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Chapter 11 Corporate Income Tax. Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus- Buller Steven Gill. Corporate Tax Rates. Corporate rates are progressive Marginal rates are from 15% to 39%, depending on taxable income There are eight brackets

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chapter 11 corporate income tax

Chapter 11Corporate Income Tax

Income Tax Fundamentals 2013

Student Slides

Gerald E. Whittenburg

Martha Altus-Buller

Steven Gill

2013 Cengage Learning

corporate tax rates
Corporate Tax Rates
  • Corporate rates are progressive
    • Marginal rates are from 15% to 39%, depending on taxable income
    • There are eight brackets
    • There are a number of ‘tax bubbles’ – these occur when tax rate schedules recapture savings from prior brackets
  • For corporations with large income (more than $18.33 million) the rate is a flat 35%
  • Qualified personal service corps taxed at flat 35%
    • Architects, CPAs, consultants, etc.

2013 Cengage Learning

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

or

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

2013 Cengage Learning

dividends received deduction
Dividends Received Deduction
  • Corporations are allowed a deduction for a percentage of the dividends received from other corporations
    • Attempt to alleviate triple taxation
  • Dividends received deduction is allowed based upon ownership
  • Percentage Ownership Dividends Received % Deduction < 20% 70%
  • 20% or more, less than 80% 80%
  • > 80% 100%
    • Dividends received deduction is limited by %
    • of corporate taxable income shown above
    • (calculated before certain deductions)

2013 Cengage Learning

charitable contributions
Charitable Contributions
  • Corporations are allowed a deduction for charitable contributions
    • Cash basis taxpayers can deduct when paid
    • Accrual basis taxpayers have until the 15th day of the third month following year-end to contribute, as long as pledge is made by year-end
  • Charitable contributions limited to 10% of taxable income*
    • Carry forward unused deduction for five years

*Calculated before any loss carry backs, net operating

losses (NOLs) or the dividend received deduction

2013 Cengage Learning

reconciliation of income loss per books with income per return
Reconciliation of Income (Loss) per Books with Income Per Return
  • Schedule M-1 of Form 1120 reconciles accounting (book) income to taxable income
  • Amounts added to book income (left column)
    • 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 (right column)
    • Income recorded on books but not on tax return
    • Expenses recorded on tax return but not on books

See Schedule M-1 on page 11-7

2013 Cengage Learning

s corporations
S Corporations
  • Certain qualified small business corporations may elect to be taxed in a manner similar to partnerships
  • Qualified small business corporation may elect S Corporation status if several criteria apply
    • 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 U.S. citizens or resident aliens

2013 Cengage Learning

s corporation pass through items
S Corporation Pass Through Items
  • Many items retain tax character when passing through to the S Corporation’s shareholders on individual K-1
  • Examples of such items include
    • Capital gains/losses
    • §1231 gains/losses
    • Dividend Income
    • Charitable contributions
    • Tax-exempt interest
    • Most credits

2013 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

Equals 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

*Boot is any property other than stock

Note: generally, corporate assumption of shareholder liabilities that are attached to property are not considered boot received

2013 Cengage Learning

accumulated earnings tax aet
Accumulated Earnings Tax (AET)
  • Penalty tax designed to prevent a corporation from avoiding tax by retaining earnings
  • 15% AET imposed on “unreasonable” accumulation of earnings; this is in addition to corporate income tax
    • Corporation may accumulate up to $250,000 a year that is exempt from AET tax or $150,000 for a service corporation
    • May accumulate more if can prove a valid business purpose

2013 Cengage Learning