Wednesday, November 30, 2011

What are Shareholders?

Shareholders:  They are the owners of the corporation.

The Shareholders possess the right to 1) Elect directors 2) Vote on fundamental transactions like mergers, sale of assets, dissolutions, and amendments of articles of incorporation.
  • They have residual claim on corporations assets if it is dissolved (“liquidation right”). Once creditors have been paid in a liquidation, the shareholders can get the remaining assets.
  • They have a right to receive a pro rata share of corporate profits (dividends) if authorized by board of directors. This is not absolute, they have to bargain for this right. Preferred Shares get dividends first.
  • Control rights are weighted by the size of your investment. This is different than a general partnership where all partners vote equally. 
  • Other than electing the board, they have no management of conduct rights. Shareholder do not have rights to act on behalf of the corporation. They are passive investors.

Monday, November 28, 2011

What is a company's authorized stock?

A company's authorized stock is the number of shares that it may legally issue. The amount of authorized stock will appear in the articles of incorporation that a company files with the secretary of state during the beginning of its existence.

A corporation cannot issue more stock, or stock of a different class, that the articles of incorporation authorize. This is why it is important for a company to anticipate its future financing needs when preparing its articles of incorporation.

However, with approval of the board of directors or shareholders, the articles of incorporation may be amended to increase the number of shares authorized, or to create an entirely new class of stock for selling to investors.

Friday, November 11, 2011

Preferred Shares –Bargain for Rights

 Preferred Shares –Bargain for Rights

  • Have preference or priority in payment over common shares Terms are set out in articles or in separate document called “certificate of designations. 
  • They get dividends paid out first. The dividends could accumulate and then preferred shares must get paid out first before holders of other classes of stock outstanding.
  • Initially, they did not have voting rights
  • Liquidation Preference- Might get right to sell shares back to the company at a certain price 
  • Preemptive rights – a right to buy shares ahead of other shareholders from the corporation This is an Anti-Dilution Device and normally something that preferred shareholders pay for and bargain to receive.

Capitalization and Depreciation

Capitalization and Depreciation- Matching Expenses with the Income that those expenses help produce

§168 of the Internal Revenue Code provides various cost recovery schedules. Under the accelerated cost recovery system ACRS, the cost recovery of an asset depends on three things:
  1. The total amount of cost to be recovered
  2. The number of years over which the cost is to be recovered
  3. The rate at which the cost is to be recovered over those year.
In theory, the total amount of cost to be recovered is the total expected decline in value while the asset is used in the taxpayer’s business, as measured by the different between the original cost and the salvage value.

For simplicity, § 168(b)(4) provides that the salvage value is always zero. Each asset class has a different life as defined by the code. Although § 168 requires straight-line depreciation for buildings and a few other types of assets, most assets are eligible for an accelerated schedule under which larger deductions are allowed in earlier years. Use the Revenue Procedure that tells you how to do it.

Double Decline Balance Method - Under the 200 percent (or double declining balance method), the first step is to calculate the percentage of cost the taxpayer could recover each year under the straight-line method. The next step is to determine the rate, which is double (200 percent of) the straight line method. That percentage is then applied each year to the unrecovered basis of the asset, to produce the ACRS deduction for the year. REDUCE BASIS

“Half-year convention” – If an asset is not placed in service at beginning of Year 1, the deduction for that year should be based on less than an entire years use of the asset. § 168(d)(1) treats assets as being placed in service in the middle of the year, with the result that only a half year’s worth of depreciation is allowed in the first year.

To accelerate a deduction is to defer income, and taxpayers ordinarily benefit from deferral. Congress intentionally permits cost recovery allowances that will usually be significantly faster than the actual declines in value of business assets.

 § 168  and tax deferral encourage investment in physical plant and equipment.2ACRS may compensate for depreciation deductions are not adjusted for inflation. ACRS is a compromise between income tax and proponents of a consumption tax. Any depreciation system that allows deductions slower that immediate expensing, but faster than actual declines in value, can be understood as a compromise between proponents of an income tax and proponents of a consumption tax. As long as a taxpayer holds a § 168 asset, the IRS assumes the asset declines in value in accordance with the applicable ACRS schedule. When asset is sold, IRS can measure the extent to which that assumption was mistaken, and require an appropriate correction.

No tax benefit rule to fix OVERSHOOTING because of §§ 1016 and 1001.  Since ACRS is a method of recovering a taxpayer’s cost, § 1016(a)(2) provides that the taxpayer’s adjusted basis in an ACRS asset must be reduced by the amount of the deduction allowed under § 168

Thursday, November 10, 2011

Average rates and Marginal Rates

What is the different between Average Rates and Marginal Rates?

The tax rates of §1 apply only to the income that is left after subtraction of the standard deduction and personal exemptions. Chill effects, which prevent people from earning more income, are bad policy and the IRS tries to avoid them whenever possible. Some chill effects do exist. For example,  ff Congress is trying to adjust the distribution of tax burdens among taxpayers of differing incomes, its focus should be on average rates. But for tax planning purposes, the marginal rate is the crucial factor.

The tax savings from a deduction is the amount of the deduction multiplied by the taxpayer’s marginal rate.

Saturday, November 5, 2011

Actual Performance vs. Planning Budget

The planning or static budget is an educated guess as to what the actual performance will be during the budget period. However, rarely does actual performance match the actual planning budget that was created at the beginning of the year. Major differences between the planning budget and actual performance are mainly caused by two different things: differences in activity level and differences in spending.

Between a planning budget and actual performance, a flexible budget can be constructed based on the actual level of activity and the revenue and cost formulas from the planning budget. The differences between the static and flexible budgets are due to the difference between planned (static) activity and actual (flexible) activity.

These differences are labeled activity variances and differences between the flexible budget and the actual performance are mainly due to differences in selling price per unit for revenue and spending per unit for expenses. These differences are labeled revenue and spending variances.

Overhead costs and selling and administrative expenses, spending variances result from both the cost per item and the number of items used.

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.