Corporate Income Tax Steve Foulks In comparison to Individual Income Tax Computation Similar, but simpler than the individual income tax Definitions of revenues and expenses are the same Corporations do not have exemptions and itemized deductions All expenses are business (code section 162) expenses Tax rate is essentially flat Unique corporate deductions Organization and startup costs – amortized over no less than 180 months, if positively elected Dividends received deduction (DRD) Charitable contribution differences DRD • DRD equals (X%) of dividends received, except where there is a loss from operations, and • (1-X%) times the dividends received is greater than the loss from operations • In this case, the DRD is (X%) of taxable income excluding the DRD, any NOL, or capital loss carryback deductions DRD X= • 70 percent where the stock ownership is less than 20 percent • 80 percent where stock ownership is between 20 and 80 percent • Always 100 percent of the dividends received, for members of an affiliated group. DRD Not available when: There was not stock ownership for 45 days during the 90 day period which begins 45 days before the stock goes ex dividend Assume each month has 30 days and the stock goes ex dividend on June 1, when is the 90 day period? Debt is used to purchase stock (the T Boone Picken’s rule) Charitable Contributions differences Deduction limited to 10% of corporate taxable income excluding – Any NOL and capital loss carryback deductions – The DRD, and – The charitable contribution deduction Deduction may be taken when accrued if – Paid within 3 ½ months after the end of the year and authorized by the Board of Directors Charitable Contributions differences There exists a special rule for contributions of ordinary income property which is used for the care of the ill, needy or infants, or scientific research property used by universities and tax-exempt scientific research organizations (two year creation rule) (Apple Computer rule) Deduction = Adjusted Basis (AB) plus 50% of appreciation, limited to 200% of AB NOL Simple to calculate o Equals negative taxable income for the year o Carries back two years (optional), and forward 20 years o If the whole NOL is not usable in the year carried to, the negative taxable income resulting from its application in the year, becomes the carryforward to the next year! Corporate tax rates Despite the tax rate table, corporate tax rates are essentially flat – 34 percent for medium sized corporations 35 percent for large corporations (and PSC’s) The complicated appearance of the table is due to the fact that corporations must give back the benefits of the lower rates as they get larger Affiliated (controlled) group types Brother / Sister (B-S) Parent / Sub. (P-S) Combination of the above two Brother Sister group A B-S affilitated group exists if 5 or fewer shareholders (entities): own at least 50% (80% in some cases) of the stock of 2 or more corporations, and have a combined 50% common ownership Common ownership is the lowest (but more than 0) % ownership that an owner has in the group of companies that are being considered for a (B-S) group Parent Subsidiary group A P-S group exists if one corporation owns at 80 % of the stock in another corporation Other corporations will be part of this group if they are 80% owned by other members (in combination) of the P-S group Consequences of Controlled group All fixed dollar parameters must be split among members of the group (50% B/S CO) Should Corporations pay income taxes? Who benefits? Who loses?
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