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Chapter 11. Corporate Income Tax Income Tax Fundamentals 2007 Gerald E. Whittenburg & Martha Altus-Buller. 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)

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Chapter 11

Chapter 11

Corporate Income Tax

Income Tax Fundamentals 2007

Gerald E. Whittenburg & Martha Altus-Buller

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.

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 benefit to LTCG]

    • No difference in tax on ordinary vs. capital income

Dividends received deduction
Dividends Received Deduction

  • 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

  • Percentage ownership

  • in corporation paying dividends DRD %

  • < 20% 70%

  • 20% or more, less than 80% 80%

  • > 80% 100%

    • Deductions limited by % and other items

Amortization of organizational expenditures
Amortization of Organizational Expenditures

  • Examples of organizational expenditures

    • Legal/accounting services incident to organization

    • Incorporation fees

      • Expenses involved in transferring assets to the corporation are not considered organizational expenses

  • These fees are capitalized and then amortized over 180 months, also

  • 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

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

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

  • Corporation must make election of S status in a prior year

    • Or within 2-1/2 months of the current tax year

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

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

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