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Module 11 Corporate Tax Calculations

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) is income from whatever source derived (§61)

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Module 11 Corporate Tax Calculations

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  1. Module 11 Corporate Tax Calculations

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

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

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

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

  6. 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

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

  8. 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

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

  10. Compliance Query: SolutionCorporate Tax LiabilityTI = $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 LiabilityTI = $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 • Marginal tax rates = tax on the next dollar of income • Effective tax rate = average tax burden across all income

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

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

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

  17. 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

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

  19. 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

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

  21. 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 + 75% of the net tax > $25,000

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

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

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

  25. 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 Various Business Credits

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

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

  28. 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 • Corporation’s first tax period

  29. Research Query: Which Estimated Taxes? • XYZ Corporation has requested but not yet received a change in accounting period. • 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? • 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 • Rev Rul 81-259, 1981-2 CB 247

  31. 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 OR • The corporation filed no tax return

  32. 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

  33. 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

  34. 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

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