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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Page 4 17-10
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This note was uploaded on 12/01/2011 for the course MGMT 504 taught by Professor Hatcher during the Spring '08 term at Purdue.

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stanfield_504_17 - Corporations: Operations 17-1 C...

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