# Effective Corporate Tax Rates

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```					       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)
 Income--exclusions = gross income (GI)
 Taxable income (TI) is gross income
minus deductions (§63)
 GI--allowed deductions = TI
Corporate vs Individual Taxation
Differences
   Corporations--no
deductions from AGI
   No “otherwise
allowable” deductions
   Corporations file Form
1120
Corporate Taxation
Key Learning Objectives

 Tax rate structure
 Corporate tax bubble
 Tax liabilities
 Marginal (effective) tax rates
 Special definitions
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
Corporate Tax Bubbles
   5% of the excess of taxable income over
\$100,000
 Notto exceed \$11,750
 Removes benefit of 15% and 25% rates

   3% of the excess of taxable income over
\$15,000,000
 Notto exceed \$100,000
 Removes the benefit of the 34% rate
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
Compliance Query:
Calculating Taxable Income (TI)

   What is a corporation’s tax liability if:
   TI = \$150,000
   TI = \$65,000
   TI = \$15,750,000
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
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
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
Marginal & Effective Tax Rates

 Marginal tax rates = tax on the next dollar
of income
 Effective tax rate = average tax burden
across all income
Compliance Query:
Calculating Tax Rates
   What are the marginal and effective tax
rates if:
   TI = \$65,000
   TI = \$150,000
   TI = \$15,750,000
Solution--Compliance Query:
Calculating Tax Rates
TI = \$65,000
 Marginal tax rate = 25%
 Effective tax rate = 17.31%
\$11,250 liability
\$65,000 TI
Solution--Compliance Query:
Calculating Tax Rates
TI = \$150,000
 Marginal tax rate = 39%
 Effective tax rate = 27.83%
\$ 41,750 liability
\$150,000 TI
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
Special Tax Rates May Apply If
 Personal service corporations
 Foreign corporations
 Controlled groups
 Corporations taxed under
 §594  (alternative tax for mutual savings bank
 Subchapter L (life insurance companies).
 Subchapter M (regulated investment and real
estate investment trusts).
Key Learning Objectives

 Deduction vs credit
 Limitations on §38 credit
 Carryback and carryforward of credits
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
 11 separate credits
 Sum of business credit carryforwards,
credit carrybacks
 Credit allowed limited to
   The first \$25,000 of net tax
+ 75% of the net tax > \$25,000
Credit Carryover
Use 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
Compliance Query:

 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?
Solution--Compliance Query:
   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.
   Foreign Tax Credit          Research Activities
   Investment Tax Credit        Credit
   Rehabilitation Credit       Incremental Research
   Reforestation Credit        Basic Research Credit
   Targeted Jobs Credit        Low-Income Housing
Credit
   Disabled Access Credit
   Welfare to work
Credit
Estimated Taxes
Key Learning Objectives

 Estimated tax payments
 Why required
 Underpayment penalty
 Definition of a large corporation
 How to calculate estimated payment
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
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
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?
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
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
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
Estimated Tax Payments
Underpayment Penalties
   Penalty is based on
 the amountof 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
Estimated Tax Payments
Estimated 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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