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stanfield_504_17

stanfield_504_17 - Corporations Operations 17-1 C...

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Page 1 17-1 Corporations: Operations 17-2 C Corporation Separate tax-paying entity Reports income and expenses on Form 1120 Income is taxed at corporate level and again at owner level when distributed as a dividend 17-3 Dividends Double taxation stems, in part, from the fact that dividend distributions are not deductible by the corporation To alleviate some of the double taxation effect, Congress reduced the tax rate applicable to dividend income of individuals for years after 2002 Generally, dividends are taxed at same marginal rate applicable to a net capital gain Thus, individuals otherwise subject to the 10% or 15% marginal tax rate pay 0% tax on qualified dividends received Individuals subject to the 25, 28, 33, or 35 percent marginal tax rates pay a 15% tax on qualified dividends
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Page 2 17-4 Corporate Income Tax Rates 17-5 Comparison of Corporate and Individual Tax Treatment Similarities Gross Income of a corporation and individual are very similar Includes compensation for services, income from trade or business, gains from property, interest, dividends, etc. Corp taxpayers are allowed fewer exclusions Nontaxable exchange treatment is similar Business deductions of a corporation and individual also are very similar 17-6 Comparison of Corporate and Individual Tax Treatment Dissimilarities Different tax rates apply All deductions of corp are business deductions Corp does not calculate AGI Corp does not deduct standard deduction, itemized deductions, or personal and dependency exemptions Corp does not reduce casualty and theft loss by $100 statutory floor and 10% of AGI
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Page 3 17-7 Accounting Periods and Methods Accounting periods Most C corporations can use calendar year or fiscal year ending on last day of a calendar month (or 52-53 week year) S corps and Personal Service Corporations (PSC) are limited in available year ends 17-8 Accounting Periods and Methods Accounting methods Cash method can’t be used by C corp. unless: In farming or timber business Qualified PSC “Ave. Annual Gross receipts” ≤ $5,000,000 As a matter of administrative convenience, the IRS will permit Entities with ave. annual gross receipts of $1 million or less for the most recent 3 year period to use the cash method (even if buying and selling inventory) Certain entities with ave. annual gross receipts greater than $1 million but not more than $10 million for the most recent 3 year period to use the cash method 17-9 Capital Gains and Losses Corporations No special tax rates apply to capital gains Entire gain is included in income subject to normal corporate tax rates Corp cannot take a deduction for net capital losses Capital losses can be used only to offset capital gains Unused capital losses are carried back 3 years and carried forward for 5 years All carried over losses are treated as short-term
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