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Chapter 11 Corporate Income Tax. Income Tax Fundamentals 2009 Gerald E. Whittenburg & Martha Altus- Buller Student’s Copy. Corporate Tax Rates. Corporate rates are progressive, from 15\% to 39\%, depending on taxable income

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chapter 11 corporate income tax

Chapter 11Corporate Income Tax

Income Tax Fundamentals 2009

Gerald E. Whittenburg &

Martha Altus-Buller

Student’s Copy

2009 Cengage Learning

corporate tax rates
Corporate Tax Rates
  • Corporate rates are progressive, from 15% to 39%, depending on taxable income
  • For corporations with large income (more than $18.33 million)
    • The rate is a flat 34%
    • Accomplished by ‘tax bubbles’
      • Occurs when tax rate schedules recaptures savings from prior brackets
  • Qualified personal service corps taxed at flat 35%
    • Architects, CPAs, consultants, etc.

2009 Cengage Learning

corporate capital gains
Corporate Capital Gains
  • A corporation can choose from two alternative tax treatments on capital gains
    • Taxed at ordinary rates


    • Elect to pay an alternative tax (35%) on net long-term capital gain [LTCG]
  • Essentially equivalent to maximum regular corporate tax [no benefit to LTCG]
    • No difference in tax on ordinary vs. capital income

2009 Cengage Learning

dividends received deduction
Dividends Received Deduction
  • Percentage ownership Dividends Rcvd Deductions %
  • < 20% 70%
  • 20% or more, less than 80% 80%
  • > 80% 100%
    • Deductions limited by % and other items
  • Corporations are allowed a deduction for a % of the dividends received from other corporations
    • Attempt to alleviate triple taxation
  • Dividends received deduction [DRD] is allowed based upon ownership

2009 Cengage Learning

amortization of organizational expenditures
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 organization expenses exceed $50,000

2009 Cengage Learning

reconciliation of tax to book income schedule m 1
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 p. 11-6 for other items

2009 Cengage Learning

s corporations
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:
    • 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 US citizens or resident aliens

2009 Cengage Learning

income reporting
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

2009 Cengage Learning

loss reporting
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 items of income/loss on a daily basis

2009 Cengage Learning

shareholder basis in stock
Shareholder Basis in Stock

A shareholder’s 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

2009 Cengage Learning