The Corporate Income Tax
Unless High Corporation is an S corporation or a personal service corporation, High can
select a tax year ending on the last day of any month (i.e., a fiscal year or a calendar year).
C:3-2 through C:3-4.
Port Corporation may change its annual accounting period without prior approval
of the IRS if it satisfies the requirements of Rev. Proc. 2006-46, 2006-45 I.R.B. 859, as listed on
page C:3-4 of the text.
If Port does not satisfy these requirements, it can request approval of a
change in accounting period by filing a Form 1128 on or before the fifteenth day of the third
month following the close of the short period resulting from the change.
Stan and Susan need to choose an accounting period.
They generally can select either a
calendar year or a fiscal year.
A fiscal year can permit an income deferral.
However, if they
elect S corporation status, they generally are required to use a calendar year.
Stan and Susan
need to select an accounting method.
They are required to use the accrual method for sales-
related items because inventories are a material income-producing factor but may want to use the
cash method for other items (i.e., the hybrid method) as long as they are eligible.
Stan and Susan need to select an accounting method for their inventory, i.e., LIFO,
FIFO, LCM, etc.
They may want to investigate which method is best for their particular type of
Because the price of digital circuits has declined in recent years, the LIFO method
does not appear to be a logical choice.
Stan and Susan need to determine whether they will
make an election to deduct up to $5,000 each and amortize the balance of organizational
expenditures and/or start-up expenditures.
An election is advisable because the election cannot
be made retroactively if, upon audit, the IRS reclassifies deducted expenses as organizational
Stan and Susan need to decide what method they will use to write off their
research and development expenses,
i.e., expense in year incurred or defer and amortize over 60
months or more.
Stan and Susan need to determine whether they want to make an S election to
pass through start-up losses.
Stan and Susan need to determine whether they want to capitalize
the corporation with debt as well as equity, and, if so, how much debt and how much equity they
pp. C:3-2 through C:3-5.
Corporations and individuals compute capital gains and losses the same way.
corporations cannot deduct capital losses from ordinary income.
A corporation can carry a
capital loss back three years and forward five years to offset capital gains.
Individuals only can
carry such losses forward, although the carryforward period is indefinite.
Corporations also do
not have a preferential tax rate for net capital gains that is lower than the top ordinary income
rate as individuals do.
pp. C:3-6 and C:3-7.