US Tax Code Essentials
13 chapters
1. 1 Trade or Business Expenses
[Verse 1]
When you're running a business, there's expenses to claim
But the IRS has rules for this deduction game
Section one-six-two says they must be ordinary
And necessary too, or you'll be sorry
Ordinary means common in your trade
Necessary means helpful for profit to be made
[Chorus]
Business expenses, ordinary and necessary
Current or capital, choose so carefully
Fifty percent for meals, entertainment's gone away
Home office needs exclusive use every single day
One-six-two is the key, learn it well today
Business expenses, the tax-saving way
[Verse 2]
Welch versus Helvering taught us what ordinary means
Not moral or usual in everyday scenes
But normal and customary in your business world
A payment that's typical where profits are unfurled
What competitors do in similar situations
That's the test for ordinary in tax regulations
[Chorus]
Business expenses, ordinary and necessary
Current or capital, choose so carefully
Fifty percent for meals, entertainment's gone away
Home office needs exclusive use every single day
One-six-two is the key, learn it well today
Business expenses, the tax-saving way
[Verse 3]
INDOPCO doctrine says look at future benefits
If it helps beyond this year, capitalize it
Tangible property regs make the rules more clear
Repairs deduct now, improvements over years
Current deduction or capital, timing matters most
Don't let wrong classification hurt your business boast
[Bridge]
Reasonable compensation when you're a corporate owner
Pay yourself too much and IRS will be a groaner
Salary versus dividends, find the balance right
Business meals at fifty percent since twenty-twenty-two's sight
Entertainment's disallowed since Tax Cuts and Jobs came through
Home office exclusive use, regular and true
[Chorus]
Business expenses, ordinary and necessary
Current or capital, choose so carefully
Fifty percent for meals, entertainment's gone away
Home office needs exclusive use every single day
One-six-two is the key, learn it well today
Business expenses, the tax-saving way
[Outro]
From Welch to INDOPCO, the lessons we have learned
Ordinary, necessary, how deductions are earned
Keep good records, follow rules, and you'll be on your way
To claiming business expenses the proper legal way
2. 2 Depreciation and Cost Recovery
[Verse 1]
When you buy a business asset, don't write it off today
MACRS is the system that will show you depreciation's way
Property classes three through twenty, each one has its time
Conventions tell you when to start, half-year keeps you in line
[Chorus]
MACRS makes it clear, property classes here
Three five seven years, or longer if you peer
One-seventy-nine lets you expense it all
But there's a limit, don't let your deduction fall
Bonus depreciation, one hundred percent through twenty-two
Then it phases down each year, eighty sixty forty twenty too
[Verse 2]
Section one-seventy-nine expensing, over one million now
But when your purchases get big, the phase-out starts somehow
Two-seven million threshold, dollar for dollar it retreats
Listed property and luxury cars have their own special beats
[Chorus]
MACRS makes it clear, property classes here
Three five seven years, or longer if you peer
One-seventy-nine lets you expense it all
But there's a limit, don't let your deduction fall
Bonus depreciation, one hundred percent through twenty-two
Then it phases down each year, eighty sixty forty twenty too
[Bridge]
Intangibles under section one-nine-seven
Fifteen years to write them off, that's depreciation heaven
Real estate has special rules, don't let them slip away
Twenty-seven and a half for homes where people stay
Thirty-nine for offices and buildings where we work
Straight-line method only, no accelerated quirk
[Verse 3]
Luxury automobiles have caps on what you claim
Listed property needs business use to play depreciation's game
Mid-quarter convention kicks in when fourth quarter's forty percent
These rules work together for the way your tax is spent
[Chorus]
MACRS makes it clear, property classes here
Three five seven years, or longer if you peer
One-seventy-nine lets you expense it all
But there's a limit, don't let your deduction fall
Bonus depreciation, one hundred percent through twenty-two
Then it phases down each year, eighty sixty forty twenty too
[Outro]
From computers to buildings, every asset finds its place
Depreciation and cost recovery, learn them at your pace
3. 3 Losses and Limitations
[Verse 1]
When you invest your money, there's a rule to know
At-risk limitations, that's how losses flow
Four sixty-five says you can only deduct what's real
The amount you're liable for, that's the deal
If you borrowed with no recourse, it won't count today
Only what you could lose gets to reduce your pay
[Chorus]
Three big limits on your losses, learn them one by one
At-risk, passive, and excess business when the year is done
NOL and hobby rules complete the five we need to know
These limitations control how much loss you get to show
[Verse 2]
Passive activities under four sixty-nine
Material participation draws the line
Seven tests to check if you're involved enough
Five hundred hours or more makes the standard tough
Real estate professionals get a special break
But rental activities need careful steps to take
[Chorus]
Three big limits on your losses, learn them one by one
At-risk, passive, and excess business when the year is done
NOL and hobby rules complete the five we need to know
These limitations control how much loss you get to show
[Verse 3]
Excess business losses hit when you make too much
Two eighty-nine for single, five seventy-eight for joint touch
These thresholds get indexed, they rise each year
When your income's higher, the limit's crystal clear
[Bridge]
NOL carries forward with no time to end
But only eighty percent of income you can spend
Nine factors test if your hobby's really trade
Profit motive matters in the grade they've made
[Outro]
From at-risk rules to passive loss
Every limit has its cost
Know these rules and you'll succeed
These five limits are what you need
4. 4 Accounting Methods and Periods
[Verse 1]
When you're keeping books for Uncle Sam to see
Two main methods set you free
Cash method counts when money's in your hand
Payment flows like grains of sand
But if your business grows beyond the line
Three million gross receipts, you'll find
Accrual method becomes your legal way
Recording when you earn, not when they pay
[Chorus]
Four accounting methods, four periods too
Cash and accrual, which one's right for you?
All-events test with economic performance
Section four-eight-one when you need conformance
Calendar year or fiscal, make your choice
Let the tax code be your guiding voice
[Verse 2]
All-events test has got two parts to know
Fixed liability before you go
Economic performance seals the deal
Makes the deduction finally real
Services rendered, property delivered
That's when your expense gets considered
Can't deduct until both tests are passed
Timing differences resolved at last
[Chorus]
Four accounting methods, four periods too
Cash and accrual, which one's right for you?
All-events test with economic performance
Section four-eight-one when you need conformance
Calendar year or fiscal, make your choice
Let the tax code be your guiding voice
[Bridge]
When you change your method mid-stream
Four-eight-one adjustment keeps things clean
Positive or negative spread over years
Prevents the double counting fears
Installment sales can spread the gain
Long-term contracts have their own refrain
Section four-six-zero's got the rules
Percentage completion for construction tools
[Verse 3]
Tax year selection sets your filing date
December thirty-first don't have to wait
But fiscal years can end most any time
Just pick twelve months and you'll be fine
Partnerships and S-Corps have special needs
Calendar year requirement usually leads
C-Corps have freedom to choose their way
But consistency is here to stay
[Final Chorus]
Four accounting methods, four periods too
Cash and accrual, installment rules pursue
All-events test with economic performance
Section four-eight-one keeps tax conformance
Calendar year or fiscal, make it right
Now you've got accounting periods in sight
[Outro]
From cash to accrual, method to year
Tax accounting principles are crystal clear
Follow the rules and you'll be just fine
Keeping your records all in line
5. 1 Formation of a Corporation
[Verse 1]
Starting up a company, you want to keep it clean
Transfer all your property without a tax routine
Section three five one can save you from the pain
If you meet the rules, there's nothing you will gain
Taxable that is, the government won't take
When you form your corp, no money's at stake
[Chorus]
Eighty percent control, that's the magic number
Keep it in the club, don't let ownership lumber
Boot means cash or debt that breaks the golden rule
Recognition follows when you leave the tax-free pool
Three five one, three five one
Incorporation can be fun
When you know the rules to follow
Tax-free formation you can swallow
[Verse 2]
Property goes in and stock comes right back out
That's the basic trade that keeps you in the route
But if you get some cash or notes upon the side
That's called boot my friend, and taxes you can't hide
Only to the extent of the gain you made
Recognition hits you, that's how the game is played
[Chorus]
Eighty percent control, that's the magic number
Keep it in the club, don't let ownership lumber
Boot means cash or debt that breaks the golden rule
Recognition follows when you leave the tax-free pool
Three five one, three five one
Incorporation can be fun
When you know the rules to follow
Tax-free formation you can swallow
[Bridge]
Basis calculations keep the numbers straight
Your stock takes the place of what you gave away
Minus any boot plus any gain you pay
Corporation's basis in the assets that it got
Equals what you had, that's the basic plot
[Verse 3]
When the corp assumes your debts that's fine to do
Section three five seven guides us safely through
Unless you're trying tricks to dodge the tax you owe
Tax avoidance purpose makes the whole deal blow
Liability relief can trigger gain recognition
So be careful with your planning and your disposition
[Chorus]
Eighty percent control, that's the magic number
Keep it in the club, don't let ownership lumber
Boot means cash or debt that breaks the golden rule
Recognition follows when you leave the tax-free pool
Three five one, three five one
Incorporation can be fun
When you know the rules to follow
Tax-free formation you can swallow
[Outro]
Form your corporation right
Keep these rules within your sight
Tax-free incorporation
Building wealth across the nation
6. 2 Corporate Income Tax Computation
[Verse 1]
When corporations earn their money through the year
Gross income starts the calculation clear
Subtract deductions from what they've made
Twenty-one percent flat rate, that's how tax is paid
No more brackets, no more climbing scales
TCJA made it simple, here's how the math prevails
[Chorus]
Twenty-one flat, that's the corporate way
Gross minus deductions, then you pay
Fifty sixty-five and one hundred too
Dividend deduction rates for me and you
Twenty-one flat, keep it in your head
Corporate income tax, now you're ahead
[Verse 2]
Dividends received get special treatment here
Section two-four-three makes the path clear
Fifty percent off if you own less than twenty
Sixty-five percent when your stake has plenty
One hundred percent deduction when you hold eighty or more
Ownership percentage opens up the door
[Chorus]
Twenty-one flat, that's the corporate way
Gross minus deductions, then you pay
Fifty sixty-five and one hundred too
Dividend deduction rates for me and you
Twenty-one flat, keep it in your head
Corporate income tax, now you're ahead
[Verse 3]
Starting up a business costs some cash
Section one-nine-five and two-four-eight won't crash
Organizational costs spread over time
Fifteen years amortization, that's the rhyme
First year gets five thousand if you qualify
But phase-out kicks in when costs get high
[Bridge]
Charitable giving has a ceiling cap
Ten percent of modified income, mind the gap
Calculate before deductions and NOL
Dividends received adjustment, do it well
[Verse 4]
Corporate AMT came back in twenty-three
Fifteen percent rate for companies you see
Inflation Reduction Act brought CAMT alive
One billion revenue threshold to survive
Book income adjustment, that's the base
Alternative minimum, know your place
[Chorus]
Twenty-one flat, that's the corporate way
Gross minus deductions, then you pay
Fifteen percent CAMT, the minimum floor
Corporate tax rules, now you know more
Twenty-one flat, keep it in your head
Corporate income tax, now you're ahead
[Outro]
From gross income down to tax you owe
These corporate rules will help you grow
Twenty-one percent, the rate stays true
Corporate income tax, we're done with you
7. 3 Distributions and Dividends
[Verse 1]
When a corporation makes some cash
Earnings and profits tell the tale
Current year and past combined
Help determine what's for sale
Shareholders receive their share
But how it's taxed depends on E and P
Distribution rules apply
Let's learn the code that sets us free
[Chorus]
Three oh one says check the order first
Current E and P gets hit
Then accumulated takes the rest
That's how dividends commit
Property distributions trigger gain
At corporate level pain
Remember E and P
That's the dividend key
[Verse 2]
Sometimes dividends aren't declared
But still they count as income flow
Constructive dividends appear
When benefits to shareholders show
Excessive salary or loans
Below market rent they pay
Corporate benefits disguised
As dividends they'll stay
[Chorus]
Three oh one says check the order first
Current E and P gets hit
Then accumulated takes the rest
That's how dividends commit
Property distributions trigger gain
At corporate level pain
Remember E and P
That's the dividend key
[Bridge]
Stock dividends and stock rights too
Section three oh five's the rule
Generally not income to you
Unless they change proportions cool
Pro rata means you're safe
Disproportionate means tax
Stock distributions have their place
Know the facts
[Verse 3]
When property gets distributed out
Corporation must recognize
The gain as if they sold it out
At fair market value price
Built-in gains can't hide away
Corporate tax will have its day
Shareholders get basis stepped
Up to value kept
[Chorus]
Three oh one says check the order first
Current E and P gets hit
Then accumulated takes the rest
That's how dividends commit
Property distributions trigger gain
At corporate level pain
Remember E and P
That's the dividend key
[Outro]
Distributions tell a story
Current then accumulated glory
E and P will guide the way
In the tax code every day
8. 4 Redemptions and Partial Liquidations
[Verse 1]
When shareholders want their money back today
There's four safe harbors showing us the way
Not essentially equivalent to a dividend paid
Substantially disproportionate, don't be afraid
Complete termination ends it all
Partial liquidation answers the call
[Chorus]
Four redemptions, four ways to go
Three-oh-two shows us what we need to know
Not equivalent, disproportionate too
Complete termination, partial liquidation for you
Four redemptions, memorize today
Section three-oh-two shows us the way
[Verse 2]
Attribution rules from three-one-eight
Family members' shares we calculate
Spouse and children, parents count as yours
Grandchildren too, that's what the law ensures
But family attribution can be waived
If certain conditions have been obeyed
[Chorus]
Four redemptions, four ways to go
Three-oh-two shows us what we need to know
Not equivalent, disproportionate too
Complete termination, partial liquidation for you
Four redemptions, memorize today
Section three-oh-two shows us the way
[Verse 3]
When redemptions don't meet the test
Three-oh-one distributions are what's left
Treated like dividends, that's the rule
Ordinary income, don't be fooled
But if you qualify for safe harbor protection
Capital gains treatment is your selection
[Bridge]
Three-oh-three has a special case
Estate tax redemptions take their place
When someone dies and taxes are due
This section helps the heirs get through
Stock redemption pays the estate tax bill
Section three-oh-three shows the will
[Chorus]
Four redemptions, four ways to go
Three-oh-two shows us what we need to know
Not equivalent, disproportionate too
Complete termination, partial liquidation for you
Four redemptions, memorize today
Section three-oh-two shows us the way
[Outro]
Remember the four, don't let them slip
Attribution rules, keep a good grip
Three-oh-one when you don't qualify
Three-oh-three when estate taxes are high
Tax law redemptions, now you know
Four safe harbors, watch your portfolio grow
9. 5 Complete Liquidations
[Verse 1]
When a company decides to close its doors
Section three three one tells us what's in store
Shareholders get cash or property in hand
Treat it like a sale across the land
Take your basis out, the rest is gain
Capital treatment, that's the refrain
[Chorus]
Three three one for shareholders, gain or loss
Three three six, the corp pays the cost
Three three two and seven, eighty percent
Subsidiary liquidation, tax event prevented
Five complete ways liquidation plays
Know the rules for corporate ending days
[Verse 2]
Three three six says the corporation
Must recognize gains across the nation
When assets go out at fair market price
Versus basis, roll the tax dice
Losses too get recognized
Unless exceptions are applied
[Chorus]
Three three one for shareholders, gain or loss
Three three six, the corp pays the cost
Three three two and seven, eighty percent
Subsidiary liquidation, tax event prevented
Five complete ways liquidation plays
Know the rules for corporate ending days
[Verse 3]
Eighty percent or more ownership stake
Three three two makes the earth shake
Parent gets the assets, no gain to see
Three three seven keeps the corp tax free
Subsidiary melts into the parent's frame
Tax-free liquidation is the name of the game
[Bridge]
But watch out for the reincorporation trick
Courts will catch it, make the taxes stick
Liquidate and then reform too soon
They'll collapse it under common tune
Substance over form will always win
Don't let form games make your head spin
[Chorus]
Three three one for shareholders, gain or loss
Three three six, the corp pays the cost
Three three two and seven, eighty percent
Subsidiary liquidation, tax event prevented
Five complete ways liquidation plays
Know the rules for corporate ending days
[Outro]
Complete liquidations, five rules to know
Tax consequences, watch the money flow
From shareholder pockets to corporate halls
Remember these sections when liquidation calls
10. 6 Corporate Reorganizations
[Verse 1]
When companies need to change their shape
Six pathways help them find escape
From A to G we'll learn today
How corporate reorgs pave the way
Type A merger brings two into one
Statutory rules get the job done
Consolidation forms brand new
Following the law straight and true
[Chorus]
A B C D E F G
Corporate reorgs set companies free
Stock and assets change their place
But continuity saves the race
Boot brings gain into the light
Tax attributes follow flight
Three-eight-one and three-eight-two
Guide the rules for me and you
[Verse 2]
Type B acquisition swaps the shares
Stock for stock with voting pairs
Type C trades stock for all assets
Business substance never forgets
Type D splits or brings together
Divisive moves through any weather
Spin-offs, split-ups lead the dance
Acquisitive gets second chance
[Chorus]
A B C D E F G
Corporate reorgs set companies free
Stock and assets change their place
But continuity saves the race
Boot brings gain into the light
Tax attributes follow flight
Three-eight-one and three-eight-two
Guide the rules for me and you
[Verse 3]
Type E recapitalization
Changes capital's foundation
Type F shifts identity
Form or place finds new reality
Type G bankruptcy's last resort
When companies need legal court
Seven types to memorize
Each one helps reorganize
[Bridge]
Continuity of interest stays
Business enterprise never strays
Boot is cash or other property
Makes you recognize what you see
Section three-eight-one carries over
Losses, credits like a rover
Three-eight-two puts limits tight
On the losses you can write
[Chorus]
A B C D E F G
Corporate reorgs set companies free
Stock and assets change their place
But continuity saves the race
Boot brings gain into the light
Tax attributes follow flight
Three-eight-one and three-eight-two
Guide the rules for me and you
[Outro]
Seven types from A through G
Tax-free corporate destiny
Follow rules and watch the flow
Corporate reorgs help you grow
11. 7 Penalty Taxes
[Verse 1]
When a company hoards its cash and doesn't pay out
The IRS might wonder what that's all about
If you're keeping profits just to dodge the tax
Section five-three-one will get you back on track
There's a credit that protects you from the penalty bite
Two-fifty thousand keeps most companies right
But service corporations get a smaller deal
One-fifty thousand is their credit ceiling
[Chorus]
Penalty taxes, they're watching what you do
Accumulated earnings, personal holding too
Two-fifty, one-fifty, know your credit line
Section five-three-one and five-four-one combined
[Verse 2]
Personal holding companies face a different test
When passive income makes up most of what's possessed
If sixty percent or more comes from investments made
Dividends and royalties, rent that tenants paid
Five or fewer people own more than half the stock
This penalty tax will give you quite a shock
Section five-four-one will tax what you retain
Unless distributions flow like cleansing rain
[Chorus]
Penalty taxes, they're watching what you do
Accumulated earnings, personal holding too
Two-fifty, one-fifty, know your credit line
Section five-three-one and five-four-one combined
[Bridge]
These taxes exist to make sure money flows
Not trapped in corporations where the revenue grows
The government wants taxes paid on what you earn
Not hidden in companies where profits churn
[Verse 3]
Manufacturing companies get the higher credit
Service firms get less, that's how Congress said it
Personal holding status has a two-part test
Ownership concentration and income at rest
Know these penalty taxes, plan your business right
Keep distributions flowing to avoid the bite
The tax code has these weapons to ensure compliance
Don't let your corporate planning show defiance
[Chorus]
Penalty taxes, they're watching what you do
Accumulated earnings, personal holding too
Two-fifty, one-fifty, know your credit line
Section five-three-one and five-four-one combined
[Outro]
Remember these sections when you plan ahead
Keep money moving or pay the tax instead
Five-three-one and five-four-one will always be
Watching corporate earnings carefully
12. 1 Partnerships (Subchapter K)
[Verse 1]
When partners come together with their cash and property
Seven twenty-one says no gain, contribute tax-free
But watch for services and debt relief exceptions here
The partnership begins when all the details are clear
[Chorus]
Partnership tax is flowing through
Seven oh four allocations too
Outside basis, inside basis, keep them straight
Seven fifty-two for debt we calculate
Hot assets, guaranteed payments, don't forget
Subchapter K rules help you place a safer bet
[Verse 2]
The partnership agreement sets the allocation plan
Income, gains, and losses distributed by their hand
But substantial economic effect must pass the test
Three parts to verify, don't settle for less
[Chorus]
Partnership tax is flowing through
Seven oh four allocations too
Outside basis, inside basis, keep them straight
Seven fifty-two for debt we calculate
Hot assets, guaranteed payments, don't forget
Subchapter K rules help you place a safer bet
[Verse 3]
Guaranteed payments under seven oh seven c
Like salary to partners, deductible you see
Outside basis starts with contributions that you make
Add income, subtract distributions that you take
[Bridge]
Seven fifty-four election changes inside ground
Seven forty-three and seven thirty-four come around
Current distributions under seven thirty-one
Liquidating payments when the partnership is done
[Verse 4]
When you sell your partnership interest, seven forty-one
But seven fifty-one hot assets can't be outrun
Disguised sales rules will catch you if you try to hide
Anti-abuse provisions keep you on the honest side
[Chorus]
Partnership tax is flowing through
Seven oh four allocations too
Outside basis, inside basis, keep them straight
Seven fifty-two for debt we calculate
Hot assets, guaranteed payments, don't forget
Subchapter K rules help you place a safer bet
[Outro]
From formation through liquidation, rules apply
Partnership taxation, now you're ready to fly
13. 2 S Corporations (Subchapter S)
[Verse 1]
Small business owners, gather 'round today
There's a special election that can save you pay
S Corporation status, it's a different way
To pass through your profits without double tax to pay
One hundred shareholders max, that's the golden rule
One class of stock only, keep it simple, cool
US citizens and residents, they're the only pool
Corporations and partnerships? Sorry, not the tool
[Chorus]
S Corp election, Section thirteen-sixty-two
Pass it through, pass it through, like partnerships do
Stock basis, debt basis, keep them straight and true
AAA, PTI, E and P in order due
S Corp election, make your choice today
Save on taxes, let the profits flow your way
[Verse 2]
File that form by March fifteenth, don't be late
All shareholders must agree to seal the fate
If you mess up the election, don't despair and wait
Inadvertent termination relief can clean your slate
Income flows pro rata based on ownership share
Calculate your daily portions with the greatest care
No special allocations like partnerships declare
Every shareholder gets their piece, completely fair
[Chorus]
S Corp election, Section thirteen-sixty-two
Pass it through, pass it through, like partnerships do
Stock basis, debt basis, keep them straight and true
AAA, PTI, E and P in order due
S Corp election, make your choice today
Save on taxes, let the profits flow your way
[Bridge]
Built-in gains tax, thirteen-seventy-four
If you converted from C Corp, there might be more
Five years recognition, then you're through the door
Passive income tax can hit at twenty-five percent or more
[Verse 3]
When distributions come your way, here's how they fall
AAA first, that's Accumulated Adjustments, y'all
Then Previously Taxed Income, standing ten feet tall
E and P comes last of all, before the capital call
Stock basis goes up and down with income and loss
Debt basis helps with deductions, but there's still a cost
S Corp versus partnership, each one has a boss
Choose the structure that fits best, whatever comes across
[Chorus]
S Corp election, Section thirteen-sixty-two
Pass it through, pass it through, like partnerships do
Stock basis, debt basis, keep them straight and true
AAA, PTI, E and P in order due
S Corp election, make your choice today
Save on taxes, let the profits flow your way
[Outro]
From C Corp to S Corp, or back again
Know the rules and timing, be the smartest when
S Corporation status helps you win
Pass-through taxation, let the savings begin
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