CH. 16 - Corporate Operations Flashcards
True or false: corporations can itemize deductions or choose the standard deduction.
False–they cannot
A corporation’s ___________ determines when income and deductions are recognized
choice of accounting methods (accrual, cash, or hybrid) as well as accounting methods for individual items such as LIFO, FIFO, or depreciation.
Corporations are required in general to use the ________ method of accounting
accural
For tax purposes, corporations with annual gross revenues of less than __________ can choose to use the cash method of accounting
27M or less for the three years prior to the current tax year
Book (financial reporting) income
the income or loss corporations report on their financial statements using applicable financial accounting standards.
Book–tax difference
a difference in the amount of an income item or deduction item taken into account for book purposes compared to the amount taken into account for the same item for tax purposes.
Each box-tax difference can be classified as ________ or ________ depending on its effect on taxable income relative to book income
Favorable or unfavorable
Unfavorable book–tax difference
any book–tax difference that requires an add-back to book income in computing taxable income. This type of adjustment is unfavorable because it increases taxable income relative to book income.
Favorable book–tax difference
a book–tax difference that requires a subtraction from book income in determining taxable income.
Permanent book–tax differences
items of income or deductions for either book purposes or tax purposes during the year but not both. Permanent differences do not reverse over time, so over the long run, the total amount of income or deduction for the item is different for book and tax purposes.
Temporary book–tax differences
book–tax differences that reverse over time such that, over the long term, corporations recognize the same amount of income or deductions for the items on their financial statements as they recognize on their tax returns.
What are the key facts of computing corporate regular taxable income?
Corporations reconcile from book income to taxable income
–Favorable (unfavorable) book-tax differences decrease (increase) taxable income relative to book income
–Permanent book-tax differences arise in one year and never reverse
–Temporary book-tax differences arise in one year and reverse in subsequent years
True or false: large corporations are required to disclose their permanent and temporary book-tax differences on a schedule attached to their tax returns
True!
Exercise price
the price at which holders of stock options may purchase stock in the corporation issuing the option
Requisite service period
the period or periods during which an employee is required to provide service in exchange for an award under a share-based payment arrangement (ASC Topic 718, Glossary).
Vesting
the process of becoming legally entitled to receive a particular benefit without risk of forfeiture; gaining ownership.
Incentive stock options (ISO)
a type of stock option that allows employees to defer the bargain element for regular tax purposes until the stock acquired from option exercises is sold. The bargain element is taxed at capital gains rates provided the stock is retained long enough to satisfy certain holding period requirements. Employers cannot deduct the bargain element as compensation expense.
Nonqualified stock options (NQO)
a type of stock option requiring employees to treat the bargain element from options exercised as ordinary income in the tax year options are exercised. Correspondingly, employers may deduct the bargain element as compensation expense in the tax year options are exercised.
Bargain element (of stock options)
the difference between the fair market value of the employer’s stock and the amount employees pay to acquire the employer’s stock.
Grant date
the date on which employees receive stock options to acquire employer stock at a specified price.
Net capital loss carryback
the amount of a corporation’s net capital loss from one year that it uses to offset net capital gains in any of the three preceding tax years.
Net capital loss carryover
the amount of a corporation’s or an individual’s net capital loss from one year that it may use to offset net capital gains in future years.
Net operating loss (NOL)
the excess of allowable deductions over gross income.
Net operating loss carryover
the amount of a current-year net operating loss that is carried forward for up to 20 years to offset taxable income in those years (20 years for pre-2018 losses; unlimited for post-2017 losses).
Net operating loss carryback
the amount of a pre-2018 net operating loss that a corporation elects to carry back to the two previous years to offset taxable income in those years.
Capital gain property
any asset that would have generated a long-term capital gain if the taxpayer had sold the property for its fair market value.
Ordinary income property
property that if sold would generate income taxed at ordinary rates.
What are the key facts of charitable contributions?
Charitable contribution deductions:
-deductible when they accrue if approved by the Board of Directors and paid within 3.5 month of year end (2.5 months for corporations with a June 30 year-end)
-Deductions limited to 10% of charitable contribution deduction modified taxable income in 2022
-Contributions in excess of the charitable contribution limit are carried forward up to 5 years
Charitable contribution limit modified taxable income
taxable income for purposes of determining the 10 percent of taxable income deduction limitation for corporate charitable contributions. Computed as taxable income before deducting (1) any charitable contributions, (2) the dividends-received deduction, and (3) capital loss carrybacks.
Divends Received Deduction Key Facts
Dividends Received Key Facts:
Dividends Received Deduction Key Facts
Dividends Received Key Facts:
-Generally lesser of deduction percentage (50%, 65%, or 100%) based on ownership x DRD modified taxable income
-Limitation doesn’t apply if full DRD creates or increases a corporations NOL
-Generally favorable, permanent book-tax difference
DRD modified taxable income
taxable income for purposes of applying the taxable income limitation for the dividends-received deduction. Computed as the dividend-receiving corporation’s taxable income before deducting the dividends-received deduction, the net operating loss deduction, and capital loss carrybacks.
Schedule M adjustments
book–tax differences that corporations report on the Schedule M-1 or M-3 of Form 1120 as adjustments to book income to reconcile to taxable income.
M adjustments
book–tax differences that corporations report on the Schedule M-1 or M-3 of Form 1120 as adjustments to book income to reconcile to taxable income.
Consolidated tax return
a combined U.S. income tax return filed by an affiliated group of corporations.
Affiliated group
two or more “includible” corporations that are related through common stock ownership and eligible to file a U.S. consolidated tax return. An affiliated group consists of a parent corporation that owns directly 80 percent or more of the voting stock and value of another corporation and one or more subsidiary corporations that meet the 80 percent ownership requirement collectively. Includible corporations are taxable U.S. C corporations, excluding real estate investment trusts; regulated investment companies; and life insurance companies.
Corporations report taxable income on Form _______
Form 1120
What are the key facts on Tax Compliance?
-Corporations report taxable income on Form 1120
-Corporations with total assets of less than $10M report book-tax differences on Schedule M-1 of Form 1120. Otherwise, they are required to report book-tax differences on Schedule M-3
-The tax return due date is 3.5 moths after year-end (2.5 months for corporations with a June 30th year end)
—Extensions extend the due date for filing Form 1120 (not for paying taxes) for six additional months after year-end (seven months for corporations with a June 30th year-end)
-An affiliated group may file a consolidated tax return
-Corporations pay expected annual tax liability through estimated tax payments
–Installments due on the 4th, 6th, 9th, and 12 months of the taxable year
-Underpayment penalties apply if estimated tax payments are inadequate
The tax return due date for most C corporations (with a tax year ending other than June 30th) is _________ after the corporation’s unextended tax return due
3.5 months
Corporations with a federal tax liability of _________ or more are required to pay their tax liability for the year in quarterly estimated installments
$500
Generally, corporations are subject to underpayment penalties if they did not pay ________, _______, _________, ________ of their required annual payment within their first, second, third and fourth installment payments
25%, 50%, 75%, 100%
Annualized income method
a method for determining a corporation’s required estimated tax payments when the taxpayer earns more income later in the year than earlier in the year. Requires corporations to base their first and second required estimated tax installments on their income from the first three months of the year, their third installment based on their taxable income from the first six months of the year, and the final installment based on their taxable income from the first nine months of the year.
Corporations that have underpaid their estimated taxes for any quarter must pay an underpayment penalty calculated on Form ______
Form 2220
