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Chapter 11 Corporate Income Tax

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Title: Chapter 11 Author: B Martindale Last modified by: k0003067 Created Date: 12/9/2000 9:31:48 PM Document presentation format: On-screen Show (4:3) – PowerPoint PPT presentation

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Title: Chapter 11 Corporate Income Tax


1
Chapter 11 Corporate Income Tax
  • Income Tax Fundamentals 2010
  • Gerald E. Whittenburg
  • Martha Altus-Buller

2
Corporate Tax Rates
  • Corporate rates are progressive
  • Marginal rates are from 15 to 39, depending on
    taxable income
  • There are eight brackets
  • There are a number of tax bubbles - occurs when
    tax rate schedules recaptures savings from prior
    brackets
  • For corporations with large income (more than
    18.33 million) the rate is a flat 35
  • Qualified personal service corps taxed at flat
    35
  • Architects, CPAs, consultants, etc.

3
Example Corporate Tax Rates
  • Example
  • Johnson Kelby Inc. (a dental products
    wholesaler) has taxable income of 300,000 for
    the current year. What is the corporations tax
    liability? How would the answer change if it was
    an architectural firm, and Johnson Kelby
    provided personal services?

4
Solution
  • Example
  • Johnson Kelby Inc. (a dental products
    wholesaler) has taxable income of 300,000 for
    the current year. What is the corporations tax
    liability? How would the answer change if it was
    an architectural firm, and Johnson Kelby
    provided personal services?
  • Solution
  • Corporate tax 100,250
  • 22,250 (39)(300,000 100,000)
  • If Johnson Kelby is a qualified personal
    service corporation, corporate tax 105,000
    (300,000 x 35)

5
Corporate Capital Gains
  • A corporation can choose from two alternative tax
    treatments on capital gains
  • Taxed at ordinary rates
  • or
  • Elect to pay an alternative tax (35) on net
    long-term capital gain (LTCG)
  • Essentially equivalent to maximum regular
    corporate tax (no tax benefit to LTCG)
  • Bottom line there is no difference in tax on
    ordinary vs. capital income

6
Dividends Received Deduction
  • Corporations are allowed a deduction for a of
    the dividends received from other corporations
  • Attempt to alleviate triple taxation
  • Dividends received deduction is allowed based
    upon ownership

Percentage Ownership Dividends
Received Deduction lt 20 70 20
or more, less than 80 80 gt 80
100 Deductions
limited by and other items
7
Amortization of Organizational Expenditures
  • Examples of organizational expenditures
  • Legal/accounting services incidental to
    organization
  • Incorporation fees
  • Organizational expenditures are capitalized and
    then amortized over 180 months
  • However, can make election to deduct up to 5,000
    of organization costs in year corporation begins
    business
  • 5,000 amount is reduced 1 for each 1 that
    organizational expenses exceed 50,000

8
Charitable Contributions
  • Corporations are allowed a deduction for
    charitable contributions
  • Cash basis taxpayers can deduct when paid
  • Accrual basis taxpayers have until the 15th day
    of the third month following year-end to
    contribute
  • As long as pledge is made by year-end
  • Limited to 10 of taxable income
  • Carry forward unused deduction for five years
  • Calculated before any loss carrybacks, NOLS or
    the dividend received deduction

9
Example Charitable Contributions
  • Example
  • Ferndale Corp. had net operating income of
    400,000 for the current year and made a
    charitable contribution of 60,000. A dividends
    received deduction of 80,000 is included in the
    net operating income calculation. What is
    Ferndales charitable contribution deduction
    what is its charitable contribution carryforward?

10
Solution
  • Example
  • Ferndale Corp. had net operating income of
    400,000 for the current year and made a
    charitable contribution of 60,000. A dividends
    received deduction (DRD) of 80,000 is included
    in the net operating income calculation. What is
    Ferndales charitable contribution deduction
    what is the carryforward?
  • Solution
  • The charitable contribution deduction is 48,000
  • (400,000 80,000) x 10 48,000 limit
  • Therefore, carryforward is 32,000 (80,000
    48,000)
  • Note had to add back DRD first!!

11
Reconciliation of Tax to Book Income Schedule
M-1
  • Schedule M-1 of Form 1120 reconciles book to tax
    income
  • Computed before NOLs and special deductions
  • Amounts added to book income
  • Federal tax expense
  • Capital losses
  • Income recorded on tax return but not on books
  • Expenses recorded on books but not on tax return
  • Amounts deducted from book income
  • Income recorded on books but not on tax return
  • Expenses recorded on tax return but not on books
  • See chapter for other items included on Schedule
    M-1

12
Filing Requirements Estimated Tax
  • Form 1120 - regular corporation
  • Form 1120S - S Corporation
  • Returns are due by the 15th day of the third
    month after year-end
  • Can file Form 7004 and receive automatic 6-month
    extension
  • Corporations must make estimated tax payments in
    similar manner as self-employed taxpayers

13
S Corporations
  • Certain corporations may elect to be taxed in a
    manner similar to partnerships
  • Qualified small business corporation may elect S
    Corporation status if several criteria apply
  • Operates as a domestic corporation
  • Has 100 or fewer shareholders
  • Shareholders may not be corporations or
    partnerships
  • Has only one class of stock
  • Has only shareholders that are U.S. citizens or
    resident aliens

14
S Corporations
  • Corporation must make election of S status in a
    prior year
  • Or within 2-1/2 months of the current tax year
  • S Corp status stays in effect until revocation
  • Status can be voluntarily revoked by consent of
    shareholders
  • or
  • Involuntarily revoked
  • If corporation ceases to be a small business
    corporation
  • or
  • If corporate passive income is 25 or more for 3
    consecutive years and corporation has accumulated
    earnings and profits at the end of each of those
    years

15
Example S Corporation Election
  • Example
  • Swannak Electronics Corporation is a calendar
    year corporation that makes an S Corporation
    election on May 25, 2009. What year may the
    corporation first be treated as an S Corporation?

16
Solution
  • Example
  • Swannak Electronics Corporation is a calendar
    year corporation that makes an S Corporation
    election on May 25, 2009. What year may the
    corporation first be treated as an S Corporation?
  • Solution
  • Since Swannak did not make its election within
    the first 2-1/2 months of the tax year, it will
    be treated as a regular corporation for the
    current year, and will become an S Corporation
    for tax year 2010.

17
Income Reporting
  • Must report all elements of income and expense
    separately on Form 1120S
  • Then each shareholder reports his/her share of
    these items of corporate income/expense on
    personal return
  • K-1 takes total shareholder income/expenses and
    allocates each item to each shareholder based
    upon his/her ownership percentage

18
Loss Reporting
  • Each shareholder of an S Corp may also report
    his/her respective share of loss
  • Cannot take a loss in excess of adjusted basis in
    stock
  • If loss exceeds adjusted basis in stock plus
    loans, shareholder can carry it forward
  • If shareholder entered/departed S Corp midyear,
    must allocate losses on a daily basis

19
S Corporation Pass Through Items
  • Many items retain tax character when passing
    through to the S Corporations shareholders on
    individual K-1
  • Examples of such items include
  • Capital gains/losses
  • 1231 gains/losses
  • Dividend Income
  • Charitable contributions
  • Tax-exempt interest
  • Most credits

20
Corporate Formation
  • Shareholders often transfer assets to a
    corporation in exchange for stock
  • No tax is due on gain from transfer of
    appreciated assets if conditions met
  • Shareholder transferred cash or property
  • and
  • Shareholder made transfer solely in exchange for
    stock
  • Shareholder is not providing a service and all
    taxpayers together own at least 80 of stock
    after transaction
  • If shareholder receives boot in addition to
    stock, transaction may qualify for partial
    nonrecognition of gain

21
Shareholder Basis in Stock
  • A shareholders initial basis in his/her stock is
    calculated as follows
  • Basis of property transferred
  • Less Boot received
  • Plus Gain recognized
  • Less Liabilities transferred
  • Basis in stock
  • The corporation has a carry-over basis in the
    property contributed equal to the basis in the
    hands of the shareholder, increased by any gain
    recognized by shareholder on the transfer

Note generally assumption of shareholder
liabilities that are attached to property are not
considered boot received.
22
Accumulated Earnings Tax (AET)
  • Penalty tax designed to prevent a corporation
    from avoiding tax by retaining earnings
  • 15 AET imposed on unreasonable accumulation of
    earnings in addition to corporate tax
  • Corporation may accumulate up to 250,000 a year
    that is exempt from AET tax or 150,000 for a
    service corporation
  • May accumulate more if can prove a valid business
    purpose

23
Example Accumulated Earnings Tax
  • Example
  • Xinix Corporation (a medical device manufacturing
    firm) has accumulated earnings of 800,000. The
    corporation can establish reasonable needs for
    500,000 of the accumulation. What would Xinix
    accumulated earnings tax be?

24
Solution
  • Example
  • Xinix Corporation (a medical device manufacturing
    firm) has accumulated earnings of 800,000. The
    corporation can establish reasonable needs for
    500,000 of the accumulation. What would Xinix
    accumulated earnings tax be?
  • Solution
  • Its AET 45,000 (in addition to regular tax)
  • (800,000 500,000) x 15

25
Personal Holding Company Tax
  • Penalty tax designed to encourage Personal
    Holding Companies to distribute earnings to
    shareholders
  • Tax is 15 on undistributed earnings
  • Corporation is not liable for both the personal
    holding company tax and the AET in the same year

26
Corporate AMT
  • Corporate AMT - calculated similar to the
    individual AMT
  • AMT is 20 of Alternative Minimum Taxable Income
  • Taxable Income
  • /- Adjustments
  • Preferences
  • - Exemption
  • Alternative Minimum Taxable Income (AMTI)
  • Small corporations are not subject to the AMT
  • Defined as having average annual gross receipts
    lt 7.5 million over a three-year period
  • Exemption is 40,000, but is phased out when
    AMTI gt 150,000

27
Youre Done with Chapter 11
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