Module 11 Corporate Tax Calculations

Corporate vs Individual Taxation

Key Learning Objectives

Similarity of (taxable) income Differences in income and deductions

Corporate & Individual Taxpayer Similarities

Gross income (GI)(GI) is income from whatever source derived (§61)

Income--exclusions = gross income (GI) Taxable income (TI)(TI) is gross income

minus deductions (§63) GI--allowed deductions = TI

Corporate vs Individual Taxation Differences

Corporations--no Corporations--no deductions from AGIdeductions from AGI

No “otherwise No “otherwise allowable” deductionsallowable” deductions

Corporations file Form Corporations file Form 11201120

Corporate Taxation

Key Learning Objectives

Tax rate structure Corporate tax bubble Tax liabilities Marginal (effective) tax rates Special definitions

Corporate Tax Rate Structure (without surtaxes)

15 % on TI < $50,000

25 % on TI > 50,000 but < 75,000

34 % on TI > 75,000 but < 10,000,000 35 % on TI >

10,000,000

Corporate Tax Bubbles

5% of the excess of taxable income over $100,000 Not to exceed $11,750 Not to exceed $11,750 Removes benefit of 15% and 25% ratesRemoves benefit of 15% and 25% rates

3% of the excess of taxable income over $15,000,000 Not to exceed $100,000Not to exceed $100,000 Removes the benefit of the 34% rate Removes the benefit of the 34% rate

Corporate Tax Rate Structure (with surtaxes)

15 % on TI < $50,000 25 % on TI > 50,000 but < 75,000 34 % on TI > 75,000 but < 100,000 39 % on TI > 100,000 but < 335,000 34% on TI > 335,000 but < 10,000,000 35% on TI > 10,000,000 but 15,000,000 38 % on TI > 15,000,000 but < 18,333,333 35 % on TI > 18,333,333

Compliance Query: Calculating Taxable Income (TI)

What is a corporation’s tax liability if:What is a corporation’s tax liability if: TI = $150,000TI = $150,000 TI = $65,000TI = $65,000 TI = $15,750,000TI = $15,750,000

Compliance Query: SolutionCorporate Tax Liability

TI = $65,000Tax liability is sum of:

.15 x 50,000 .15 x 50,000 7,500 7,500

.25 x 15,000 3,750

65,000 $11,250

Compliance Query: Solution Corporate Tax Liability

TI = $150,000 Tax liability is sum of:

.15 x 50,000 .15 x 50,000 7,500 7,500

.25 x 25,000 6,250

.34 x 25,000 8,500

.39 x 50,000 19,500

150,000 $41,750

Compliance Query: Solution Corporate Tax Liability

TI = $15,750,000.15 x.15 x 50,000 50,000 $ 7,500 $ 7,500

.25 x 25,000 6,250

.34 x 25,000 8,500

.39 x 235,000 91,650

.34 x 9,665,000 3,286,100

.35 x 5,000,000 1,750,000

.38 x 750,000 285,000

15,750,000 $5,435,000

Marginal & Effective Tax Rates

Marginal tax rates = tax on the next dollar of income

Effective tax rate = average tax burden across all income

Compliance Query: Calculating Tax Rates

What are the marginal and effective tax What are the marginal and effective tax rates if:rates if: TI = $65,000TI = $65,000 TI = $150,000TI = $150,000 TI = $15,750,000TI = $15,750,000

Solution--Compliance Query: Calculating Tax Rates

TI = $65,000

Marginal tax rate = 25% Effective tax rate = 17.31%

$11,250 liability

$65,000 TI

Solution--Compliance Query: Calculating Tax Rates

TI = $150,000 Marginal tax rate = 39% Effective tax rate = 27.83%

$ 41,750 liability

$150,000 TI

Solution--Compliance Query: Calculating Tax Rates

TI = $15,750,000

Marginal tax rate = 38% Effective tax rate = 34.51%

$ 5,435,000 liability

$15,750,000 TI

Special Tax Rates May Apply If

Personal service corporations Foreign corporations Controlled groups Corporations taxed under

§594 (alternative tax for mutual savings bank §594 (alternative tax for mutual savings bank conducting life insurance business).conducting life insurance business).

Subchapter L (life insurance companies).Subchapter L (life insurance companies). Subchapter M (regulated investment and real Subchapter M (regulated investment and real

estate investment trusts).estate investment trusts).

Business Tax Credits

Key Learning Objectives

Deduction vs credit General business credit (§38) Limitations on §38 credit Carryback and carryforward of credits Various business tax credits

Credit vs Exclusion vs Deduction

Tax credit--a direct reduction of liability Generally at a single tax rate Generally at a single tax rate

Exclusions--eliminate income from tax Zero marginal tax rateZero marginal tax rate

Deductions reduce the amount of income subject to tax Tax benefits depend on marginal tax Tax benefits depend on marginal tax

raterate

General Business Credit §38

11 separate credits Sum of business credit carryforwards, current

business credits, plus the business credit carrybacks

Credit allowed limited to The first $25,000 of net tax The first $25,000 of net tax

+ 75% of the net tax > $25,000+ 75% of the net tax > $25,000

Credit Carryover Use in a different tax period

Unused §38 credits earned AFTER 12-31-97 First, carried back 1 year First, carried back 1 year Then, excess carried forward 20 years Then, excess carried forward 20 years

Unused §38 credits earned BEFORE 12-31-97 First, carried back 3 years First, carried back 3 years Then, excess carried forward 15 years Then, excess carried forward 15 years

Compliance Query: General Business Credit

T Corporation’s available general business T Corporation’s available general business credit for post 1997 tax year is $60,000. credit for post 1997 tax year is $60,000.

Its net income tax liability is $55,000.Its net income tax liability is $55,000. How much of the credit can T use?How much of the credit can T use?

What can T do with any unused amount?What can T do with any unused amount?

Solution--Compliance Query: General Business Credit

Credit allowed:Credit allowed:

100% x $25,000 = $ 25,000100% x $25,000 = $ 25,000

75% x 75% x 30,00030,000 = = 22,50022,500

Total allowed Total allowed $ 47,500$ 47,500

T can carry the unused credit back one yearT can carry the unused credit back one year Any remaining amount is carried forward for 20 Any remaining amount is carried forward for 20

years. years.

Various Business Credits

Foreign Tax Credit Investment Tax Credit Rehabilitation Credit Business Energy Credit Reforestation Credit Targeted Jobs Credit Disabled Access Credit

Research Activities Credit

Incremental Research Credit

Basic Research Credit Low-Income Housing

Credit Welfare to work

Credit

Estimated Taxes

Key Learning Objectives

Estimated tax payments Why required Underpayment penalty Definition of a largelarge corporation How to calculate estimated payment

Estimated Tax Payments Pay As You Go

Four installment (each 25% of liability) if expected liability exceeds credits allowed Regular tax liabilityRegular tax liability Alternative minimum taxAlternative minimum tax Environmental taxEnvironmental tax

Estimated Tax Payments

The payments are due on the 15th day of the 4th, 6th, 9th, and 12th month

Not required if: Expected tax liability < $1000 Expected tax liability < $1000 Corporation’s first tax periodCorporation’s first tax period

Research Query: Which Estimated Taxes?

XYZ Corporation has requested but not yet XYZ Corporation has requested but not yet received a change in accounting period.received a change in accounting period.

Should XYZ make estimated payments on Should XYZ make estimated payments on the basis of its current accounting period or the basis of its current accounting period or its expected new period? its expected new period?

Solution--Research Query:Which Estimated Taxes?

A corporation that has requested but not yet A corporation that has requested but not yet received a change in accounting period received a change in accounting period must continue to make estimated payments must continue to make estimated payments on the basis of its current accounting periodon the basis of its current accounting period

Rev Rul 81-259, 1981-2 CB 247Rev Rul 81-259, 1981-2 CB 247

Estimated Tax Payments (Regular Corporation)

100% of the tax shown on the return OR 100% of the tax shown on the return for the

preceding year Second rule N/A if preceding year

Was for a period less than 12 months ORWas for a period less than 12 months OR The corporation filed no tax returnThe corporation filed no tax return

Estimated Tax Payments(Large Corporation)

Taxable income of $1,000,000 or more during the preceding three tax years

May not use preceding year rule except to estimate first quarter

Must catch up to actual by second estimate

Estimated Tax PaymentsUnderpayment Penalties

Penalty is based on the amount of underpayment AND The amount of time it was unpaid

Penalty rate is the sum of the federal short-term rate plus three percentage points

If underpaid > $100,000, the rate is the federal short-term rate plus five percent

Estimated Tax PaymentsEstimated Tax Deposits

Deposited with a federal reserve bank or an authorized commercial bank on or before the due date

Taxpayers making tax deposits on any tax in excess of $50,000 are required to make tax deposits electronically