Income Tax Fundamentals 2010 Gerald E. Whittenburg & Martha Altus-Buller Student’s Copy 2010 Cengage Learning.
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Income Tax Fundamentals 2010 Gerald E. Whittenburg & Martha Altus-Buller Student’s Copy 2010 Cengage Learning
Corporate rates are progressive °Marginal rates are from 15% to 39%, depending on taxable income °There are eight brackets °There are a number of ‘tax bubbles’ - occurs when tax rate schedules recaptures savings from prior brackets For corporations with large income (more than $18.33 million) the rate is a flat 35% Qualified personal service corps taxed at flat 35% ◦ Architects, CPAs, consultants, etc. 2010 Cengage Learning
A corporation can choose from two alternative tax treatments on capital gains ◦ Taxed at ordinary rates or ◦ Elect to pay an alternative tax (35%) on net long-term capital gain (LTCG) Essentially equivalent to maximum regular corporate tax (no tax benefit to LTCG) Bottom line: there is no difference in tax on ordinary vs. capital income 2010 Cengage Learning
Corporations are allowed a deduction for a % of the dividends received from other corporations ◦ Attempt to alleviate triple taxation Dividends received deduction is allowed based upon ownership 2010 Cengage Learning Percentage Ownership Dividends Received % Deduction < 20% 70% 20% or more, less than 80% 80% > 80% 100% Deductions limited by % and other items
Examples of organizational expenditures ◦ Legal/accounting services incidental to organization ◦ Incorporation fees Organizational expenditures are capitalized and then amortized over 180 months However, can make election to deduct up to $5,000 of organization costs in year corporation begins business ◦ $5,000 amount is reduced $1 for each $1 that organizational expenses exceed $50,000 2010 Cengage Learning
Schedule M-1 of Form 1120 reconciles book to tax income ◦ Computed before NOLs and special deductions Amounts added to book income ◦ Federal tax expense ◦ Capital losses ◦ Income recorded on tax return but not on books ◦ Expenses recorded on books but not on tax return Amounts deducted from book income ◦ Income recorded on books but not on tax return ◦ Expenses recorded on tax return but not on books See chapter for other items included on Schedule M-1 2010 Cengage Learning
Certain corporations may elect to be taxed in a manner similar to partnerships Qualified small business corporation may elect S Corporation status if several criteria apply ◦ Operates as a domestic corporation ◦ Has 100 or fewer shareholders Shareholders may not be corporations or partnerships ◦ Has only one class of stock ◦ Has only shareholders that are U.S. citizens or resident aliens 2010 Cengage Learning
Must report all elements of income and expense separately on Form 1120S Then each shareholder reports his/her share of these items of corporate income/expense on personal return ◦ K-1 takes total shareholder income/expenses and allocates each item to each shareholder based upon his/her ownership percentage 2010 Cengage Learning
Each shareholder of an S Corp may also report his/her respective share of loss ◦ Cannot take a loss in excess of adjusted basis in stock ◦ If loss exceeds adjusted basis in stock plus loans, shareholder can carry it forward If shareholder entered/departed S Corp midyear, must allocate losses on a daily basis 2010 Cengage Learning
A shareholder’s initial basis in his/her stock is calculated as follows Basis of property transferred Less Boot received Plus Gain recognized Less Liabilities transferred Basis in stock The corporation has a carry-over basis in the property contributed equal to the basis in the hands of the shareholder, increased by any gain recognized by shareholder on the transfer 2010 Cengage Learning Note: generally assumption of shareholder liabilities that are attached to property are not considered boot received.