Select tax years and accounting methods for C corporations: Corporate tax year
Corporate Tax Year
- Can use calendar year or fiscal year.
- Tax year must = financial accounting year.
- Tax year must always end on the last day of a month.
- Short tax year - corporation begins or ends business in the middle of the year.
- Must request
Select tax years and accounting methods for C corporations: Accounting methods
- Same methods must be used to compute financial accounting income and taxable income.
- Generally, accrual method must be used.
-- Special $5 million rule.
- Cash method may not be used if inventories are a material income-producing factor in the busines
Calculate deductions particular to corporations and arrive at corporate taxable income: General rules for determining corporate tax liability (Income Tax)
Gross Income
Less: deductions and losses
Taxable income before special deductions
Less: special deductions (e.g. DPAD, DRD)
Taxable Income
Times: corporate tax rates
Regular tax before credits and other taxes
Less: foreign tax credit and possessions tax c
Calculate deductions particular to corporations and arrive at corporate taxable income: General rules for determining corporate tax liability (Alternative Minimum Tax)
Taxable Income before NOL Deduction
Plus or Less: Adjustments to taxable income
Plus: Tax preference items
Less: Alternative tax NOL deduction
Alternative minimum taxable income
Less: Statutory exemptions
Tax base
Times: 20% tax rate and other taxes
Tenta
Calculate deductions particular to corporations and arrive at corporate taxable income: General rules for determining corporate tax liability (calculating tax)
Income (regular) Tax Liability
Plus: Alternative minimum tax
Plus: Special taxes (if applicable)
Plus: Accumulated earnings tax
Plus: Personal holding company tax
Total tax liability
Less: Estimated tax payments
Net tax due (or refund)
Calculating corporate tax liability:
Regular Tax
+ AMT
+ ACE or PHC
= Total Tax Liability
Accounting for sale or exchanges of property:
Capital Gains:
- Must net all capital gains with all capital losses for the tax year.
- No capital gain rate differential for corporations as there is for individuals.
Capital Losses
- If there is a net C/L, then cannot deduct currently; only used to offs
Accounting for business expenses:
- Section 162 - tax deduction allowed for ordinary and necessary expenses.
- No deduction allowed for bribes, kickback fines, penalties, certain "key man" insurance premiums, or debt to purchase of tax-exempt securities.
Accounting for organizational expenses:
Organizational expenditures - generally must be capitalized and amortized.
- Section 248 - may deduct the first $5,000 if total org. exp. < $50,000
- Includes legal and accounting fees, fees paid to the state of incorporation, and expenses of temporary di
Accounting for start-up expenses:
Start-up expenses - ordinary and necessary business expenses to:
- investigate the creation/acquisition of a business
- create a new business
- engage in for-profit activities
Examples include advertising, training, etc.
Section 195 - deduct first $5,000,
Accrued Compensation - 2 1/2 Month Rule
- Accrued compensation must be paid within 2 1/2 months of the end of the year, or the corporation cannot deduct until the year the amount is actually paid.
Accounting for charitable contributions (generally)
- Section 170 - a deduction is permitted for a contribution made to a bona fide charity of a state or local government or political subdivision thereof (e.g., public schools)
- A bona fide charity usually means a charitable organization as defined by Sect
Charitable Contributions (timing)
Generally, a charitable contribution can only be deducted when paid, not when pledged.
Exception: Can deduct the year when accrued if:
- Board of Directors authorizes the contribution; and
- Corporation pays within 3 1/2 months of the EOY.
Example - Motive
ABC corporation, as part of a marketing campaign, promises to contribute $1 for every unit sold to a local charity. They cannot deduct the contribution under Section 170 since their motive for making the donation is to promote a product rather than disint
Accounting for contributions of property:
General rule: Amount of deduction = FMV
- Includes most capital gain property (e.g. artwork)
Exceptions:
- Ordinary income property (e.g. inventory)
- Special other scenarios that are narrow and specific (just know they exist)
Accounting for contributions of ordinary income (OI) property:
OI Property = inventory, investment property held < 1 year, and property with depreciation recapture
Deduction = FMV less short-term capital gain or OI amount
- Deduction = cost or adjusted basis
Example - Donation of Inventory
TP is a retailer and donates 1,000 blankets to the Red Cross for use in a disaster relief area. The blankets retail for $20 each but have a cost of $5 each. What is the amount of the charitable deduction?
Substantiating charitable deductions
- Contributions > $500 - must attach description of the property to the tax return
- Contributions > $5,000 - must obtain a qualified appraisal and attach description and an appraisal summary to tax return
- Contributions > $500,000 - must attach qualifie
Limitations on deductions
- Maximum total deduction permitted in any given year is 10% of adjusted taxable income ("ATI")
- ATI = taxable income without the effects of:
1. Charitable contribution deduction
2. NOL carryback
3. Capital loss carryback
4. Dividends Received Deduction
Special Deductions
- Domestic Production Activities Deduction (DPAD)
- Dividends-Received Deduction (DRD)
- Net Operating Losses (NOLs)
- Sequencing of Deductions
Domestic Production Activities Deduction (DPAD) - Section 199
Calculation: 9% times lessor of:
- Qualified Production Activities Income (QPAI) or
- Taxable income before DPAD
Limitation: DPAD can't exceed 50% of W-2 wages allocable to qualifying domestic production activities.
Domestic Production Activities Deduction (DPAD) - Section 199
Calculation: 9% times lessor of:
- Qualified Production Activities Income (QPAI) or
- Taxable income before DPAD
Limitation: DPAD can't exceed 50% of W-2 wages allocable to qualifying domestic production activities
Qualified Production Activities Income (QPAI)
Domestic Production Gross Receipts (DPGR)
Less: COGS allocable to DPGR
Less: Direct deductions, expenses, and losses allocable to DPGR
Less: Indirect deductions, expenses, and losses ratably allocated to DPGR
= QPAI
Domestic Production Gross Receipts (DPGR)
Consists of the following:
1. Lease, rental, sale of a) qualified production property mfg in the US; b) qualified film production; c) electricity, natural gas, or water produced in the US
2. Construction in the US
3. Engineering/architectural services per
Dividends Received Deduction (DRD)
- DRD permits a corporation to exclude some or all of dividends received on stock it owns in another company.
- Without DRD, there could be up to three layers of tax on the same dollar of dividends (investment company, taxpayer corporation, and then corpo
Accounting for DRD (generally)
Corporation may deduct dividends received from stock it owns in another company as follows:
Ownership < 20% = 70% DRD
Ownership 20-80% = 80% DRD
Ownership > 80% (affiliated group) = 100% DRD
Limitations on the DRD (<20%)
If <20% owned (first tier), then DRD is limited to lessor of:
- 70% of dividends received; or
- 70% of taxable income excluding:
-- NOLs
-- Capital loss carrybacks
-- DRD
-- DPAD
Limitations on the DRD (>20%)
If >20% owned (second tier), then DRD is limited to lessor of:
- 80% of dividends received; or
- 80% of taxable income excluding:
-- NOLs
-- Capital loss carrybacks
-- DRD
-- DPAD
Exception to DRD limitation
- No taxable income limitation on the DRD if the DRD creates or increases an NOL for the year.
- Note that low taxable could cause the corporation to permanently lose DRD deductions
-- Corporation may be better off finding a way of pushing itself into an
Affiliated Groups
- A group of corporations are affiliated if a parent company owns at least 80% stock (voting and value) of one or more subsidiaries
- The DRD = 100% and is not subject to a taxable income limitation
- The 100% DRD is taken before the 80%/70% DRD
Other DRD Issues
- No DRD for dividends received from foreign corporations since it is not taxable by the US to begin with.
- No DRD for stock held 46 days or less during defined 90 day period.
- No DRD for debt-financed stock.
Net Operating Losses (NOL)
- Deductions > Income = NOL
- Do not include any NOL carryforward or carrybacks in calculating CY NOL.
- No DPAD if there is a CY NOL because no taxable income.
Carrybacks and Carryforwards
- NOL carries back 2 years and carried forward 20 years.
- Any unused NOLs expire after 20 years and expired amounts become permanently nondeductible.
- TP can elect to forgo carryback and just carryforward.
Sequencing deduction calculations
Specific order by which the corporation takes categories of deductions:
- All deductions other than charitable, DRD, NOL, and DPAD.
- Charitable contributions (after NOL CF)
- DRD
- NOL
- USPAD (DPAD)
Exceptions for closely held corporations
- Congress has placed limits on certain transactions to prevent abuse in situations where a corporation is closely held.
- Controlling shareholder owns >50% of controlled corporation's stock.
- For instance, different accounting methods used (see Example
Compute a corporation's regular income tax liability
- Once taxable income is determined, now calculate tax liability.
- Rate schedule shown on page 3-23
- Planning opportunities may result.
Recognize what a controlled group is and determine the tax consequences of being a controlled group: Consolidated groups (generally)
Generally, there are rules to prevent controlled groups from artificially allocating revenue and expenses among group members in order to minimize regular taxes and maximize credits.
Recognize what a controlled group is and determine the tax consequences of being a controlled group: Consolidated returns
Affiliated groups can generally file a (combined) consolidated return.
Criteria:
- Common parent must own 80% stock (voting and value) of at least one other corporation.
- The group must own 80% stock (voting and value) oof any of the other affiliated cor
Advantages to filing a consolidated return
- Losses of one member can offset profits of another (subject to certain Section 382 limits).
- Capital gains and losses can be combined across the group.
- Intercompany profits and gains can be deferred until triggered.
Limitations on utilizing NOLs - Section 382
One corporation cannot acquire another corporation and utilize the acquiree's outstanding NOLs to offset the purchaser's income.
Chapters 7 and 8 have a more in-depth discussion of Section 382.
Disadvantages of Filing a Consolidated Return
- Election to file a consolidated return is binding upon subsequent years unless grated permission to discontinue by IRS.
- Intercompany losses are deferred until triggered.
- Losses from one member may affect the deductions and credits of another member.
Book-tax differences
Schedule L: balance sheet per books
Schedule M-1: reconciliation of book income to taxable income
Schedule M-3 for large corporations with total assets > $10m
- Shows permanent and temporary differences
Schedule M-2: analysis of unappropriated RE (like a
Book-tax differences (permanent)
- Differences arise when financial accounting treats a transaction differently than how it is treated for tax purposes
- Permanent differences - income never recognized or deductions never taken
-- Meals and entertainment
-- Tax-exempt interest
Book-tax differences (temporary)
- Income will eventually be recognized (or deductions taken), but at a different time than the other system (ex. tax depreciation that is accelerated)
Determine the financial statement implications of corporate federal income taxes: tax provision
- Also known as federal income tax expense (or "tax provision") on the financial statements.
- Rules of the provision presentation are dictated by ASC 740 (issued by FASB)
- Income tax expense (or provision) is broken down into current and deferred compon
Determine the financial statement implications of corporate federal income taxes: Deferred Tax Assets (DTAs)
- Taxpayer will realize the tax benefit of an event some time in the future.
- If there is a possibility that the taxpayer won't get the full benefit, the DTA must be reduced by a valuation allowance.
- This reduction is only required if there is not a gr
Determine the financial statement implications of corporate federal income taxes: Uncertain Tax Positions (UTP)
- The taxpayer may take certain positions in its tax return which may or may not pass IRS scrutiny.
- FASB may require the taxpayer to reduce or eliminate the tax benefit.
- The taxpayer cannot recognize the tax benefit for financial accounting purposes u
Determine the financial statement implications of corporate federal income taxes: Balance sheet classifications
- DTAs and DTLs must be classified as current or noncurrent.
- Classification depends on underlying asset, then expected reversal date.
- Current assets and liabilities are netted to one amount.
- Non-current assets and liabilities are netted to another a