1. 1 Chapter 5-1C. Corp. Taxation Reconciliation of Book and Taxable Income Howard Godfrey, Ph.D., CPA Professor of Accounting Copyright © 2016

2. 2 Reconcile tax and book income [Page 25+]

3. 3 Corporation governed largely by Section 162 when determining deductibility of payments to shareholders. Shareholders governed largely by Sections 162 and 212 when making corporate related expenditures, but are limited by Sections 262 and 263(a)(1).

4. 4 162(a) In General. There shall be allowed as a deduction all the ordinary and necessary expenses … in carrying on any trade or business, including- (1) a reasonable allowance for salaries.. (2) traveling expenses … (3) rentals …

5. 5 What is the presumption in the Code regarding the relationship of corporate activities and Section 162(a)? Does Section 212 apply to corporations?

6. 6 Corporation's Taxable Income. Business Expenses. Deductions are allowed for ordinary and necessary business expenses. No deduction is allowed for: interest on amounts borrowed to purchase tax-exempt securities, illegal bribes or kickbacks, fines or penalties imposed by a government, or insurance premiums incurred to insure the lives of officers and employees when the corporation is beneficiary.

7. 7 Note that on the next slide, the problem provides net income as a starting point. You remove any item of income or expense that is not part of the computation of taxable income.

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33. Office Rental Inc. – Slide 1 of 6. Office Rental, Inc. collects rent in advance from some tenants and bills others at the end of each month for that month’s rent. The accrual basis income statement (GAAP) for Year 2 shows revenue earned of $54,700. Rent Receivable was $3,100 at start of Year 2 and $2,500 at the end of Year 2. Unearned Revenue Account had a balance of $2,600 at start of Year 2 & $1,300 at end of Year 2. What is cash basis revenue for Year 2 (collections from tenants)?

39. Realty Corp. Rental Income Realty Co. was organized on Jan-1, year 1. Realty bought a building on that date for $400,000, having an estimated 40 ‑ year life with no salvage. The S/L depreciation method is used for tax & GAAP. Depreciation is $10,000 per year on the tax return and in the GAAP statements. Realty rented the building to IBM for 2 years at $20,000 per year. Rent of $40,000 was received on Jan-1, year 1. Realty’s income tax rate is 40%. Yr. 1 operations are described on next slide.

45. Note, the installment sales method is generally prohibited for dealers in inventory. However it is allowed in limited circumstances. The problem on the preceding slide is included to help illustrate the differences between accrual accounting and other revenue recognition methods – and the impact on deferred taxes.

46. 46 The End