1. ©2010 Pearson Education, Inc. Publishing as Prentice Hall

2. THE CORPORATE INCOME TAX (1 of 2)
Corporate elections
Computing corporation’s taxable income
Computing a corporation’s income tax liability
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3. THE CORPORATE INCOME TAX (2 of 2)
Controlled groups of corporations
Tax planning considerations
Compliance and procedural considerations
Financial statement implications
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4. Corporate Elections Tax Year (1 of 2)
New corp elects tax year by filing return
First return may be for short-period
Some corporations restricted
S-corporation uses calendar year
Affiliated group member must be same as parent
PSCs usually calendar year
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5. Corporate Elections Tax Year (2 of 2)
Changing the tax year
Usually requires IRS approval
Automatic approval if
Annualizes short-period income
Keeps books based on new year
Short period does not have a NOL
No change in accounting period for 48 mo
No interest in flow-through entities
Not a specialized corporation
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6. Corporate Elections Accounting Methods
Accrual
GAAP: generally required for C corps
Cash
Qualified PSC, or C corp w/ gross receipts < $5M
Inventories cannot be significant
If inventories significant, must use accrual method for sales, COGS, inventories, accts. rec., & accts. pay. (the hybrid method)
Family farm w/ gross receipts < $25M
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7. Computing a Corporation’s Taxable Income
Sales and exchanges of property
Business expenses
Special deductions
Exceptions for closely held corporations
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8. Sales and Exchanges of Property Capital Gains and Losses
Net capital gain taxed at ordinary income rates
Net capital losses cannot offset ordinary income
Net capital losses
Carryback 3 years and forward 5 years
Carryovers classified as short-term
Expired losses are lost forever
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9. Sales and Exchanges of Property §291 Tax Benefit Recapture Rule
§1250 property sold at a gain
Amount of depreciation in excess of straight line is characterized as ordinary income plus
An additional 20% of all depreciation characterized as ordinary income under §291
No §1250 recapture under MACRS
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10. ©2010 Pearson Education, Inc. Publishing as Prentice Hall
Business Expenses
General rule
Organizational expenditures
Start-up expenditures
Limitations on deductions for accrued compensation
Charitable contributions
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11. ©2010 Pearson Education, Inc. Publishing as Prentice Hall
General Rule
All ordinary and necessary expenses reasonable in amount
No deductions for
Interest on loans to buy tax exempts
Illegal bribes or kickbacks
Fines or penalties
Insurance premiums if corp is beneficiary
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12. Organizational Expenditures (1 of 2)
Expenses incident to creating corp
E.g., legal, accounting, temporary director fees, state incorporation fees
§248 election deemed to be made
No need to filed election w/ 1st return
May expense first $5K of org costs
$5K reduced $ for $ when org costs > $50K
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13. Organizational Expenditures (2 of 2)
Amortize remainder over 180 months
Expenditures must be incurred before end of first year of business
May elect to capitalize and not w/o amortization
Election irrevocable
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14. Start-up Expenditures (1 of 3)
Non-organizational
Ordinary and necessary expenses
Paid or incurred BEFORE the actual start of business operations
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15. Start-up Expenditures (2 of 3)
Examples of include expenses to:
Investigate creation or acquisition of an active trade or business
Create an active trade or business
Conduct an activity engaged in for profit or production of income before business operations begin
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16. Start-up Expenditures (3 of 3)
Election to expense first $5K of org costs
$5K reduced $ for $ when org costs > $50K
Remainder amortized over 180 months Election must be made by due date for filing tax return for first year of operation or ownership
Election deemed to be made w/ 1st return
May elect to capitalize with no amortization
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17. Limitation on Deductions for Accrued Compensation
Accrued bonuses/compensation must be paid within 2-1/2 months after close of tax year
If paid after 2-1/2 months, payment deemed deferred compensation and is deductible in year paid
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18. Charitable Contributions (1 of 4)
Timing of deduction
Deducted in the year paid
Accrual basis corps may elect to include payment made w/in 2-1/2 months following the end of tax year
Board of directors must have authorized contribution during year it was accrued
Must meet substantiation requirements to deduct contribution
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19. Charitable Contributions (2 of 4)
Donated money
Deduction equals amount donated
Non-cash property
Amount USUALLY equal to FMV of property donated
Ordinary income property
Deduction limited to FMV less Ord Inc or STCG that would have been recognized if property were sold (includes recapture)
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20. Charitable Contributions (3 of 4)
Non-cash property (continued)
Certain inventory related to exempt function
Deduction = adjusted basis + 1/2 gain
Similar rule for computer technology donated for educational purposes
Special rules pertaining to contributions of computer equipment, book inventory, and wholesale food inventory
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21. Charitable Contributions (4 of 4)
Max deduction is 10% of “adjusted taxable income” (ATI)
ATI is taxable income before NOL carryback, capital loss carryback, dividend received deduction or charitable contribution deduction
Excess carried forward for 5 yrs
Creates a deferred tax asset
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22. ©2010 Pearson Education, Inc. Publishing as Prentice Hall
Special Deductions
U.S. Production activities deduction
Dividends-received deduction
Net operating losses
Sequencing of the deduction calculations
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23. U.S. Production Activities Deduction (1 of 3)
Deduction is lesser of a % times
Qualified production activities income OR
Taxable income before the U.S. production activities deduction
Phased-in percentages
6% for
9% for 2010 and thereafter
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24. U.S. Production Activities Deduction (2 of 3)
Qualified production activities income
Domestic production gross receipts from lease, rental, sale, or exchange, of tangible property manufactured in the U.S. LESS
Expenses related to qualified income including CoGS, & indirect allocable expenses
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25. U.S. Production Activities Deduction (3 of 3)
Deduction limited to 50% of W-2 wages
Not an expense for financial accounting
Creates a permanent difference
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26. Dividends Received Deduction (1 of 3)
Corps owning < 20% of a domestic corporation deduct lesser of
70% of Dividends Received or
70% of taxable income before NOL, capital loss carryback or DRD
Exception to taxable income limitation
If 70% of dividend received creates an NOL, then the full DRD is deductible
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27. Dividends Received Deduction (2 of 3)
Corps owning  20% and < 80% of a domestic corp
80% deduction instead of 70%
Corps owning  80% of domestic corp
Member of affiliated group
100% deduction
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28. Dividends Received Deduction (3 of 3)
No deduction is allowed if :
Paying corp is a foreign corp
Stock purchased w/borrowed money
Stock of paying corp held for < 46 days
Results in a permanent difference
Affects effective tax rate, but not deferred taxes
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29. Net Operating Losses (NOL)
Deductions exceed gross income for the year before NOL carrybacks
NOL may be carried back 2 yrs & then forward 20 yrs
Corp may elect to forgo carryback & only carry NOL forward 20 yrs
Creates a deferred tax asset
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30. Sequencing of the Deduction Calculations
Charitable contributions, DRD, NOL, and all other deductions must be taken in the following order
1. All other deductions
2. Charitable contributions
3. DRD
4. NOL
5. U.S. production activities deduction
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31. Exceptions for Closely-Held Corporations
Special rules apply to shareholders who own >50% of corp
§1239 sale of depreciable property to corp causes gain to be ordinary income to the controlling shareholder
§267 disallows loss on sale of property by corp to controlling shareholder
Loss may be recovered by shareholder if later sells prop at a gain
©2010 Pearson Education, Inc. Publishing as Prentice Hall

32. Computing a Corporation’s Income Tax Liability
General rules
Regular income tax formula
Personal service companies
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33. ©2010 Pearson Education, Inc. Publishing as Prentice Hall
General Rules
The tax rates are graduated
Rate surcharges eliminate benefit of lower graduated tax rates from lower income brackets
Corps with income >$18.33M pay a flat 35% on all income
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34. Regular Tax Formula (1 of 3)
Gross Income
- Deductions and Losses
- Special Deductions
=Taxable Income
x Appropriate Rate (or rates)
=Regular Tax Liability before credits
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35. Regular Tax Formula (2 of 3)
Regular Tax Liability before credits
- Foreign tax credit
- Other Credits
+ Credit recapture
=Regular tax liability
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36. Regular Tax Formula (3 of 3)
Regular Tax Liability
+ AMT Liability
+ Special Taxes (if any)
- Estimated Payments
=Refund or tax due
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37. Personal Service Corporations (1 of 2)
PSCs taxed at a flat 35%
PSC is defined as a corp that:
Substantially all of the activities involve services in the following fields:
Health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting
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38. Personal Service Corporations (2 of 2)
Substantially all stock must be owned by employees, former employees or survivors of employees
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39. Exceptions for Closely-Held Corporations (1 of 3)
Special rules apply to shareholders who own >50% of corp
§1239 sale of depreciable property to corp causes gain to be ordinary income to the controlling shareholder
§267 disallows loss on sale of property by corp to controlling shareholder
Loss may be recovered by shareholder if later sells prop at a gain
©2010 Pearson Education, Inc. Publishing as Prentice Hall

40. Exceptions for Closely-Held Corporations (2 of 3)
Special rules apply to shareholder who own >50% of corp (continued)
Corporation and shareholder using different accounting methods
Defers deduction for accrued expenses owed by accrual-method corp to cash-method controlling shareholder until income recognized by cash-method shareholder
©2010 Pearson Education, Inc. Publishing as Prentice Hall

41. Exceptions for Closely-Held Corporations (3 of 3)
Loss limitation rules
If 5 or fewer s/hs own > 50% of the stock, the corp’s losses are limited to amount corp has “at risk”
Losses not currently deductible are carried over to be used in a later year
May also be subject to passive activity rules
PSCs and closely held corps subject to passive activity limitation rules
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42. ©2010 Pearson Education, Inc. Publishing as Prentice Hall
Controlled Groups
Why special rules are needed
What is a controlled group?
Special rules applying to controlled groups
Consolidated tax returns
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43. Why Special Rules are Needed
Prevent shareholders from using multiple corporations to avoid having income taxed at 35%
Each corporation would be able to take advantage of lower graduated rates
Lower graduated rates must be spread among all corporations in a controlled group
©2010 Pearson Education, Inc. Publishing as Prentice Hall

44. What Is a Controlled Group?
Two or more corps owned directly or indirectly by same shareholder or group of shareholders
Types of controlled groups
Parent-subsidiary
Brother-sister
Combined
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45. Parent-Subsidiary Controlled Group
One corp directly owns at least:
80% of voting power of all classes of voting stock OR
80% of total value of all classes of stock of subsidiary corporation
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46. Brother-Sister Controlled Group
50%-80% definition
Five or fewer individuals, trusts or estates own:
At least 80% of voting power or at least 80% of value of stock of two or more corporations AND
> 50% of the voting power or value is held by identical owners (common ownership)
50%-only definition is 2nd test above
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47. Combined Controlled Groups
Three or more corps which meet the following criteria:
Each corporation is a member of a parent-subsidiary or brother-sister group
At least one is both a parent and a member of a brother-sister group
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48. Special Rules Applying to Controlled Groups (1 of 2)
Benefits allocated among members
5% and 3% surcharge
50%-only test for brother-sister groups
$40,000 AMT exemption amount
The $250,000 minimum accumulated earnings credit
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49. Special Rules Applying to Controlled Groups (2 of 2)
Benefits allocated (continued)
$128,000 §179 expense amount
50%-only test for brother-sister groups
The $25,000 general business credit limitation
80%-50% test for brother-sister groups
No loss on sale of assets between members
©2010 Pearson Education, Inc. Publishing as Prentice Hall

50. Consolidated Tax Returns
Affiliated groups
Advantages of filing a consolidated return
Disadvantages of filing a consolidated return
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51. Affiliated Groups (1 of 2)
One or more chains of includible corps connected through stock ownership to a common parent
Common parent directly owns 80% of voting power AND value of at least one includible corporation
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52. Affiliated Groups (2 of 2)
Each corp owned at least 80/80 by another member of the group
An affiliated group MAY file a consolidated return
Capital losses offset capital gains from other group members
Operating losses reduce operating income from other group members
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53. Consolidated Return Advantages
Losses of one member offset gains of another member
Capital losses of one member offset capital gains of another member
Profits and gains from intercompany transactions deferred until sale outside the group
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54. Consolidated Return Disadvantages
Election binding on all subsequent tax years
Unless IRS grants permission otherwise
Losses from intercompany transactions deferred until sale outside the group
Additional administrative costs
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55. Tax Planning Considerations
Compensation planning for shareholder-employees
Special election to allocate reduced tax rate benefits
Using NOL carryovers and carrybacks
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56. Compensation Planning
Salary payments
Reduce double taxation if paid to shareholder-employees
Fringe benefits
Deducted by corporation and certain benefits are not be taxable to shareholder-employee
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57. Allocating Reduced Tax Rate Benefits
A controlled group may apportion lower tax rates in any manner to member corporations
Reduce benefits to members with little or no income
Increase benefits to members with the highest income
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58. Using NOL Carryovers and Carrybacks
Two options
Carryback to 2nd previous year, then 1st previous year, then forward
Forgo the carrybacks and carry forward
Examine marginal tax rates in prior years and expected marginal tax rates in future years to maximize tax benefit
©2010 Pearson Education, Inc. Publishing as Prentice Hall

59. Compliance and Procedural Considerations Estimated Taxes
Estimated taxes required if corp owes >$500 for current year.
Pay in four installments
Each installment 25% of annual liability
Underpayment of estimated tax penalty
Small corps exempt from penalty if
Pay in lesser of 100% of prior or current year’s tax liability
©2010 Pearson Education, Inc. Publishing as Prentice Hall

60. Compliance and Procedural Considerations Filing Requirements
Return is required each year regardless of income
Use form 1120
Use form 1120A if gross receipts, total income & total assets each < $500K
Large corps (assets>$10M) must fill out more detailed schedule M-3
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61. Financial Statement Implications
Scope, objectives, & principles of SFAS No. 109
Temporary differences
Deferred tax assets and the valuation allowance
FASB Interpretation 48
Balance sheet classification
Tax provision process
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62. Scope, Objectives, & Principles of SFAS No. 109 (Scope)
Establishes principles of accounting for current and deferred taxes
Arising from temporary differences
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63. Scope, Objectives, & Principles of SFAS No. 109 (Principles)
Addresses financial statement consequences of
Rev, exp, gains/losses recognized in different years for tax and financial statement purposes
Events affecting book/tax differences in bases of assets and liabilities
Loss & credit carrybacks or carryforwards
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64. Scope, Objectives, & Principles of SFAS No. 109 (Objectives)
Recognize current yr taxes payable or refundable
Recognize deferred tax liabilities and assets for future tax consequences of events on fin stmts or tax return
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65. Temporary Differences (1 of 2)
Deferred tax liabilities occur when
Rev/gains recognized earlier for book than tax
Exp/losses deducted earlier for tax than book
Tax basis of asset < book basis
Tax basis of liability > book basis
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66. Temporary Differences (2 of 2)
Deferred tax assets occur when
Rev/gains recognized earlier for tax than book
Exp/losses deducted earlier for book than tax
Tax basis of asset > book basis
Tax basis of liability < book basis
Loss/credit carryforwards exist
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67. Deferred Tax Assets and the Valuation Allowance
Firm will realize tax benefit of event in the future
Valuation allowance used for portion of benefit not likely to be realized
Use “more likely than not” standard
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68. FSAB Interpretation No. 48 (FIN 48)
FIN 48 two-step to account for uncertain tax positions
Determine if position exceeds “more likely than not” (>50%) probability of being sustained on its merits by IRS
If not, corp cannot recognize tax benefit
Records liability for unrecognized tax benefits
If yes, measure amount of benefit
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69. Balance Sheet Classification
Classify as current or noncurrent
If related to another asset or liability use classification of related asset/liab
Net current assets and liabilities
Net noncurrent assets and liabilities
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70. Tax Provision Process (1 of 3)
Identify temporary differences and tax carryforwards
Prepare “roll forward” schedules
Apply appropriate tax rates in roll forward schedules to determine deferred tax asset/liability balances
Adjust deferred tax assets by valuation allowance if necessary
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71. Tax Provision Process (2 of 3)
Adjust income tax expense for uncertain tax positions under FIN 48
Determine current federal income taxes payable (current tax expense)
Determine total federal income tax expense (benefit)
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72. Tax Provision Process (3 of 3)
Prepare and record tax journal entries
Prepare tax provision reconciliation
Prepare tax rate reconciliation
Prepare financial statements
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73. ©2010 Pearson Education, Inc. Publishing as Prentice Hall