Corporate Income Tax

1
Corporate Income Tax

• Steve Foulks

2
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

3
Unique corporate deductions

• Organization and startup costs amortized over
  no less than 180 months, if positively elected
• Dividends received deduction (DRD)
• Charitable contribution differences

4
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

5
DRD

• 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.

X
6
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
  Pickens rule)

7
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

8
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

9
NOL

• Simple to calculate
• Equals negative taxable income for the year
• Carries back two years (optional), and forward 20
  years
• 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!

10
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 PSCs)
• 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

11
Affiliated (controlled) group types

• Brother / Sister (B-S)
• Parent / Sub. (P-S)
• Combination of the above two

12
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

13
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

14
Consequences of Controlled group

• All fixed dollar parameters must be split among
  members of the group (50 B/S CO)

15
Should Corporations pay income taxes?

• Who benefits?
• Who loses?