19.1 C Corporation Tax Planning
Key Takeaways
- TCP is a 4-hour Discipline section with 68 multiple-choice questions and 7 task-based simulations; MCQs and TBSs each count for 50% of the scaled passing score of 75.
- A C corporation is a separate taxpayer taxed at a flat 21% rate, so every shareholder transaction can produce a separate entity-level and shareholder-level answer.
- Current and accumulated earnings and profits (E&P) control dividend treatment; only after E&P is exhausted do basis recovery and capital gain apply.
- Distributing appreciated property triggers corporate gain under Section 311(b) as if the asset were sold at fair market value (FMV).
- A large corporation (taxable income of $1 million or more in any of the three prior years) loses the prior-year estimated-tax safe harbor for installments two through four.
Why C corporation planning matters on TCP
Tax Compliance and Planning (TCP) is one of the three CPA Discipline sections. It runs 4 hours and contains 68 multiple-choice questions (MCQs) across two testlets plus 7 task-based simulations (TBSs); MCQs and TBSs each contribute 50% of your scaled score, and you need a 75 to pass. C corporation tax planning sits in TCP Areas covering entity transactions and dominates the simulation portion because a C corporation is a separate taxpayer taxed at a flat 21% rate.
A single contribution, loan, property distribution, or liquidation can create one answer for the corporation and a different answer for the shareholder.
Start with two ledgers
For every fact pattern, build two ledgers. The corporation ledger tracks taxable income, net operating losses (NOLs), capital losses, asset basis, earnings and profits (E&P), consolidated eliminations, and estimated payments. The shareholder ledger tracks stock basis, amount realized, dividend income, basis recovery, and capital gain.
| Transaction | Corporation question | Shareholder question |
|---|---|---|
| Section 351 contribution | Is nonrecognition available; what carryover basis applies? | Is gain triggered by boot or debt relief over basis? |
| Cash distribution | Is current or accumulated E&P available? | Dividend, basis recovery, or capital gain? |
| Appreciated property distribution | Section 311(b) gain as if sold at FMV | Dividend equal to FMV; basis = FMV |
| Shareholder loan | Bona fide debt with terms and interest? | Imputed interest under Section 7872? |
| Complete liquidation | Section 336 gain/loss on assets | Section 331 gain/loss on stock |
Losses and planning levers
C corporation losses stay inside the corporation. A post-2017 NOL offsets only 80% of taxable income and carries forward indefinitely with no carryback. Capital losses offset only corporate capital gains and carry back 3 / forward 5 years. A planning prompt may ask whether to harvest a capital gain this year to absorb an expiring capital-loss carryover, or to close a deal before a Section 382 ownership change limits NOL use.
Estimated tax planning
A C corporation must pay estimated tax in four installments (15th day of months 4, 6, 9, and 12). The general rule is the lesser of 100% of current-year tax or 100% of prior-year tax. But a large corporation — taxable income of $1,000,000 or more in any of the three preceding years — may use the prior-year safe harbor only for the first installment; installments two through four must be based on 100% of current-year tax (any first-installment shortfall is recaptured in the second). Do not invent thresholds; use the facts and rules supplied.
Distributions and E&P
E&P is the tax measure of dividend capacity. A cash distribution is a dividend to the extent of current and accumulated E&P; excess reduces stock basis, then becomes capital gain. Worked example: Corp has $40,000 current E&P, distributes $100,000 cash to a sole shareholder with $25,000 stock basis. Result: $40,000 dividend, $25,000 tax-free basis recovery, $35,000 capital gain. For appreciated property, the corporation also recognizes Section 311(b) gain as if it sold the asset, which can itself increase current E&P before the dividend test.
Consolidated and international signals
A consolidated Form 1120 requires an affiliated group (generally 80% vote and value through a common parent) and elimination of intercompany items. International facts are usually signals: identify source of income, foreign branch versus subsidiary, controlled foreign corporation (CFC) status, withholding, or permanent establishment, then answer only the tested consequence.
Section 351 contributions and liquidations
A Section 351 contribution is tax-free when the contributing shareholders are in control — at least 80% of total voting power and 80% of each nonvoting class — immediately after the exchange. The shareholder takes a substituted basis in the stock; the corporation takes a carryover basis in the assets. Boot (cash or other non-stock property) triggers recognized gain limited to the lesser of realized gain or boot received. Liabilities assumed by the corporation are generally not boot unless total liabilities exceed the aggregate basis of contributed property, in which case the excess is gain under Section 357(c).
A complete liquidation is a double-tax event. Under Section 336, the liquidating corporation recognizes gain or loss as if it sold each asset at FMV. Under Section 331, the shareholder treats the liquidating distribution as full payment for the stock, recognizing capital gain or loss equal to FMV received less stock basis. A parent-subsidiary liquidation under Section 332 is an exception: an 80%-owned subsidiary liquidates into its parent tax-free.
Reasonable compensation and accumulated earnings
Closely held C corporations face two planning traps the exam likes. First, unreasonable compensation to a shareholder-employee can be recharacterized as a nondeductible dividend, increasing corporate tax. Second, the accumulated earnings tax (a penalty surtax) and the personal holding company tax discourage hoarding earnings to avoid shareholder-level dividend tax. A well-documented business need for retained earnings (the $250,000 general accumulated-earnings credit, lower for personal service corporations) is the standard defense.
Exam workflow
- Classify the transaction and parties.
- Record the corporation-level effect (21% tax, Section 311(b), NOL, Section 336).
- Record the shareholder-level effect (dividend, basis, Section 331 gain).
- Update E&P, basis, carryovers, and payment schedules.
- Recheck whether a planning fact changes timing, character, or jurisdiction.
A C corporation distributes appreciated land to its sole shareholder in a nonliquidating distribution. The corporation has sufficient current and accumulated earnings and profits. Which treatment is most consistent with TCP entity rules?
A corporation had taxable income of $1.4 million two years ago and is therefore a large corporation. For its current-year estimated tax installments, which statement is correct?