1. Module 11 Corporate Tax Calculations

2. Corporate vs Individual Taxation Key Learning Objectives n n Similarity of (taxable) income n n Differences in income and deductions

3. Corporate & Individual Taxpayer Similarities n (GI) n Gross income (GI) is income from whatever source derived (§61) n n Income--exclusions = gross income (GI) n (TI) n Taxable income (TI) is gross income minus deductions (§63) n n GI--allowed deductions = TI

4. Corporate vs Individual Taxation Differences n Corporations--no deductions from AGI n No “otherwise allowable” deductions n Corporations file Form 1120

5. Corporate Taxation Key Learning Objectives n n Tax rate structure n n Corporate tax bubble n n Tax liabilities n n Marginal (effective) tax rates n n Special definitions

6. Corporate Tax Rate Structure (without surtaxes) n n 15 % on TI < $50,000 n n 25 % on TI > 50,000 but < 75,000 n n 34 % on TI > 75,000 but < 10,000,000 n n 35 % on TI > 10,000,000

7. Corporate Tax Bubbles n n 5% of the excess of taxable income over $100,000 u Not to exceed $11,750 u Removes benefit of 15% and 25% rates n n 3% of the excess of taxable income over $15,000,000 u Not to exceed $100,000 u Removes the benefit of the 34% rate

8. Corporate Tax Rate Structure (with surtaxes) n n 15 % on TI < $50,000 n n 25 % on TI > 50,000 but < 75,000 n n 34 % on TI > 75,000 but < 100,000 n n 39 % on TI > 100,000 but < 335,000 n n 34% on TI > 335,000 but < 10,000,000 35% on TI > 10,000,000 but  15,000,000 n n 38 % on TI > 15,000,000 but < 18,333,333 n n 35 % on TI > 18,333,333

9. Compliance Query: Calculating Taxable Income (TI) n What is a corporation’s tax liability if: u TI = $150,000 u TI = $65,000 u TI = $15,750,000

10. Compliance Query: Solution Corporate Tax Liability TI = $65,000 Tax liability is sum of:.15 x 50,000 7,500.25 x 15,000 3,750 65,000$11,250

11. Compliance Query: Solution Corporate Tax Liability TI = $150,000 Tax liability is sum of:.15 x 50,000 7,500.25 x 25,000 6,250.34 x 25,000 8,500.39 x 50,000 19,500 150,000 $41,750

12. Compliance Query: Solution Corporate Tax Liability TI = $15,750,000.15 x 50,000 $ 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

13. Marginal & Effective Tax Rates n n Marginal tax rates = tax on the next dollar of income n n Effective tax rate = average tax burden across all income

14. Compliance Query: Calculating Tax Rates n What are the marginal and effective tax rates if: u TI = $65,000 u TI = $150,000 u TI = $15,750,000

15. Solution--Compliance Query: Calculating Tax Rates TI = $65,000 n n Marginal tax rate = 25% n n Effective tax rate = 17.31% $11,250 liability $65,000 TI

16. Solution--Compliance Query: Calculating Tax Rates TI = $150,000 n n Marginal tax rate = 39% n n Effective tax rate = 27.83% $ 41,750 liability $150,000 TI

17. Solution--Compliance Query: Calculating Tax Rates TI = $15,750,000 n n Marginal tax rate = 38% n n Effective tax rate = 34.51% $ 5,435,000 liability $15,750,000 TI

18. Special Tax Rates May Apply If n n Personal service corporations n n Foreign corporations n n Controlled groups n n Corporations taxed under u §594 (alternative tax for mutual savings bank conducting life insurance business). u Subchapter L (life insurance companies). u Subchapter M (regulated investment and real estate investment trusts).

19. Business Tax Credits Key Learning Objectives n n Deduction vs credit n n General business credit (§38) n n Limitations on §38 credit n n Carryback and carryforward of credits n n Various business tax credits

20. Credit vs Exclusion vs Deduction n n Tax credit--a direct reduction of liability u Generally at a single tax rate n n Exclusions--eliminate income from tax u Zero marginal tax rate n n Deductions reduce the amount of income subject to tax u Tax benefits depend on marginal tax rate

21. General Business Credit §38 n n 11 separate credits n n Sum of business credit carryforwards, current business credits, plus the business credit carrybacks n n Credit allowed limited to u The first $25,000 of net tax + 75% of the net tax > $25,000

22. Credit Carryover Use in a different tax period n n Unused §38 credits earned AFTER 12-31-97 u First, carried back 1 year u Then, excess carried forward 20 years n n Unused §38 credits earned BEFORE 12-31-97 u First, carried back 3 years u Then, excess carried forward 15 years

23. Compliance Query: General Business Credit n T Corporation’s available general business credit for post 1997 tax year is $60,000. n Its net income tax liability is $55,000. n How much of the credit can T use? n What can T do with any unused amount?

24. Solution--Compliance Query: General Business Credit n Credit allowed: 100% x $25,000 = $ 25,000 75% x 30,000 = 22,500 75% x 30,000 = 22,500 Total allowed $ 47,500 Total allowed $ 47,500 n T can carry the unused credit back one year n Any remaining amount is carried forward for 20 years.

25. Various Business Credits n n Foreign Tax Credit n n Investment Tax Credit n n Rehabilitation Credit n n Business Energy Credit n n Reforestation Credit n n Targeted Jobs Credit n n Disabled Access Credit n n Research Activities Credit n n Incremental Research Credit n n Basic Research Credit n n Low-Income Housing Credit n n Welfare to work Credit

26. Estimated Taxes Key Learning Objectives n n Estimated tax payments n n Why required n n Underpayment penalty n large n Definition of a large corporation n n How to calculate estimated payment

27. Estimated Tax Payments Pay As You Go n n Four installment (each 25% of liability) if expected liability exceeds credits allowed u Regular tax liability u Alternative minimum tax u Environmental tax

28. Estimated Tax Payments n n The payments are due on the 15th day of the 4th, 6th, 9th, and 12th month n n Not required if: u Expected tax liability < $1000 u Corporation’s first tax period

29. Research Query: Which Estimated Taxes? n XYZ Corporation has requested but not yet received a change in accounting period. n Should XYZ make estimated payments on the basis of its current accounting period or its expected new period?

30. Solution--Research Query: Which Estimated Taxes? n A corporation that has requested but not yet received a change in accounting period must continue to make estimated payments on the basis of its current accounting period n Rev Rul 81-259, 1981-2 CB 247

31. Estimated Tax Payments (Regular Corporation) n n 100% of the tax shown on the return OR n n 100% of the tax shown on the return for the preceding year n n Second rule N/A if preceding year u Was for a period less than 12 months OR u The corporation filed no tax return

32. Estimated Tax Payments (Large Corporation) n n Taxable income of $1,000,000 or more during the preceding three tax years n n May not use preceding year rule except to estimate first quarter n n Must catch up to actual by second estimate

33. Estimated Tax Payments Underpayment Penalties n n Penalty is based on u u the amount of underpayment AND u u The amount of time it was unpaid n n Penalty rate is the sum of the federal short- term rate plus three percentage points n n If underpaid > $100,000, the rate is the federal short-term rate plus five percent

34. Estimated Tax Payments Estimated Tax Deposits n n Deposited with a federal reserve bank or an authorized commercial bank on or before the due date n n Taxpayers making tax deposits on any tax in excess of $50,000 are required to make tax deposits electronically