2025

welcome to video six of part two of the EA tax training free EA exam prep course for 2025 tom here back with you to discuss Ccorporations some of what you learn here will also be relevant when we look at S corporations in the next video for now though let's get started learning about C corps what we will cover in this video is C corps in general and an overview of form 1120 then we'll talk about the taxation of CC corps and how they are taxed then we'll talk about forming a corporation then distributions and liquidations then we'll talk about controlled groups and closely held corporations and we will finish up by looking at schedules L M1 M2 and M3 our free resources from IRS.gov we've got two of them in bold here form 1120 and its instructions and then IRS publication 542 which does cover corporations i definitely recommend you get both of those and then there are a couple of other ones there as well if you are interested in those topics as a recap a CC Corp as you'll recall is a separate taxpaying entity profits and losses do not pass through to the owners for tax purposes so unlike a partnership or an S corporation for example where those profits and losses do pass through to the owners and even a sole proprietorship those profits and losses are on the owner's tax return the Ccorporation pays tax itself rather than passing on those profits or losses to the owners and then when the corporation distributes those profits to its shareholders in the form of dividends those dividends are also taxable to the shareholders and they are not deductible by the corporation so this results in that double taxation of corporate profits so the profits are taxed first at the corporate level then when they are distributed out they are taxed again at the shareholder level so the same profits are taxed twice a newly formed corporation is a corp by default so if you go to the state secretary of state's office you form a corporation you don't file anything with the IRS then you will be taxed as a Ccorporation by default of course you have the option to elect to be taxed as an S corporation if you meet the qualifications and of course we'll talk about S corporations in our next video the Ccorporation though files their tax return on form 1120 so let's look at the form 1120 at least we'll look at page one for now so at the top here we've got the tax year so if you're not a calendar year then you're going to put in your beginning and ending dates of your tax year if it is a calendar year corporation then you can just leave that blank then we have all the normal information then you will see the income section here remember we've got those portfolio type of income included here which is unique among the business returns so you've got dividends and interest etc then we'll go down to the expenses and you can see the various categories and if you've got things that are not on this list you've got other deductions and much like with a partnership you will add a statement in order to list out those other deductions and then when you come down you're going to have taxable income and a total tax your payments and an amount owed or an overpayment so this is a lot like the 1040 in that respect because the Ccorporation is a separate taxpayer just like the individual is there are of course several other pages to the 1120 we will look at some of those as we go along but of course you will be getting your copy of the 1120 and looking it over as well the filing deadline for the 1120 is the 15th day of the fourth month following the end of the tax year so if it is a calendaryear corporation then that is due April 15th remember there is this one kind of oddity here and it's an exception if the fiscal year of the corporation ends on June 30th then they have to file by September 15th which is the 15th day of the third month following the end of the year but any other year end it is the 15th day of the fourth month of course they can get an extension by filing the form 7004 and just like the individual that extension does not extend the time to pay the tax due that is just an extension of time to file the return interest and penalties interest is charged on taxes that are paid late the late filing penalty much like individuals is 5% of the unpaid tax for each month or part of a month up to 25% of the unpaid tax in total if it's more than 60 days late then the penalty is the smaller of the tax due or $510 unless you can show good cause and the penalty for late payment much like individuals is 1 half of 1% of the unpaid tax per month up to a maximum of 25% of the unpaid tax so how are Ccorporations taxed that's what we will talk about next the corporation pays a tax on its net income and that rate is a flat rate of 21% so there are no brackets like there are with individuals it is just a flat tax rate of 21% and it doesn't matter what kind of income it is we'll talk about capital gains and losses later but even capital gains are going to be taxed at 21% and then when the income is distributed to the shareholders as dividends it is fully taxable even if some of the income was not taxable to the corporation so of course it is possible to have non-taxable income and the corporation will not have to pay their 21% on that however once it gets distributed out in the form of dividends there's no way to distinguish how much of that was taxable versus non-t taxable so it is all just considered taxable and the shareholders will pay tax on it at their tax rates accumulated earnings tax so some shareholders of corporations especially closely held corporations want to avoid this double taxation problem so what they will want to do is try to hoard or accumulate their earnings in the corporation and not distribute it out as dividends so in order to discourage that and to punish those who do that there is something called the accumulated earnings tax so what this is is a tax it's an additional tax of 20% of something called accumulated taxable income and remember these earnings the same earnings have already been taxed at 21% and they're going to be taxed again here 20% of the accumulated taxable income will be taxed and of course once they are finally distributed out to the shareholders the shareholders will pay tax again so this accumulated earnings tax really is a penalty even though technically it is called a tax so what is accumulated taxable income well you start the calculation with just regular taxable income then you are going to subtract some things so first of all you're going to subtract income tax expense because federal income tax of course is not deductible by the corporation but it is an actual cash outlay that they have so you're allowed to deduct that similarly you can deduct any disallowed deductions so you have all of those things that are not allowed as deductions under the tax law that are allowed for book purposes when we're figuring out accumulated taxable income you are allowed to deduct those again because it is still a cash outlay that you had similarly any dividends that you did pay you get to deduct those even though dividends are not taxdeductible same idea it's like a disallowed deduction you get to deduct it and then finally something called the accumulated earnings credit so those first items the income tax expense and other disallowed deductions and the dividends paid those are pretty black and white you can figure out what those are the accumulated earnings credit is not so black and white so what is it it is the amount of earnings and profits that are retained for the reasonable needs of the business less the net capital gains for the year and the reasonable needs of the business is going to be based on the facts and circumstances so for example let's say the corporation has a large debt that is coming due in the next year or two well it is reasonable for them to retain some earnings in order to pay off that debt or let's say they have a large capital asset or a large capital project that they are going to have in the next year or two again it is reasonable for them to retain some earnings in order to pay for those capital projects so those are the types of things when we say reasonable needs you basically need to look at the corporation what cash needs are they going to have in the near future and anything that is considered reasonable will be this accumulated earnings credit now of course there are a lot of disputes between the IRS and corporations about reasonable needs and some of these cases can end up in court but this is at least the theory and for the exam this is the definition that you want to know there is a safe harbor for accumulated earnings and that is that a corporation can keep up to $250,000 of accumulated earnings and it will not be considered excessive so the IRS will not argue with you if you've got up to $250,000 of it after you go through that calculation your taxable income you subtract all those things if that is $250,000 or less then you're good to go the IRS will not argue the point that $250,000 though is only $150,000 for service corporations in the fields of health law engineering architecture accounting actuarial science performing arts or consulting the idea is there that service type businesses are not as capital intensive they don't generally need to hold on to as much money for large capital purchases and large capital projects so their safe harbor is only $150,000 but let's talk about the $250,000 one and what the IRS might do let's say they go through that calculation to come up with the accumulated earnings and they figure it out to be $450,000 what the IRS is likely to do is say "Okay $250,000 that's the safe harbor." So any amount over that in this case it would be $200,000 over the 250 that's what they would say you owe that 20% accumulated earnings tax on that's how they would figure that amount next is the corporate alternative minimum tax so this just started in 2023 corporations with average adjusted financial statement income over the last three years of $1 billion or more are subject to a corporate alternative minimum tax that tax is 15% of that adjusted financial statement income after subtracting out the AMT foreign tax credit for the year so what are we talking about here adjusted financial statement income this is more or less book income it's not exactly book income but that's the easy way to think about it so in the corporate world especially these very large corporations there is this tension between book and tax income for the corporation on the one hand the corporation wants to show as low a taxable income as possible in order to pay the least amount of tax possible so they want taxable income to be low on the other hand their book income their financial statement income for these big companies they're usually publicly traded companies so those are going to be available to the public and to the investors and to their lenders even if they're not publicly traded those financials will be available to their lenders and to others who might want to invest in the company so for that purpose the corporation wants to look good so they want to show as much income as possible so they want to show high book income or financial statement income and they want to show low taxable income so what this corporate alternative minimum tax says is no matter what tax strategies that you have used in order to lower your taxable income you are going to pay 15% of that book income that you're so proud of that book income that you show to all of your investors and to all of your lenders so that's what the corporate alternative minimum tax is you will just want to remember that especially this 15% amount corporate minimum tax credit so for several years before this 2023 corporate alternative minimum tax came into play there was no corporate AMT however there was a corporate AMT in 2017 and before so it is still possible for a corporation to have older unused AMT credits that carry over to the current year and so they can use those and those are filed on form 8827 so you just want to know that it is possible to have this corporate minimum tax credit and that that would be from a year in 2017 or prior special deductions and credits so for the most part corporations are going to follow the same rules as all other businesses when it comes to reporting revenue and expenses but there are a few items that are handled differently so we are going to look at each of these we've got the dividends received deduction charitable deductions capital gains and losses net operating loss and executive compensation limit so first the dividends received deduction a Ccorporation can deduct a percentage of the dividends it receives from other corporations in other words it owns part or all of another corporation it gets dividends from that corporation so that counts in income but they are allowed to deduct a certain percentage of that depending on the circumstances if the CC Corp owns less than 20% of the other corporation's stock then they can deduct half of the dividends that they receive from that corporation 50% if they own 20% or more of the other corporation's stock they can deduct 65% of the dividends that were received if the other company is a member of the same controlled group as this Ccorporation or if they are a small business investment company they can deduct 100% of the dividends that were received so in effect none of those dividends end up being taxable we will talk later in this video about what a controlled group is and how you define that for foreign dividends if the company owns 10% or more of that foreign corporation's voting stock then they generally can deduct 100% of the dividends received from that foreign corporation however the stock must be held for at least 365 days in order for that deduction to be allowed there are limitations on the dividend receive deduction there are some exceptions first of all you can find those in publication 542 and the instructions to form 1120 we're not going to go over them here because they are just not likely to be tested on the exam then the other limitation is that the deduction is going to be limited to 50% or 65% depending on how much is owned of taxable income ignoring any nol carryover in other words they are not going to let you wipe out all or most of your taxable income with the dividends received deduction you're going to be limited to 50% or 65% of your taxable income for that deduction however if you have any NOL carryover we'll be talking about NOL coming up but if you had an NOL carryover from a prior year for example you get to look at the taxable income before you applied that NOL when you are determining these percentages charitable contributions a Ccorporation can generally deduct charitable contributions up to 10% of taxable income you want to know that for the exam so they can make charitable contributions and deduct them up to 10% of taxable income and taxable income for this purpose means taxable income without taking into account all of these things so you don't have to take into account the charitable contributions themselves you don't have to take into account the dividends received deduction you can pretend like that does not exist you do not have to take into account the deduction for bond premium that was paid you do not have to take into account any NOL carryover to the current year and you do not have to take into account any capital loss carryover to the current year so you look at your taxable income without taking into account all of those things the corporation can deduct up to 10% of that amount for property contributions other than cash the amount of the contribution is its fair market value reduced by the amount that would not be long-term capital gain if it were sold at fair market value in other words that's a long- winded way of saying the deduction is limited to the adjusted basis of the property for non long-term capital gain property so for instance if the corporation is contributing inventory for example remember inventory is not a capital asset so they cannot deduct the fair market value of that inventory they can only deduct their basis in the inventory similarly you could have capital gain property that you are contributing but if it's short-term gain in other words you haven't held it for more than one year then same thing applies you can only deduct the adjusted basis of that property if it is long-term capital gain property then you can deduct the full fair market value of that property this reduction where you can't deduct the full fair market value that is going to be reduced to 50% if they're contributing certain inventory items for the care of the ill needy or infant so if they got these certain inventory items not capital gain property but they are specifically for the ill the needy or the infants then you still can't deduct the full fair market value but you don't have to deduct only your basis you get to deduct a number right in between the two of those so you get half of the benefit of the fair market value rather than all of the fair market value for any contributions of property with a value over $5,000 you do have to have an appraisal contributions of food can be made up to 15% of the corporation's taxable income so instead of that 10% number if you are contributing food then it is 15% and then any contributions that cannot be used in the current year can be carried forward up to five years as long as they do not increase an NOL carry forward so if you already got a loss that you're carrying forward you can't increase that but absent that you can carry forward charitable contributions that are not deductible this year up to five years capital gains and losses capital gains for a CC corp as we said are taxed at the same 21% rate as other income there are no favorable capital gains rates for a Ccorporation and capital losses can only be deducted up to the amount of the capital gains there is no $3,000 net capital loss allowed like there is for individual taxpayers net capital losses can be carried back three years and forward five years but those carrybacks and carry forwards are always considered short-term capital losses so if you are a Ccorporation you might think well we don't have to worry about if it's capital gain or not because it's all taxed at the same rate anyway but you do still have to worry about it you do still have to track it because you need to know particularly if you have losses what those losses are and then the amounts of the carrybacks that are related to that net operating loss a net operating loss is simply when deductions exceed revenue for the year however the following rules do apply a current year NOL cannot be increased by NOL carrybacks or carryovers from other years in other words if you had a $100,000 NOL carryover from last year and then this year you had another $50,000 loss you do not say that you have a $150,000 NOL this year you do have a $150,000 NOL carryover in total but you're going to keep it separate $100,000 was from the prior year 50,000 is from the current year also remember the dividends received deduction can be taken without regard for the net operating loss the deduction for dividends paid on certain preferred stock of public utilities can be taken without considering the net operating loss and the deduction for foreign derived intangible income is not allowed don't get too caught up in those details just read them over remember they're on the list not something that is likely to be tested for tax years beginning after 2020 no NOL carryback is allowed but they can be carried forward indefinitely but there is this exception so for farming losses and losses from insurance companies other than life insurance companies they can be carried back two years so all other taxpayers cannot carry back their losses at all however all taxpayers can carry them forward indefinitely an NOL carryover from a year beginning after 2017 so 2018 or later can only be used to offset 80% of taxable income in the current year so if you have a $150,000 NOL carry forward and you've got $100,000 of current year taxable income you can only use $80,000 of that NOL carry forward to offset this year's taxable income so your taxable income would end up being $20,000 the other $70,000 that you've got left would then be a carry forward to next year an NOL carry over from a year beginning before 2018 and so 2017 or prior can be used to offset 100% of taxable income for the year so the old NOL you were always allowed to offset 100% this was a change that came in the law to make it only offsetting 80% so if you have one of those older NOLs you are still allowed to offset 100% of current year income and one of the big reasons for that is because those older NOLs can only be carried forward 20 years from when incurred so there is an end date so the IRS doesn't want a corporation losing their NOL because they weren't allowed to use it all in their 20 years ended up expiring so if you got the older NOL you can use it to offset 100% of taxable income newer NOL you can only offset 80% of taxable income executive compensation so this is only for publicly held companies that are always going to be C corps so publicly held companies cannot deduct more than $1 million per year in compensation to senior executive officers that includes the CEO chief executive officer the CFO chief financial officer and the three highest paid individuals this does not prohibit the corporation from paying them more than $1 million it's just that they cannot deduct the excess over $1 million so this rule again only applies to publicly held companies it does not apply to any privately held Ccorporations estimated tax payments as a taxpaying entity a CC corp is subject to underpayment penalties and interest if it does not make estimated payments so it's much like individuals but no penalty will apply if the balance due for the year is less than $500 the estimated payments are due quarterly on the 15th day of the following months fourth month of the tax year which is April 15th for a calendar year corporation sixth month which is June 15th the 9th month which is September 15th and the 12th month which is December 15th as you will remember for individuals it's a little bit different it's April 15th June 15th September 15th and then January 15th of the following year but for corporations that last payment is December 15th so you will want to remember those dates there are two basic methods of computing estimated payments so very cleverly they are called method one and method two so method one is going to be based on the estimated income of the corporation for the current year method two is based on the actual tax liability last year so with method one each installment is 25% of the tax that the 1120 for the current year will show so you have to estimate how much tax you are going to owe that's why they are called estimated payments and then you need to pay in 25% of that amount each quarter so that's method one with method two the amount of each installment is 25% of the tax shown on the previous year's 1120 now this is only allowed if the corporation filed a fullear tax return the previous year and if there was a positive tax liability but if you meet that criteria and you're not a large corporation that we're going to talk about then you can use method two so you can base this year's estimates on the amount of tax that you owed last year and if you do that then even if you weigh underpaid because maybe this year ends up being a lot better year than last year as long as you paid in according to method two then there will not be any underpayment penalties or interest that are due a large corporation which for this purpose means they have at least $1 million of modified taxable income in any of the three prior years may use method two only for the first quarterly payment so for payments two through four any of these large corporations have to use method one but they will give them a little grace in the first quarter and say "Okay it might take you some time to get a good handle on what your tax is going to be for the year." So for that very first payment they will allow you to use method two there are two alternate methods you do not need to know these in detail just know that they exist and the type of taxpayers that they are appropriate for so first is the adjusted seasonal installments method and as the name implies this may be advantageous if a large portion of the corporation's income is realized in a short period of time in other words if it is a seasonal business so maybe you've got a ski resort or something and they get the bulk of their income in January through April and then the rest of the year they don't have very much income they can use this adjusted seasonal installments method and then you can see there there's this rule about how you can decide whether or not you can use that method you can look at that if you want to again wouldn't worry too much about it just know that this method exists and it allows that corporation to time their estimated payments according to the seasonality of the business next is the annualized income installments method this is kind of similar but it is a little different so this may be advantageous if income fluctuates throughout the year so not that it's necessarily seasonal but that there are times of the year when income is higher and times when it is lower and what this method does again is it allows the corporation to time their payments to be in line with when they are actually making their money rather than having to do it equally throughout the year and in order to use this method the annualized income installments method they have to elect it by filing this form 8842 and no matter which method you're using if you're using method one or two if you're using one of these alternate methods these payments must be made using the EFTPS the electronic federal tax payment system obviously those are electronic payments our next topic is forming a corporation capital contributions capital contributions whether or not in exchange for shares of stock do not result in any gain or loss to the corporation so obviously the corporation is receiving something either cash or other property but that's not income that is equity to the corporation so there's no tax on the amount of those contributions to the corporation when a shareholder contributes cash in exchange for stock in a corporation the shareholders basis in that stock is the amount of cash contributed i think that makes sense when a shareholder contributes property in exchange for stock the shareholder recognizes a gain on the exchange if the fair market value of the stock exceeds their adjusted basis in the asset unless the exchange qualifies as something called a section 351 non-t taxable transfer which we will be talking about here shortly the fair market value of that property is also the shareholders basis in the stock and the corporation's basis in the asset so if you do not qualify for this section 351 non-t taxable transfer then when you contribute property in exchange for stock you are going to recognize a gain on that contribution to the extent the fair market value of the stock received exceeds the adjusted basis in that asset it is also possible to get stock in exchange for services rendered so if someone receives shares in exchange for services the fair market value of the services rendered are taxable to the service provider and is also their basis in the stock so this is common for instance in startup companies they may be short on cash but they need people to do work so let's say you have an attorney who is doing some legal work for a startup corporation they don't have much cash so the attorney agrees to take stock in the corporation instead of cash so what they have to look at is what is the fair market value of those legal services that they rendered how much would that corporation for instance have to pay another attorney in order to do that same work so that attorney then has to recognize that much income so they treat it just as if they had received for instance cash for their services so it is income in their legal business and then the amount that they recognized becomes their basis in the stock section 351 non-t taxable exchange which we already talked about a little bit before so remember in general if a shareholder contributes property with a fair market value greater than their basis in exchange for stock then they are going to be taxed on that gain as if they had sold the property for the stock what section 351 does is in certain situations allows you to avoid that tax treatment so no gain or loss is recognized if one or more persons contribute property solely in exchange for stock if immediately after the exchange those persons are in control of the corporation and when we say person here it could be an individual could be a trust could be an estate could be a partnership could be an association or it could even be another corporation but if one or more persons contribute property and after that exchange they are in control of the corporation then there is no gain or loss recognized on that exchange so what does control mean it means ownership of at least 80% of the voting power of all classes of stock and at least 80% of the total number of shares of all non voting stock so Ccorporations can have lots of different types of stock and what we call classes of stock but when you look at it if you want to know are we in control or not you're going to want to remember for the exam this test this 80% 80% test they have to have at least 80% of the voting power of all stock and at least 80% of the total number of shares of all non- voting stock the contributions that are made must be of property which can include cash contributions of services do not qualify for this the shareholders basis in the stock and the corporation's basis in the property received is equal to the shareholders adjusted basis in the property that was contributed and then it is important to point out that this also applies to corporations who elect to be S corporations so this is a corporation rule not specifically a Ccorporation rule so if you are forming a corporation even if you elect SC corporation status section 351 still applies there are certain transactions that do not qualify for section 351 non-T taxable treatment first of all transfers to investment companies which is just what it sounds like it's a company that is set up primarily to invest rather than to run an actual business transfers in bankruptcy and similar proceedings and stock received in exchange for the corporation's debt none of those qualify for section 351 non-t taxable treatment if cash or other property is received from the corporation in addition to stock this is called boot we've heard that phrase before then gain is realized to the extent of boot received so if the shareholder contributes some property and not only do they get stock in the corporation back but the corporation also pays them some cash or the corporation gives them some other type of property then the shareholder does have to recognize gain but only to the extent of that cash or other property that is received boot does include debt obligations issued by the corporation so if the corporation basically says okay you gave us this property here's the stock and then here's an IOU and we will pay you this amount later that IOU in effect counts as boot and the shareholder will have to pay tax on that amount if the property that is transferred by the shareholder is subject to a liability such as a mortgage which is less than the contributor's adjusted basis the corporation's assumption of the liability is generally not considered boot and is therefore not taxable so if the liability is less than the adjusted basis then it is not boot and there is no tax the shareholder doesn't have to pay any tax on that exchange on the other hand if that liability is greater than their adjusted basis then the contributor recognizes a gain to the extent of the difference and the contributor's basis in the stock received is reduced by the amount of the non-t taxable liability that is assumed so that's a lot of words on a page but let's look at a couple of examples to see how this works example one Bob contributes a building with a fair market value of $250,000 to corporation R in exchange for 100% of its stock so obviously Bob is in control after this exchange happens bob's adjusted basis in the building is $100,000 and it is subject to a mortgage of $75,000 which the corporation assumes no gain is recognized on the exchange and Bob's basis in the stock of corporation R is $25,000 so he had an adjusted basis in the building of $100,000 if the corporation was not assuming any mortgage his adjusted basis in the stock would be $100,000 but since they did assume the $75,000 mortgage you have to subtract that and so now his basis is only $25,000 example two same facts as above except the mortgage is $125,000 in that case Bob must recognize a gain of $25,000 and his basis in the stock of corporation R is zero so he has to recognize a gain because his adjusted basis in the property was only $100,000 and it had a mortgage of $125,000 that the corporation was assuming so that's a gain for Bob that's an economic gain he's come out ahead there he's come out ahead by $25,000 so he has to pay tax on that $25,000 and his basis in the stock is going to be zero because he had $100,000 basis in the building however all of that mortgage was assumed so the $100,000 of that mortgage that was not taxable to him was assumed has to be deducted from his basis so his basis in the stock is zero distributions and liquidations earnings and profits so when dividends or distributions are paid out by the corporation their taxability to the shareholder is going to depend largely on something called the company's earnings and profits or ENTP entp is defined as the corporation's economic ability to pay dividends an ENTP should be determined every year from the beginning of the corporation and accumulated ENTP should be tracked so in other words the very first year you compute earnings and profits which we're going to talk about how you do that you compute it the first year then the next year you compute it again and you're going to add that amount to last year and now that's your accumulated earnings and profits then the next year you compute it again and then you keep doing that every year so you've got two types of earnings and profits you've got current year earnings and profits and you've got accumulated earnings and profits and both of those numbers are important and this concept of earnings and profits is also going to be relevant if the Ccorporation later makes an S corp election so in our next video when we talk about S corps we are again going to be referring to earnings and profits so you'll want to know this not only for the CC Corp portion of the exam but also for the S corp portion of the exam so what are we talking about how do you compute this earnings and profits well current year EMP is computed by starting with taxable income so taxable income is your starting point then you are going to add some positive adjustments and you are going to subtract some negative adjustments so you start with taxable income you add some things you subtract some things and that will give you your earnings and profits this is trying to determine the corporation's economic ability to pay dividends in other words you're trying to get to the true economic income of the corporation because taxable income is not that remember there are some things where the corporation receives income but it's not taxable but economically they still received the income there are other things that the corporation spends their money on they have an expense but it's not taxdeductible so it lowered their cash but it's not reflected in taxable income because you were not able to deduct it so EMP is trying to figure out the economics of the situation it's similar if you're familiar with accounting to retained earnings it's a similar type of concept so specifically here's what you do in order to compute it you start with taxable income then you are going to add any of these things that you may have federal income tax refunds not taxable but they are an economic benefit to the corporation so you're going to add those tax exempt incomes same idea you didn't include it in taxable income but the corporation got the money so we're going to add that nol deductions this is something you deducted but it wasn't actually a current year money out of pocket type of expense it was a carryover from a different year so we're going to add that back non-t taxable life insurance proceeds so if you have any of those again they were not included in taxable income we're going to add those back those dividend received deductions so you received all the dividends that was the actual true economics that's what you received was 100% of the dividends but for tax purposes as we saw you've got to deduct 50% of those or 65% of those or even 100% of those depending on the circumstances so to figure out your true earnings and profits you're going to add those back capital loss carryovers similar to the NOL carryovers it's not a current year loss so you add that back and charitable contribution carryovers same thing deferred gains from installment sales so you sold the property this year but you're not going to recognize all of the gain this year so it wasn't all included in your taxable income some's going to be included next year and maybe the year after that but economically you sold it this year so you quote unquote earned that income this year so we include that in earnings and profits and then non-t taxable cancellation of debt so if you had any debt canceled wasn't taxable we add that back then on the other side are the subtraction amounts the negative adjustments federal income taxes paid or acrewed not deductible for federal income tax purposes but they are an actual outofpocket expense that the corporation has so we will subtract those expenses of producing taxexempt income again not deductible subtract those then you have all of these other non-deductible expenses fines and penalties political contributions etc and so forth not deductible but still were actual economic outlays that the corporation had so they will be subtracted from taxable income in order to compute earnings and profits earnings and profits are also going to be adjusted for depreciation the reason they are not on that prior list is because they could be either an addition to taxable income or a subtraction from taxable income depending on the circumstances so for ENTP purposes any tangible assets are going to be depreciated straight line over the assets ADS recovery period remember that's that alternative depreciation system and if you'll remember ads is always straight line depreciation and the recovery periods are not exactly the same as the regular makers recovery periods remember 3 years 5 years 7 years etc the ads lives or recovery periods tend to be longer so for EMP purposes you're not going to have any of that accelerated depreciation that we have under the general depreciation system it is all going to be straight line over this longer recovery period these ads recovery periods so as a result this is going to show lower depreciation in the early years of the assets recovery period and higher depreciation in the later years so remember with either system you are still depreciating 100% of the cost of the asset it's just that under the ADS it's taking a longer period of time to do it so in the early years GDS results in higher depreciation amounts and in the later years ADS actually results in higher depreciation amounts so when you're doing your EMP calculation you're going to figure this out for each asset and then you are either going to add to taxable income or subtract from taxable income in order to determine earnings and profits if you claim section 179 expense on an asset then those assets are going to be depreciated straight line over five years in other words it doesn't matter what the recovery period of that 179 asset would have been if you hadn't done 179 it is just going to be assumed that it is a five-year asset and it will be depreciated straight line over those five years for purposes of ENTP so why are we going through all of this well as we said before earnings and profits determines the taxability of dividends that are paid so dividends are taxable to the shareholder up to the amount of the corporation's earnings and profits both their current year earnings and profits and their accumulated earnings and profits so what that means is you could have a negative EMP that is possible so you could have negative accumulated earnings and profits but if you've got current year positive earnings and profits then any distributions that you make any dividends that you pay up to the amount of those current year earnings and profits is taxable to the shareholder as a dividend if you have positive accumulated earnings and profits then even if the distributions are greater than current year since you've got accumulated positive earnings and profits again those dividends will be taxable up to the amount of that accumulated earnings and profits any distributions in excess of earnings and profits so if you in effect burn through all of the current year EMP all of the accumulated EMP so you've distributed all of that out those amounts are tax-free to the shareholder up to the amount of the shareholders basis in the stock so this makes sense this is kind of like if you went out into the stock market and bought a stock let's say you paid $10,000 for some stock in the stock market and then the corporation bought back your shares for $10,000 well there would be no gain or loss you have basis in those shares of $10,000 they're just giving you your money back at that point so there's no gain on that so it's the same thing here corporations already distributed all of their earnings and profits now they're distributing more those amounts that they are now distributing are simply a return of the shareholders basis and so they are not taxable up to the amount of that basis what if the corporation keeps making distributions in excess of even the shareholders basis that then is taxable capital gain to the shareholder so again think about buying stock in the stock market if you bought stock for $10,000 and you sold the stock for $15,000 for example the first $10,000 that's not gain that's just giving your money back but that extra $5,000 above and beyond your basis that is capital gain so it's the same idea here you got all your basis back they kept distributing money that is capital gain the only difference here is if you sell your stock in the stock market you don't own the stock anymore here it may be that you do still own the stock depending on the circumstances but it is the same idea there are a lot of ways that a corporation can make payments to a shareholder so we are going to talk about several of these first of all they can pay the shareholder wages and fringe benefits if that shareholder works in the business which of course in a closely held or private corporation the shareholders often do work in the business the corporation can pay dividends as we have discussed the corporation can do something called a stock redemption and make a payment to the shareholder corporation can liquidate and pay out to the shareholder the corporation can make a loan to the shareholder they can pay rent to the shareholder they can purchase an asset from the shareholder or they can reimburse expenses of the shareholder we're not going to talk about these last two the purchase of an asset we did cover in a previous video so we've got nothing to add to that and if it's an expense reimbursement then that is what it is the shareholder had the expense and the corporation paid them back there's no tax effect to that but we are going to talk about the rest of these wages and fringe benefits a shareholder who works in the business receives wages like any other employee they pay payroll taxes they're subject to withholding they receive a W2 so this is different than with a partnership or a sole proprietorship they are on payroll if it's a CC corp they work in the business then they are going to be on payroll also the shareholder can receive fringe benefits tax-free just like other employees so if it is a tax-free fringe benefit to all employees then it is also tax-free to the Ccorporation shareholder who works for the business again this is different than partnerships and different than S corporations reasonable compensation so the compensation paid to the shareholder employee must be reasonable what some business owners want to do is to pay themselves a larger than normal salary the reason they want to do this is to avoid paying out money as dividends because remember dividends are taxable to the shareholder and they are not deductible by the corporation but the salary is deductible so some CC corp owners will have the bride idea well I don't want to pay double tax so I don't want to have to pay tax on dividends so instead of giving myself dividends I will just pay myself an exorbitant salary so I'll get the salary of course the salary is still taxable to the shareholder but it's deductible by the corporation so it will reduce the corporation's taxable income so they will not be paying their 21% tax on the amount of that salary so what the IRS says is no you cannot do that you cannot pretend that what is actually a dividend is salary so what is reasonable compensation well it is dependent on the facts and circumstances and it takes into account the experience and skill of the employee the duties that they perform and other factors but salary paid to shareholders who do not even work in the business would clearly be improper and it seems silly to even have to put that on here but as you can imagine this has happened corporation owners put family members on the payroll just so they can pay them salaries rather than having to pay themselves dividends and then of course the salaries are deductible and then the shareholder themselves can just take the money from the family member so you have to have if somebody's an employee of the business they actually have to be an employee of the business and they have to be working and the pay that they're getting has to be commensurate with the services that are performed as you can imagine this is another area that is highly litigated you have the IRS and the taxpayers disagreeing on what is reasonable compensation for the exam you're not going to have to decide well is this reasonable or not you're not going to do anything like that you just need to understand the concept that the CC Corp shareholder has to receive reasonable compensation they can't pay too much in order to get around paying dividends and in order to avoid that double taxation next we have dividends which of course are distributions to the shareholders from the earnings and profits of the corporation and as we have said they are taxable to the shareholder and they are not deductible by the corporation dividends of property other than cash so distributions of property to a shareholder result in gain to the corporation to the extent the fair market value of that property exceeds the corporation's adjusted basis in the property and fair market value for this purpose is the greater of the actual fair market value or the amount of any liabilities assumed by the shareholder in connection with the property so this is the reverse of the assumption of liabilities that we had before here you could have the corporation distributing out a property that is subject to a mortgage and the shareholder is now going to be responsible for the mortgage so when we talk about the gain the fair market value means the greater of the actual fair market value or the amount of those liabilities so if the mortgage is higher than the fair market value of the property you have to use the amount of the mortgage as the fair market value in order to compute the gain to the corporation this is considered a sale of the property to the shareholder and do note that a corporation cannot recognize a loss on the distribution of property to a shareholder unless it is distributed in complete liquidation of the corporation which we will be talking about here in a little while so the corporation will have a gain if the fair market value is greater than their adjusted basis but they cannot have a loss if the fair market value is lower than their basis again they don't want related parties creating tax losses constructive dividends a constructive dividend is when a corporation makes a payment to or enters into a transaction with a shareholder that while it's not labeled as a dividend it has the same economic effect of being a dividend in other words they're not calling it a dividend but that's what it actually is so this can be thought of as a disguised dividend so here are some examples first of all the corporation paying the personal or hobby expenses of a shareholder is a constructive dividend remember in the first video when we said that corporations and their owners should not co-mingle their funds you should have separate bank accounts separate credit cards etc and that is absolutely true however in the real world it happens all the time you can actually have shareholders of corporations who take their personal credit card bill hand it to their company bookkeeper and say "Here pay this credit card bill." Well those are their personal expenses so if they do that that is not a deduction to the corporation when they pay that amount out that is a dividend to the shareholder it's just like you gave the shareholder that same amount of money and then the shareholder turned around and paid off their credit card it's the same exact thing same way with any personal expenses that the corporation may pay you may have seen cases in the news where corporation shareholders had their company pay to have their personal residence renovated and to get new furniture and so on and so forth any of those expenses that the corporation pays is a dividend to the shareholder it is not a deductible expense usually the ones you see in the news is because they tried to treat it as a deductible expense they got caught and so now they're owing all the tax etc and very likely they are going to prison as well but in any case if the corporation does pay the personal expenses of the shareholders that is a dividend similarly hobby expenses so sometimes the owner of a corporation will have a very expensive hobby and they try to write it off as a business expense so for example a couple of cases I've seen have involved race car driving some of these corporate owners like to race cars and maybe they put the name of their company on the car or something like that and they try to write it off as a marketing expense but the IRS says no that's not marketing that is just a hobby and you're trying to turn a personal hobby into a business expense and they will not allow that and so that becomes a constructive dividend next loans to shareholders with below market interest the interest that is not charged can be a constructive dividend so if you got a loan to the shareholder the corporation can do that and we'll talk more about loans later but if they don't charge a market interest rate then the interest they don't charge is a dividend to the owner cancellation of shareholder debt is also a constructive dividend so if the corporation loans the shareholder some money and then forgives that loan that is a dividend to that shareholder next transfers of property to a shareholder at less than fair market value the excess of the fair market value over the value paid by the shareholder can be a constructive dividend so let's say the corporation owns a building that's worth $300,000 and they sell that building to the shareholder for $50,000 well that shareholder just received a $250,000 dividend because that house was sold to them obviously way below the fair market value so that is just as good as if the corporation had handed that shareholder a check for that amount of money next above market rents paid to a shareholder can be a constructive dividend we will be talking about that in a little while and then unreasonable compensation can be a constructive dividend which we have already discussed liquidating distributions a corporation terminates upon the complete liquidation of its assets so if it just goes out of business liquidates its assets corporation then terminates the corporation distributes all assets to its shareholders and recognizes any gain or loss as if it were a sale of those assets so you can do a liquidation in a few different ways one thing you could do is you could just sell all of your assets and then take whatever cash is left over pay off your debts send the rest out to the shareholders that would be kind of the easiest cleanest way to do it then of course the corporation would have a gain or loss on the sale of all those assets and that would be reported on their tax return often though especially in these smaller closely held corporations that's not what they do they may sell some of the assets but some of the assets they just distribute out directly to the shareholder so when they do that the corporation is going to recognize a gain or loss on that distribution the shareholders are deemed to have sold their shares in the company for the fair market value of the property that was received thereby realizing a gain or loss the corporation cannot recognize a loss on distribution of property to a related party if the distribution is not proportional or if the property was received by the corporation in a section 351 exchange within the last 5 years so if you are going to give a disproportionate distribution to one particular shareholder disproportionate to their amount of actual ownership of the corporation then the corporation cannot recognize a loss on that distribution or if the property that was distributed had just been received within the last 5 years in a non-t taxable exchange this 351 exchange then similarly the corporation cannot recognize a loss on that distribution if a corporation does a liquidating distribution they have to do two things first of all they have to file a form 966 corporation dissolution or liquidation within 30 days of adopting a plan to dissolve and liquidate so they file that with the IRS secondly they must issue a form 1099 div to any shareholder who receives $600 or more in the liquidation what the combination of these two things does is lets the IRS know what's going on and lets them know which shareholders received how much in the liquidation stock redemptions a stock redemption is when a corporation buys shares back from a shareholder it differs from a liquidation in that the corporation is going to continue to exist generally that redemption will result in a capital gain to the shareholder it's treated as a sale of the stock to the corporation so the shareholders got some stock the corporation is paying them some money or giving them some property in exchange the shareholder is giving the company back that stock so that is a capital gain to the shareholder the purchase of the stock by the corporation is not deductible by the corporation when a corporation buys their own stock back that is called treasury stock and that actually reduces shareholders equity it is not an expense in certain cases a redemption will be reclassified as a dividend resulting in ordinary income so for example if the redemption is made proportionally to all shareholders and does not reduce their percentage of ownership it will be treated as a dividend so corporation X has 1500 shares of stock outstanding shareholders A B and C each own 500 shares corporation X redeems half of the shares 250 from each shareholder a B and C now own 250 shares and there are 750 shares outstanding the ownership percentages have not changed this redemption is a dividend so what's going on here well you've got these three shareholders who are trying to game the system here they're trying to turn an ordinary income that would come from a dividend into a capital gain so both before and after this redemption these three shareholders still own the exact same percentage of the corporation so prior to this redemption they each owned onethird of the corporation after this redemption they each own onethird of the corporation so they are just disguising a dividend as a redemption in order to get capital gain treatment for that amount rather than ordinary treatment that they would get from a dividend so the IRS does not allow this in some cases a corporation can choose to partially liquidate and they file a plan to do that what that means is they are going to liquidate some of their assets but not all of their assets and they're not going to go out of business such a partial liquidation will be treated as a stock redemption rather than as a dividend for any non-corporate shareholder so if you're a corporation and you are a shareholder in another corporation if you get a redemption that is a result of a partial liquidation that is ordinary income to that corporate shareholder it's treated as a dividend if you are not a corporation and you are a shareholder in the corporation it will be treated as a normal stock redemption therefore you can get capital gain from that loans to shareholders corporate loans to shareholders are allowed it does of course need to be a bonafide loan and there should be a written loan agreement you want to use market interest rates because remember if you use below market rates or you don't have any interest at all that can result in a constructive dividend you do want to make sure the corporate form is maintained in other words the loan needs to be approved by the board of directors if it meets certain criteria so you want to do all of that and the risk of not doing all of this is that the entire loan will be classified as a dividend so as always when you're dealing with related party transactions you want to make sure to dot your eyes and cross your tees you want to do everything right and so the same thing is true of a loan to the shareholder if you're just pretending it's a loan when actually it's a dividend then the IRS is going to come in and say it's a dividend you have to pay tax on it rent paid to shareholders a shareholder can rent property to the corporation happens all the time can be a great tax planning strategy but the rents should be of course at market rates because above market rates can result in a constructive dividend so let's say the owner of the corporation the shareholder they also own a building and the fair market value of the rent for that building is $3,000 a month and they rent it to their corporation for $7,000 per month that extra $4,000 a month above the fair market value rent will be considered a constructive dividend to that owner but as long as you use fair market value rent there's nothing wrong with this and this is a good way to actually get some money out of the corporation without it being a dividend because of course rent is deductible by the corporation so they have to pay rent to somebody they might as well pay it to the shareholder then the shareholder of course they're going to have to pay tax on the rent that they receive however they also get all the deductions so they've got a rental property so they can deduct their taxes and maintenance and depreciation etc and the corporation can deduct the amount of the rent so this can work can be a good strategy but again you're dealing with related parties you want to make sure you've got all the rental agreements in place and that everybody is following those agreements and doing everything that they are supposed to do just as if the rent was being paid to some third-party provider now let's move on to talk about controlled groups and closely held corporations taxpayers will sometimes try to lower their overall taxes by splitting their businesses into separate corporations so they may split it into all these corporations and then they may have different agreements between the corporations they might call it a management agreement or service agreement or rental agreement or something like that and by doing this they're trying to lower their overall tax liability well in order to prevent this and to better reflect actual economic reality some groups of corporations are required to be treated essentially as one for many purposes in the tax law so this is known as a controlled group there are three basic kinds of control groups you want to know these parent subsidiary brother sister and combined group so we are going to talk about each of these this is another area of the law that can be very complex especially if you're dealing with lots and lots of different corporations but again on the EA exam fortunately you are not going to have to deal with all those really complex situations you just want to understand the basic idea here of a control group what it is and these different kinds and basically how they work without getting into the weeds and the nitty-gritty of everything so we're going to look at each of these different types of groups a parent subsidiary group this is probably the most familiar concept this is where corporation A owns Corporation B so it's a parent and it's a subsidiary it is considered a parent subsidiary group when the parent company owns directly or indirectly 80% or more of another entity so that is parent sub if they own 80% or more it is a parent subsidiary group the parent may be the parent of multiple subsidiaries so one corporation might own more than 80% of several different corporations in which case that parent company is called the common parent because they're the common parent of all those different corporations members of a parent subsidiary group must file a consolidated income tax return this is different than the other two groups with the other two groups they will be considered as one corporation for many things in the tax law but they do not have to file a consolidated income tax return for a parent subsidiary group they do file they file one tax return to report all of the income and expenses of all of the corporations in the parent subsidiary group brother sister group a brother sister group is when five or fewer individuals estates or trusts own a controlling interest in the group and have effective control this exists when these two tests are met both of these tests the same five or fewer individuals estates or trusts own 80% or more of each company under consideration and the same five or fewer individuals estates or trusts have identical ownership in more than 50% so you have to meet both tests so what does this mean let's look at a simple example adams Corp and Bell Corp are owned by four shareholders as shown below this is not a brother group so let's look at this shareholders A B C and D this is their percentage of ownership in each of these corporations as you can see they own 100% of both corporations so clearly they passed the first test these four shareholders own greater than 80% of both Adams Corp and Bell Corp however there is one more test they're identical ownership has to meet that 50% threshold so what does identical ownership means well you go through for each one and you're going to take the lowest percentage so shareholder A owns 80% of Adams 20% of Bell the lowest is 20% so we're going to use 20% then shareholder B their lowest of the two is 10% and then C and D here their lowest is 5% so this is their identical ownership in these two corporations it only adds up to 40% that's below the 50% therefore this is not a brother sister group again don't get too concerned about all the details i'm showing you the example just so you can comprehend the idea you are not likely to have to get into any of these type of calculations they're just going to want to make sure you understand the concept so with a brother sister group if you think about the others the parent subsidiary if you think of that is like a parent child this is brother sister because they are owned by the same people so each of the entities is owned by the same people so they're like all children of those owners and so they are brothers and sisters so that is what we mean by a brother sister group then our last group is a combined group so if all we had was the parent subsidiary and the brother sister there are some gaps that would come up and you could arrange the corporations in such a way that you didn't meet the parent subsidiary rules and you didn't meet the brother sister rules yet you still had control over all the corporations so a combined group is when you have three or more corporations each of which is a member of either a parent subsidiary group or a brother sister group and at least one of those is both the common parent of a parent subsidiary group and also a member of a brother sisteront controlled group so those are the rules you will want to remember those rules and let us look at an example alex owns 80% of York Corp and 90% of Sharp Corp york Corp owns 85% of Trip Corp this is a combined group because York and Sharp are members of a brother group and York and Trip are members of a parent subsidiary group so each of these corporations is a member of either a brother sister group or a parent subsidiary group and York is the parent of the parent subsidiary group and a member of a brother or sister group so that's the other criteria one of the companies has to be the parent of a parent subsidiary group and a member of the brother sister group so York qualifies for that so that is a combined group so note without this rule without this combined group rule Sharp and Trip would not be part of the same controlled group even though Alex controls both of them because they have no direct parent subsidiary or brother sister relationship so look at Sharp and Trip alex owns 90% of Sharp though Sharp is in a brother sister group with York York owns 85% of Trip but Sharp and Trip are not part of a brother sister group and Sharp and Trip are not part of a parent subsidiary group so Alex clearly controls all three of these companies but if we didn't have this combined group rule trip would not count as a corporation that is part of the controlled group so this is why we have this rule in effect you can think about these look at these examples make sure you understand them however do not get yourself lost in all the possible combinations and permutations as you can imagine what if you had 10 or 12 corporations with all different ownership percentages and you're trying to figure all this out it is very labor intensive and time consuming to do that of course you're not going to have to do anything like that on the EA exam so just make sure you understand the basics and understand the concepts and can answer some fairly simple questions about how these groups work closely held corporations we actually saw this before when we were talking about at risk limitations but it applies to Ccorporations so we are going to cover it briefly again a closely held corporation is one where if at any time in the last half of the tax year more than 50% of the value of the stock is owned by five or fewer individuals that is a closely held corporation you will want to know that definition the at risk limitations apply to closely held corporations just like they do to individuals so losses are only allowed up to the amount of the corporate taxpayers's risk of financial loss and those at risk limits do not apply to non-closely held Ccorporations so it is only closely held corporations that meet that definition that have to worry about the at risk limits we will now move on to looking at schedules L M1 M2 and M3 if you were with us in the partnership video this is going to be very similar there are some differences with partnerships but a lot of the forms are going to look very much the same on the form 1120 the last page contains schedules L M1 and M2 much like with the partnership schedule L of course is the balance sheet per books schedule M1 is a reconciliation of book and tax income for corporations with less than $10 million in assets schedule M2 is a reconciliation of beginning and ending retained earnings and schedule M3 is again a separate form and it is a more detailed reconciliation of book and tax income for corporations with $10 million or more in assets so let's look at these schedules here's an overview again you can see schedule L and then M1 and M2 let's zoom in here we have again the balance sheet beginning of year end of year going to list all of your assets all of your liabilities and equity you may notice that the equity section is a lot different than with a partnership with a partnership it was just one line capital accounts here for a corporation we've got what is it i think it's six lines for equity so first you have capital stock so when stock is issued by the corporation there's something called the par value of the stock often it's only like $1 per share or $10 per share something like that the par value of the stock goes under capital stock then you have additional paid in capital so any amounts that were paid above and beyond the par value are called additional paidin capital next you have retained earnings both appropriated and unappropriated so this is an accounting concept kind of similar to that earnings and profits that we saw earlier appropriated retained earnings means that the board of directors has said this amount of retained earnings is not available to be paid out as dividends because it is needed it is appropriated for some future need that we are aware of and that we are anticipating so those are appropriated retained earnings and then unappropriated retained earnings are retained earnings that have not been appropriated and they are available in order to pay out dividends to the shareholders then you have adjustments to shareholders equity that's just to pick up any miscellaneous type of adjustments that you may have during the year then we subtract out the cost of treasury stock remember when you do a stock redemption the corporation buys back their own stock that is a reduction in equity so this is where you show that then that comes down to the total liabilities and equity schedule M1 is that reconciliation of book and tax income so you start with book income you are going to list all of the book and tax differences additions subtractions and you are going to end up with taxable income again that is for corporations with under $10 million of assets then schedule two is an analysis of unappropriated retained earnings per books so you're going to say what were those retained earnings at the beginning of the year then you're going to have your increases your decreases and show what were the retained earnings at the end of the year and again that will tie back up here to schedule L where we show your unappropriated retained earnings at the beginning of the year and the end of the year similar to the partnership there are some corporations that do not have to file schedules L M1 M2 and M3 if the corporation has less than $250,000 of gross receipts and less than $250,000 of assets they do not have to file those schedules those requirements are a little bit different than the partnership so you'll want to be able to distinguish between those if they are not required to file these schedules they must enter cash and the book value of property distributions on schedule K line 13 we will look at that so even if they don't have to file these schedules if they did in fact make any distributions of cash or other property they do have to list the amount of those distributions and these schedules can still be completed even if they are not required so here is schedule K so it's going to start by saying "Are the corporation's total receipts and total assets less than $250,000?" You're going to say yes or no if it is yes then you don't have to file those schedules but this is where you will put in the amount of those distributions that were made and this is just one small part of schedule K there is more to it than just this schedules M1 and M3 corporations must file schedule M3 if they have total assets at the end of the year of $10 million or more so this is much simpler than the partnership rule remember the partnership was if you had assets over a certain amount or if you had gross receipts over a certain amount etc this is more cut and dried if you have total assets $10 million or more then you have to file M3 consolidated groups have to include the assets of all members of the group so this is one of those places where if you're in a controlled group then you have to include all the assets in order to determine whether or not M3 is required if the corporation is required to file the M3 then they must also file this schedule B of form 1120 so in the partnership return it was schedule C on the 1120 it is schedule B and again similar to the partnership rule corporations with $50 million or more of assets have to file all of schedule M3 corporations with at least 10 million but less than 50 million can opt to complete only part one of the M3 and then to file schedule M1 instead of parts two and three of M3 and if they're not required to file parts two and three then they are also not required to file schedule B any corporation can choose to file M3 even if it's not required but if they do so they have to follow these same rules so let's look quickly at the M3 it's going to be very similar to what you saw before so you're going to start at the top with some financial information come down to list out your book income your total assets and liabilities and then the next page is going to start your reconciliation of book and tax income by talking about the income items so very similar to what we saw in the partnership return and then the last page is going to be the reconciliation of book and tax expense and deduction items again similar to what we saw on the partnership and then schedule B this is the one that on the partnership with schedule C but for the form 1120 it is schedule B again it is check boxes that the corporation has to check this gives the IRS some more information for things that they might want to look at in case of an audit and that is going to do it for video six go over the major concepts here especially contributions the 351 non-T taxable exchange distributions just understanding what the control groups were watch it again if you need to study the slides and the form instructions and the publications and in our next video we will cover S corporations so I will see you in video seven