Ch 3: Corporations and operating Rules

What is the corporate taxable income calculation?

Income
(Exclusions)
= GI
(Deductions except NOL and DRD)
= TI before NOL and DRD
(NOL deduction)
(DRD)
= TI
Tax on Taxable Income
Corporate Alternative Minimum Tax
(Tax Credits)
= Tax Due (Refund)

Most C corporations use a calander year or fiscal year ending on:

the last day of a calendar month (or 52-53 week year)

S corporations and Personal Service Corps (PSCs) are restricted in the use of the:

financial year

Most corps must use the ___method of accounting

accrual

The following institutions can use the cash method: (4)

S Corps
Corps engaged in the trade or business of farming or timber
Qualified PSCs
Corps with average annual Gross Receipts of $31 million or less for the most recent 3 year period

Under the ___ method of accounting, they generally must recognize gross income no later than the tax year in which such income is included in income for financial statement purposes

accrual

If an accrual basis corporation has an accrual outstanding at the end of any taxable year with a related party; it cannot claim a deduction until:

the related party reports the amount as income

How are net capital gains treated for corporations?

no preferential treatments - regular corporate tax rate

How are net capital losses treated for corporations

Only offset against capital gains (back 3 or forward 5 years)
All carrybacks or overs are treated as short term

What Section talks about business interest expense limitation

163(j)

The Business Interest Expense Limitation limits the deduction for business interest expense to the sum of:

Taxpayers Business Interest Income for the year and
30% of the taxpayers Adj TI for the year

The Business interest expense limitation does not apply to taxpayers with

less than $29 million or less in average gross receipts or profits for the 3 prior year period

Interest expense deductions are limited for several reasons including:

Reduce tax avoidance through shifting of debt across borders from low tax subsidiaries to related firms in high tax jurisdictions
Equalize the tax treatment of debt financed investment compared to equity financing (the expense of equity finance is generally non deductible)

The amount of interest income includable in gross income for the year which is related to a trade or business

Business Interest Income

All interest Income and interest expense of a corporation is assumed to be part of the ___ for the business interest income

corps trade or business

The Adjusted Taxable income (for BII)= taxable income without regard to any:

Nonbusn income, gain, deduction, loss
Business interest or business interest income
NOL deduction
Deduction for qualified business income (199A)
Deduction allowable for depreciation, amortization, or depletion (tax yrs after 12/31/24)

Corp taxpayers may deduct charitable contributions in the year paid, except for accrual basis corps. They allow deduction in year preceding payment if:

Authorized by the board of directors by the end of that year, and
Paid on or before the due date of the corps tax return (April 15 following the close of its taxable year)

Amount deductible for charitable contributions of property depends on the:

property contributed

LTCG property charitable deduction is equal to the

FMV of the property

What is the exception to the LTCG = FMV of the property

Corporation may only deduct basis if tangible personal property is contributed and not used by charity in its exempt function

Ordinary income property charitable contribution deduction is equal

basis in property

The ordinary income property of charitable contributions exception creates a basis of

basis +50% of appreciation can be deducted for corporate contributions of inventory OR twice the properties basis (Lessor of the two)

Corporate charitable contribution deduction is limited to:

10% of taxable income before:
Charitable contribution deduction
NOL or capital Loss carryback
DRD

What is the carryforward limitation for charitable contributions?

up to 5 years but in carryforward year, CY contributions are always used first

For tax years after 12/31/25, the charitable contribution is subject to

1% TI floor
no carryforward

Section ___ limits the deductible amount of a publically held corporations compensation to an covered employee to $1 million annually

162(m)

What is the excessive exclusive compensation =

$1 million annually

Covered employees include:

Principal executive officer
Principal financial officer
Employees whose compensation must be reported to shareholders as the top 3 paid executives other than the CFO or CEO
The 5 other most highly paid compensated officers
Any employee who was a covered employee in the prior year

Tax years beginning after 12/31/25 the excessive executive compensation includes

aggregation of compensation paid by all members of a controlled group

In general, the $1 million Excessive Executive Compensation applies to:

Compensation
Commissions based on individual performance
Performance based compensation tied to overall company performance

Before 2018, the $1 million Excessive Excutive Compensation limit EXCLUDED

Commissions and performance based compensation

Contracts relating to Excessive Executive Compensation Limit, that are placed on Nov 2, 2017 are:

grandfathered in as long as there are no material changes to the contract

T/F: A corporation is allowed a deduction for NOL.

T

T/F: Does not adjust its tax loss for CL, since a corp cannot deduct net capital losses

T

T/F: A corporation is not allowed to include the DRD in computing its NOL

F

Occurs when business deductions exceed gross income. Can be carried forward indefinitely (limited to 80% of TI)

Net Operating Loss (NOL)

If a corporation owns stock in another corporation and receives dividends, a portion of the dividends may be deducted from income (DRD). If it is less than 20% ownership, the deduction percentage is:

50%

If a corporation owns stock in another corporation and receives dividends, a portion of the dividends may be deducted from income (DRD). If it is more than 20% or more (but less than 80%) ownership, the deduction percentage is:

65%

If a corporation owns stock in another corporation and receives dividends, a portion of the dividends may be deducted from income (DRD). If it is more than 80% ownership, the deduction percentage is:

100%

The Dividends Received Deduction is limited to a percentage of the taxable income of a corporation

Taxable income is computed without regard to:

NOL Deduction
DRD
Any Capital Loss Carryback to the current tax year

The percentage of taxable income limitation corresponds to the deduction percentage

However, the taxable income limitation does not apply if the corporation has an ___ for the current taxable year

NOL

What are the steps to calculate the DRD

Multiply dividends received by deduction percentage
Multiply taxable income by deduction percentage
Subtract Step 1 from taxable income.
If an entity has income before DRD, but DRD creates (or increases) NOL, amount in Step 1 is DRD (the NOL rule)
If DRD does not create (or increase) NOL, deduction is limited to the lesser of Step 1 or 2

Under section ___, a corporation may elect to amortize organizational expenses over a 180-month in which the corp begins business. (organizational expenditures)

248

Under section 248, organizational expenses may be amortized, but a special exception allows the corporation to:

immediately expense the first $5000 of these cost (phased out after 50,000)

Organizational expenditures include the following:

Legal services incident to organization
Necessary accounting services
Expenses of temporary directors and of organizational meetings of directors and shareholders
Fees paid to the state of incorporation

Expenditures connected with issuing or selling shares of stock or other securities or with the transfer of assets to a corporation do not qualify as ___. These reduce the amount of capital raised and are not deductible at all

organizational expenditures

Start-up expenditures include:

Various investigation expenses involved in entering a new business (ex: travel, market surveys, financial audits, legal fees)
Also includes operating expenses, such as rent and payroll, that are incurred by a corporation before it actually begins to produce any gross income

At the election of the taxpayer, such expenditures can be treated in the same manner as organizational expenditures, Start up Expenditures

Up to $5,000 can be immediately expensed (subject to the dollar cap and excess-of-$50,000 phaseout)
Any remaining amounts are amortized over a period of 180 months

T/F: Start up expenditures are available to noncorporate taxpayers

T

Corporate TI EXPANDED:

Gross income

Less: Deductions (except charitable, DRD,

STCL carryback, domestic production activities)

Taxable income for charitable limitation

Less: Charitable contributions (limited to 10% of above)

Taxable income for dividends received deduction

Less: Dividends received deduction

Taxable income before carryback

Less: STCL carryback

TAXABLE INCOME before NOL

NOL (80% limitation)

Taxable income

Prior to 2018, corporations were subject to an alternative minimum tax (AMT) that was similar to the individual AMT
However, the corporate AMT was repealed for:

tax years beginning after 2017

New ___ was enacted as part of the Inflation Reduction Act of 2022

corporate alternative minimum tax (CAMT)

The corporate AMT applies to any corporation with more than $1 billion in average annual adjusted financial statement income (AFSI) for the three-year period ending with the current tax year
A corporation has an AMT liability only if its:

tentative minimum tax exceeds of 15 percent of the AFSI for the year, less any AMT foreign tax credit for year

designed to mitigate double taxation on income earned in foreign countries by U.S. taxpayers subject to an annual limitation

Foreign Tax Credit (FTC)

Unused FTCs are:

carried back one year and then forward 10 years

Almost all credits available to corporations are

nonrefundable credits

A ___ is available to a taxpayer even if it exceeds a taxpayer’s tax liability, while a nonrefundable credit cannot exceed a taxpayer’s tax liability

refundable credit

The main tax credits claimed are

the foreign tax credit
the general business credit

The general business credit equals the sum of many different credits
The annual limitation is equal to:

the corporation’s net income tax (regular income tax plus the AMT minus the FTC) reduced by 25 percent of the net regular tax liability (regular income tax minus the FTC) that exceeds $25,000.

Unused general business credits are

carried back one year, with any remaining credits carried forward 20 years

T/F: Corporation must file a Federal income tax return whether or not it has taxable income

T

Must make estimated tax payments equal to the lesser of:

100% of the corporation’s tax for the current year
100% of the tax for the preceding year

No estimated tax payments are required if the tax liability is expected to be:

less than $500

What are the due dates for the current tax year estimates?

4th month
6th month
9th month
12th month

Corporations must reconcile financial accounting income with taxable income on

Schedule M–1

Corporations must reconcile retained earnings at beginning of year with retained earnings at end of year using

Schedule M-2

Schedule L (balance sheet), Schedules M−1 and M−2 of Form 1120 are not required for corporations with:

less than $250,000 of gross receipts and less than $250,000 in assets

Corporate taxpayers with total assets of $10 million or more are required to report much greater detail regarding differences in financial accounting income (loss) and taxable income (loss)

Schedule M-3

Schedule M−3 should:

Create greater transparency between corporate financial statements and tax returns
Help the IRS identify corporations that engage in aggressive tax practices