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The Corporate Income Tax

3. Chapter. The Corporate Income Tax. Filing Requirements and Computing the Tax. Filing Requirements. C corporations are separate tax-paying and tax-reporting entities from their owners Annual tax returns required

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The Corporate Income Tax

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  1. 3 Chapter The Corporate Income Tax

  2. Filing Requirements and Computing the Tax

  3. Filing Requirements • C corporations are separate tax-paying and tax-reporting entities from their owners • Annual tax returns required • Form 1120 or Form 1120-A (corporations with gross receipts, total income and total assets < $500,000) • Original due date is the 15th day of the third month following the fiscal year-end [IRC §6072(b)] • Can obtain an automatic 6 month extension of time to file using Form 7004 [IRC §6081] • Extension of time to file the tax return does not extend the time for paying the tax

  4. The Corporate Tax Formula • For C Corporations:Total Income- Allowable DeductionsTaxable Income before NOLs and Special Deductions- NOLs and Special Deductions=Taxable Income

  5. Corporate Tax Rates [IRC §11(b)(1)]

  6. Corporate Tax Rates • Exception: Personal Service Corporations • Taxed at a flat 35% [IRC §11(b)(2)] • Definition [IRC §448(d)(2)]

  7. Example 1a: Computing the Tax • The Purple Corporation has taxable income of $125,000. What is the tax before credits if this corporation is not a personal service corporation? • Answer:22,250 + (125,000 – 100,000) x 39% = $32,000

  8. Example 1b: Computing the Tax • The Purple Corporation has taxable income of $125,000. What is the tax before credits if this corporation is a personal service corporation? • Answer:125,000 x 35% = $43,750

  9. Example 2a: Computing the Tax • The Green Corporation has taxable income of $425,000. What is the tax before credits if this corporation is not a personal service corporation? • Answer:113,900 + (425,000 – 335,000) x 34% = $144,500 • Alternatively: 425,000 x 34% = $144,500

  10. Example 2b: Computing the Tax • The Green Corporation has taxable income of $425,000. What is the tax before credits if this corporation is a personal service corporation? • Answer: 425,000 x 35% = $148,750

  11. Tax Accounting Periods

  12. Accounting Periods • Generally, a corporation’s tax period is the same as its fiscal period for financial accounting purposes [IRC §441(b)(1) and (c)] • Can be any 12 month period ending on the last day of any month [IRC §441(d) and (e)] • Can elect a 52/53 week around the end of any month [IRC §441(f)] • Short tax periods (less than 12 months) may occur in a corporation’s first or last years of business, or in the year of a change in accounting period

  13. Accounting Periods • Exception: Personal Service Corporations • Definition [IRC §441(i)(2)] • Principal activity is performance of personal services • By owner-employees who own more than 10% of stock • Must use a calendar year unless can establish, to the satisfaction of the IRS, a business purpose for using a different fiscal year [IRC §441(i)(1)] • Can elect a different year-end if deferral period is not longer than 3 months [IRC §444(a) and (b)(1)] • If minimum distribution requirements are not met, deductions for payments to owner/employees of PSCs are limited of deferred to future years [IRC §280H]

  14. Changing Accounting Periods • Corporation can just pick a year-end for its first tax return but after that, IRS approval is generally required to change tax years [IRC §442] • Regulations and Rev. Proc 2002-37 allow an automatic approval of a change in accounting period if certain conditions are strictly met [Reg. §1.442-1(c)]

  15. Changing Accounting Periods • If a short period return results from a change in accounting period, the tax is calculated using the “annualized” taxable income method [IRC §443]

  16. Example 3a: Short Periods • The Blue Corporation (not a PSC) files a tax return for the short period September 1st to December 31st. Taxable income reported in the short period return is $82,000. What is the tax for the short-period if this is the corporation’s first year of business? • Answer:13,750 + (82,000 – 75,000) x 34% = $16,130

  17. Example 3b: Short Periods • The Blue Corporation (not a PSC) files a tax return for the short period September 1st to December 31st. Taxable income reported in the short period return is $82,000. What is the tax for the short-period if the corporation changed its fiscal year from August to December? • Answer:Annualized TI = 82,000 x 12/4 = $246,000 Tax on ATI = 22,250 + (246,000 – 100,000) x 39% = $79,190 Tax due for the short period = 79,190 x 4/12 = $26,397

  18. Tax Accounting Methods

  19. Accounting Methods • Accounting method determines when an item of income or expense is included in taxable income • Method is selected in the corporation’s first tax return • Must get IRS consent to change accounting methods once established [IRC §446(e) and (f)] • Method taxpayer regularly uses to compute income in per books [IRC §446(a)] • Method must “clearly reflect income” or IRS can impose a different method [IRC §446(b)]

  20. Accounting Methods • Overall accounting methods that are generally permissible include [IRC §446]: • Cash method • Accrual method • Hybrid method

  21. Accounting Methods • Exception: C corporations generally cannot use the cash method [IRC §448(a)(1)] • Exception 1: Qualified farming businesses may use cash method [IRC §448(b)(1) and (d)(1)] • Exception 2: Qualified personal service corporations may use cash method [IRC §448(b)(2) and (d)(2)] • Exception 3: Corporations with gross receipts of not more than $5,000,000 may use cash method [IRC §448(b)(3)]

  22. Cash Method • Income is generally taxable when it is received or constructively received [Reg. §1.446-1(c)(1)(i)] • Exception: Inventory sales must be accounted for using the accrual method [Reg. §1.446-1(c)(2)(i)]

  23. Cash Method • Expenses are generally deductible when they are actually paid [Reg. §1.446-1(c)(1)(i)] • Exception: Inventory purchases and cost of goods sold must be accounted for using the accrual method [Reg. §1.446-1(c)(2)(i)] • Exception: Prepaid interest must be deducted when accrued rather than when paid [IRC §461(g)] • Exception: Payments creating assets with useful lives of more than one year must be capitalized [IRC §263] • These may then be depreciated or amortized

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