Chapter 3 - Chapter 3- The Corporate Income Tax 1...

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1 Chapter 3- The Corporate Income Tax
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2 Objectives After studying this chapter you should be able to: 1. Apply the requirements for selecting tax years and accounting methods to various types of C corporations. 2. Compute a corporation's taxable income. 3. Compute a corporation's income tax liability. 4. Understand what a controlled group is and the tax consequences of being a controlled group. 5. Understand how compensation planning can reduce taxes for corporations and their shareholders. 6. Determine the requirements for paying corporate income taxes and filing a corporate return.
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3 Corporate Elections I. Corporate Elections. When a corporation is formed there are certain elections that must be made. A. Choosing a Calendar or Fiscal Year. A new corporation may select either a calendar or fiscal year by filing its first tax return for the selected period. The corporation's tax year must be the same as its annual accounting period that is used for financial accounting purposes. A corporation's first tax year may not cover a full 12-month period. In that case, a short-period tax return must be filed. A corporation's final year may also cover a short period.
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4 General Formula For Determining the Corporate Tax Liability . Each year a corporation is responsible for computing its regular tax liability. In addition, the corporation may owe the alternative minimum tax and possibly either the accumulated earnings tax or personal holding company tax. The total tax liability equals the sum of the two primary corporate tax liabilities plus the amount of any special levies that are owed. See Table C3-1 and Form 1120 on B-50).
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5 Computing Corporate Taxable Income Computing a corporation's taxable income is very similar to computing an individual's taxable income. Differences Between Individual and Corporate Taxable Income. Table C3-1 outlines the computation of corporate taxable income and the corporate income tax liability. Gross income is computed in much the same way as for an individual. Some specific differences between individual and corporate taxable income are discussed below. These can be found in Figure C3-1.
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6 Sales and Exchanges of Property Sales and exchanges of property are treated the same for corporations as they are for individuals except for capital losses and an additional 20% depreciation recapture that is required under Sec. 291. A corporation nets all of its capital gains and losses together. Net long-term capital gains and net short-term capital gains are included in gross income. (See Example C3-2 on page 3-6.) Net capital losses cannot be deducted in the current year. They can only be used to offset capital gains. Any excess losses must be carried back as short term capital losses to the third previous year and then carried forward for five years. Any losses that remain after the carry forward period are lost. (See Example C3-3 on page 3- 7.) ( problem 3-47 )
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7 Business Expenses Deductions are allowed for ordinary and necessary business expenses. No
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Chapter 3 - Chapter 3- The Corporate Income Tax 1...

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