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