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Tax Cumulative Cheat Sheet (DRAFT) by

§368- reorg, §199A - QBI deductions, §§351 & 357 - property exchange, §302 - related Redemptions, M-1/ CC/ DRD, E&P, §332 - Complete liquidations of subsidiaries, §1031- prop for investment

This is a draft cheat sheet. It is a work in progress and is not finished yet.

E & P

What is E&P?
a tax concept — not defined in the Code — that measures a corpor­ation's economic ability to pay dividends without impairing its capital
 
the tax version of "­ret­ained earnin­gs,­"
 
Upper limit on the amount shareh­olders must recognize as dividend income
 
Includes current year E&P plus accumu­lated E&P
No statute of limita­tions
the IRS can always redete­rmine E&P, so corpor­ations should keep meticulous records
Current E&P
Taxable income adjusted for the current year. Calculated by adding back excluded items and subtra­cting certain nonded­uctible items.
Accumu­lated E&P
Sum of all prior years' current E&P since 1913, reduced by prior distri­butions from E&P. A running balance carried forward year to year.
Computing E&P
Start with taxable income, then apply adjust­ments. The goal is to reflect actual economic capacity to pay dividends.

§§351 && 357

§351 the basic rule
No gain or loss is recognized when property is transf­erred to a corpor­ation solely in exchange for stock, IF the transf­erors control the corpor­ation (own ≥80% immedi­ately after).
 
Services ≠ property → transferor of services does NOT count toward 80% control and must recognize ordinary income on the FMV of stock received for services.
 
Boot received (non-stock consid­era­tion) triggers gain recogn­ition
 
recognized gain = lesser of boot received or realized gain. Losses are never recogn­ized.
§351 shareh­older's stock basis
Shareh­older's stock basis =
Basis of property transf­erred
 
+ Gain recognized
 
− Boot received
 
− Liabil­ities assumed by the corp
Corpor­ation's basis in the asset =
transf­eror's basis
 
+ any gain recognized by the transferor (also called a carryover basis).
§357 General rule (a)
Liability assumed is NOT boot for gain recogn­ition
 
But it DOES reduce the shareh­older's stock basis.
Exception 1: (b)
If the liability lacks a business purpose or is a tax avoidance device →
ENTIRE liability amount is treated as boot (taints all liabil­ities)
Exception 2 (c)
If total liabil­ities assumed EXCEED the basis of ALL assets transf­erred
recognized gain = excess (liabi­lities − total basis)
 
This prevents a negative stock basis.
§357(b) predom­inates over §357(c). If both apply, use §357(b) — the larger gain recogn­ition rules (all liabil­ities as boot).

Cash basis taxpayers: accounts payable are excluded from §357(c)

Redemp­tions & Complete liquid­ations

Redemp­tions:
qualifying vs. non-qu­ali­fying
non-qu­ali­fying =
dividend distri­bution
 
tax at ordinary rates up to E&P
qualifying =
sale-o­r-e­xchange treatment
 
gain/loss = proceeds − stock basis
Four qualifiers §302(b)
(1) complete termin­ation of interest
 
(2) substa­ntially dispro­por­tionate
 
shareh­older drops below 50% voting and ratio of shares drops to 80% or less of pre-re­dem­ption %
 
(3) not essent­ially equivalent to a dividend
 
(4) partial liquid­ation (corpo event)
Corpo effect­s-r­ede­mption
Corpo recognizes gain on distri­bution of apprec­iated property
 
deemed sale
 
Loss → NOT recognized
How to recognize the loss?
Sell property THEN then distribute the proceeds
E&P reduction in a qualifying redemp­tion:
E&P is reduced by no more than the percentage of the corpor­ation's stock redeemed (not the full redemption amount).
§331
Complete liquid­ations
Shareh­olders:
liquid­ating distri­bution = proceeds from sale of stock
 
sale-o­r-e­xchange treatment // capital gain/loss
 
Gain or loss = liquid­ating proceeds − stock basis
Corpor­ation recognize:
gain or loss on assets distri­buted in liquid­ation
 
treated as FMV on the date of distri­bution
 
Losses ARE recognized in a complete liquid­ation
Exception:
loss limitation
 
IF (distr­ibuted property) was acquired in a §351 transa­ction within 5 years && (distr­ibu­tion) to related party THEN loss may be disallowed or limited.
TLDR
Regular (non-l­iqu­ida­ting) distri­bution:
corpo = deemed sale, rec gain NOT loss
 
Shareh­older = dividend (ala w/i E&P)
Qualifying redemp­tion:
shareh­older = sale treatment
 
corpo = deemed sale, rec gain NOT loss
Complete liquid­ation:
shareh­older = sale treatment
 
corpo = recognizes both gains AND losses
 

§199A

§199A allows noncor­porate taxpayers to deduct up to 20% of qualified business income (QBI).
Available whether taxpayer itemizes or takes standard deduction
QBI deduction = lesser of:
(1) 20% × QBI
OR
20% × modified taxable income
MTI
taxable income - net capital gain
QBI
net ordinary income from a qualified trade or business conducted as a sole propri­eto­rship, partne­rship, or S corpor­ation.
QBI excludes:
capital gains/­losses
 
dividends
 
interest income (unless properly allocable to the business)
 
reasonable compen­sation paid to the owner, and guaranteed payments to partners
QBI is reduced by:
self-e­mpl­oyment tax deduction [§164(f)]
 
self-e­mployed health insurance [§162(l)]
 
qualified retirement plan contri­butions [§404]
High-i­ncome limita­tions
For 2025: thresholds are $394,600 (MFJ) / $197,300 (single)
Above these, the deduction is limited to the GREATER of:
(a) 50% of W-2 wages paid by the business
 
(b) 25% of W-2 wages + 2.5% of unadjusted basis of qualified property
 
For specified service trade or business (SSTB — health, law, accoun­ting, consul­ting, etc.): the QBI deduction phases out completely above the threshold.
If a taxpayer has a net qualified business loss across all businesses in a year, no QBI deduction is allowed and the loss carries forward to the next year to reduce QBI (but not below zero).
Example 46:
QBI from A = $20,000; Loss from B = ($50,000) Net = ($30,000) → No deduction, $30,000 carryf­orward
Next year: QBI $70,000 − $30,000 carryf­orward = $40,000 net QBI → deduction = $8,000

E&P

E&P =
the corpor­ation's economic ability to pay dividends
Distri­bution treatment:
First: Dividend income
E&P: current first, then accumu­lated
Second: Return of capital
reduces shareh­older's stock basis
Third: Capital gain
when basis reaches zero
Allocating E&P:
If current E&P is + && total distri­butions > current E&P
prorate current E&P
Current E&P to each distri­bution =
(That distri­bution / Total distri­but­ions) × Current E&P
Property distri­but­ions: corpo
When Corpo distri­butes apprec­iated property:
deemed sale (recognize at FMV)
When Corpo distri­butes deprec­iated property:
Loss on distri­bution → NOT recognized
Shareh­older receives:
dividend = FMV of property (to extent of E&P)
Shareh­older's basis in property:
FMV at date of distri­bution
Corpor­ation's E&P reduced by:
FMV of property (net of liabil­ities assumed by shareh­older)
If current E&P is positive but accumu­lated E&P has a deficit: do NOT net them.

If accumu­lated E&P is positive but current E&P is a deficit: net both at the date of distri­bution

consol­idated returns and affiliated groups

Affiliated group:
parent owns at least 80% of voting stock and value of all subsid­iaries.
Consol­idated return:
allows losses of one member to offset income of another.
 
eliminates interc­ompany transa­ctions
DRD in a consol­idated group:
100% DRD applies to dividends
Built-in losses on assets
subject to §351 —losses that existed before joining the group can be limited.
 

Gain/L­oss­/Basis

(1) Taxable transa­ction
Realized = FVM - OG Basis
 
Recognized = same
 
New Basis = FMV
(2) Deferred
Realized = FVM - OG Basis
 
Recognized = 0 (all deferred)
 
New Basis = OG basis
(3) Deferred with boot
FMV = OG basis - boot
 
Realized = FVM - OG Basis
 
Recognized = Realized - Boot
 
New Basis = FMV - Recognized
If there is a realized LOSS, boot NEVER triggers recogn­ition in a deferred exchange.
Deferred with boot : recognized = lesser of boot or realized gain

§368 Reorgs

§368
creates deferral
requir­ements:
(1) a written plan of reorga­niz­ation
 
(2) continuity of interest
 
shareh­olders must retain equity in the acquiring corp
 
(3) continuity of business enterprise
 
(4) a sound business purpose
 
(5) the step transa­ction doctrine must not apply
Types
Type A: merger or consol­idation
All-in-one
 
-60% boot allowed
 
-same tax attributes (NOL & E&P)
 
shareh­olders = 40% voting stock
Type B: Stock-­for­-stock
Both Live
 
-NO boot
 
- parent /subsi­diary
Type C: Stock-­for­-assets
Cull
Type D: Divisive
Divide
Type E: Recapi­tal­ization
Exchange inside
Type F: Change in identity, form, or place
Face-lift
Type G: Bankruptcy
Gone broke
Boot in a §368
If shareh­olders receive boot
they recognize gain up to the lesser of boot received or realized gain
Both the transferor corpor­ation and the acquiring corpor­ation recognize $0 gain or loss in a qualifying reorga­niz­ation.

The gain is deferred into the new entity's basis and the shareh­older's new stock basis.

M-1, CC, DRD

Schedule M-1
reconc­iling book income to taxable income
ADDITIONS:
+ Federal income tax per books
 
+ Excess capital losses over capital gains
 
+ Income reported for tax NOW but not in books (pre-paid)
 
+ Expenses deducted in books but not for tax (excess charity)
SUBTRA­CTIONS:
− Income reported in books but excluded from tax (tax-e­xempt interest)
 
− Tax deductions not expensed in books (excess tax deprec­iation)
Result: taxable income before NOL and DRD.
Charitable contri­butions
10% of taxable income // Excess contri­butions carry over 5 years
taxable income calc not affected by:
(1) the charitable contri­bution deduction itself
 
(2) NOL or capital loss carrybacks
 
(3) the DRD
Dividends received deduction (DRD)
Ownership % → DRD %:
Less than 20% →
50%
20%–79% →
65%
80% or more →
100%
Step 1:
Dividends received × DRD %
Step 2:
Taxable income (before DRD) × DRD %
Step 3:
Deduction = lesser of Step 1 or Step 2
EXCEPTION (NOL rule):
if using Step 1 creates an NOL, use Step 1 anyway.
M-1 items — proceeds are tax-free (subtr­act), premiums are non-de­duc­tible (add).

Accrual basis corpor­ations: may deduct in the year preceding payment if the board authorized the contri­bution by year-end AND payment is made by the 15th day of the 4th month after year-end

Stock must be held more than 45 days to claim the DRD.