Corporate Taxation Flashcards
What is the main tax form for corporations’ tax liabilities?
Form 1120
What is the overall calculation for corporate income tax?
Income - deductions = taxable income x tax rate = tax liability - payments - credits = tax due (or overpaid)
This is the outline of Form 1120
When must a corporation file Form 1120?
By the 15th day of the third month after the corporation’s tax year – which is usually March 15
What is the purpose of Form 7004?
It extends the filing deadline for Form 1120 by six months – though it does not extend the deadline for paying taxes
What is peculiar about federal corporate income tax rates?
They do not consistently increase with income, but decrease at various points
What are the 2013 federal income tax rates for corporations?
Under $15k -- 15% $50k - $75k -- 25% $75k - $100k -- 34% $100k - $335k -- 39% $335k - $10mil -- 34% $10mil - $15mil -- 35% $15mil - $18,333,333 -- 38% Over $18,333,333 -- 35%
Why do corporate income tax rates increase and then decrease?
Various brackets have a higher % in order to phase out the benefits from the lower bracket, making it as if the entire income up to that point were at a fixed rate
E.g. for 2013, after a corporation pays 39% tax on up to $335k in income, it will have an effective tax rate through that $335k of 34% – the total taxes divided by the income will be 34%
Do any corporations pay different income tax rates?
Yes, some personal service organizations are required to pay a flat 35% tax rate
Which concepts of individual income taxation do not apply to corporate taxation?
AGI, standard or itemized deductions, and personal exemptions
What is a dilemma provided by organizational and startup costs for a corporation?
Business expenses can normally be deducted, but those only apply to expenses for an already-running business, whereas startup expenses by definition do not apply to that
How can organizational and startup costs be deducted?
As of 2013, the total amount is capitalized and can be deducted as it is amortized over 180 months, but $5,000 can be deducted in the first year
This $5,000 is phased out as the startup costs range from $50,000 to $55,000, however
-see if this is correct for 2013 still
Which costs are included in and excluded from organizational costs?
Costs for (1) organizational meetings, (2) incorporation fees, (3) temporary directors, and (4) accounting or legal expenses related to organization are included
Costs for issuing stock are not
What are startup costs?
Any costs for creating an active trade or business, incurred before the actual business begins
Examples:
(1) market or product analysis costs (though not research or experimental costs)
(2) ads for executives or other positions
(3) pay for employees in training
(4) costs to attain prospective distributors, suppliers, or customers
What is the dividends received deduction (DRD)?
If a corporation is a shareholder in another corporation, the ordinary double taxation of corporate income paid out to shareholders can become triple (or quadruple, etc.) taxation
To reduce this, there is a deduction available for corporations who own stock in another corporation
How much of a deduction does the dividends received deduction (DRD) provide?
Depends on the corporate stockholder’s percentage of ownership
80% ownership: 100% deduction
20-80% ownership: 80% deduction
<20% ownership: 70% deduction
What is the taxable income limitation on the dividends received deduction (DRD)?
If the full DRD does not cause or further a net operating loss, then the DRD cannot be greater than the same % of taxable income
This can occur if the DRD is 70% or 80%, but not if it is 100%
What is an example of a taxable income limitation on the DRD?
A corporation has $100k of dividend income from a 50%-controlled corporation but a final taxable income of only $85k. The full DRD would be 80% of $100k ($80k), but the DRD is in this case restricted to 80% of taxable income = $85k x 80% = $68k
Other than when the DRD is 100%, when does the taxable income limitation not apply?
If the full DRD, when subtracted from taxable income would cause a NOL (or further extend one)
What is an example where the taxable income limitation on the DRD does not apply?
A corporation has $100k of dividend income from a 50%-controlled corporation but a final taxable income of only $70k. If the full DRD ($80k) is deducted from taxable income, the result would be a NOL of -$10k. In this case, the corporation need not limit the deduction to 80% of taxable income, but can deduct the full $80k.
How is a DRD deduction calculated if a corporation has both 70%-deductible dividends and 80%-deductible dividends?
The same general rules apply regarding the taxable income limitation and NOLs, but the relevant numbers are calculated by first deducting the 80% deduction and then the 70% deduction
Under what circumstances does the dividends received deduction not apply?
If the stock is held for a short period of time
For most stock, it must be held for 45 days within a 90-day period that starts 45 days before the dividend date
For preferred stock, it must be held for 90 days within a 180-day period that starts 90 days before the dividend date
Can a corporation deduct life insurance premiums for officers?
No, no such premiums for any important people in the corporation are deductible – and neither are proceeds from such policies taxable as income
Can a corporation deduct charitable contributions?
Yes, but only to 10% of its taxable income
This taxable income is calculated without already incorporating (1) the DRD, (2) any NOL carrryback, (3) any capital loss carryback, or (4) the charitable contribution deduction itself
What happens to charitable contributions in excess of 10% of taxable income?
They can still be deducted, as they can be carried forward for five years
How do individual and corporate taxation differ regarding capital gains and losses?
Individual taxpayers can have a net capital loss, but corporate taxpayers can, at best, apply capital losses against capital gains to reduce such gains to zero
If a corporation has an excess capital loss, how can it still deduct it?
Such net losses can be carried back three years or carried forward five years
However, these carrybacks and carryforwards are always treated as short-term losses, not long-term
How may a corporation apply a net operating loss (NOL)?
Can be carried back 2 years or carried forward 20
How does the Worker, Homeownership, & Business Act of 2009 (WHBA) relate to NOLs?
It extended the carryback period of NOLs from 2 years to 5 years for many taxpayers in 2008 and 2009
This NOL can generally be applied only to one of those extra years, but eligible small businesses can apply it to two
How does the WHBA limit the carryback of a NOL to five years in the past?
If the NOL is applied to the furthest year back (5 years back), then the NOL applied to that year cannot be >50% of that year’s taxable income
What is the alternative minimum tax (AMT) for corporations?
Functions similarly to the AMT for individuals – the alternative minimum taxable income (AMTI) must be calculated and compared to regular taxable income, and the greater of the two is taxed
Both include adjustments, preferences, and exemptions
Which corporations are exempt from paying an AMT?
Only those who qualify as small corporations – must have had a gross income <$7.5 mil for the past three years
Once a status as a small corporation is lost, it cannot be regained
In calculating corporate AMT, what are some examples of adjustments?
Adjustments regarding:
(1) passive activities
(2) excess depreciation
(3) long-term contracts employing the percentage-of-completion method
(4) adjustments to a property’s basis
(5) installment sales
These can be added or subtracted when calculating AMT
In calculating corporate AMT, what are some examples of preferences?
Preferences regarding:
(1) appreciated property donated to a charity
(2) tax-exempt interest on private activity bonds
(3) accelerated depreciation
(4) intangible drilling costs
(5) % depletion over a property’s adjusted basis
These are always added when calculating AMT
What are adjusted current earnings (ACE)?
A further calculation of income taken by making adjustments to AMTI
If ACE > AMTI, then 75% of the difference is a positive adjustment to AMTI
What are some examples of ACE adjustments?
The 70% dividends received deduction and interest income from municipal securities
What kind of exemption can corporations claim when calculating AMT?
As of 2013, all are allowed a $40,000 exemption
This phases out by 25% as the AMTI ranges from $150k to $310k
How do credits affect the calculation of AMT?
Just as with individual taxation, various credits can reduce the AMT after it is calculated
Example: foreign tax credit
What is the AMT credit?
If a corporation’s AMT is higher than its ordinary tax debt, then it receives a credit for the difference
This credit can be carried forward indefinitely to apply to ordinary tax debts (but not future AMTs)
Which part of Form 1120 is for reconciling book income and taxable income?
Schedule M-1 – modifies book income to arrive at taxable income
What does Schedule M-1 not require when reconciling book income to taxable income?
Any distinction between temporary and permanent differences
This has to be recognized when the reconciliation occurs in financial accounting
In Schedule M-1, what is added to book income?
(1) federal income tax expense
(2) net capital loss
(3) income items which are taxable though excluded from book income
(4) expense items which are deductible from book income but not from taxable income
In Schedule M-1, what are some income items that are taxable though excluded from book income?
(a) royalties
(b) prepaid rent
(c) service fees
(d) interest income
In Schedule M-1, what are some expense items that are deductible from book income but not from taxable income?
(a) premiums for key-person life insurance
(b) accrued contingencies
(c) charitable contributions >10% of taxable income
(d) depreciation expense from using a different method
In Schedule M-1, what is subtracted from book income?
(1) income items which are not taxable though included in book income
(2) expense items which are deductible from taxable income but not from book income
In Schedule M-1, what are some income items that are not taxable though included in book income?
(a) proceeds from key-person life insurance
(b) interest from tax-exempt bonds
