10-1

Taxation of Regular (C) Corporations

Distinguishing tax feature relative to other business entities: double taxation Corporate income is taxed at the entity level

and to shareholders when distributedLegal characteristics of the corporate form

Limited LiabilityContinuity of LifeFree Transferability of InterestsCentralization of Management

10-2

Corporate Taxable Income

Taxable gross income minus allowable business deductions (Chapters 5 & 6)

Taxable net gains on property dispositions - net capital losses not currently deductible (Chapter 7)

Special corporate considerations:Charitable contribution limitationDividends received deduction

10-3

Special Corporate Issues

Corporate deduction for charitable contributions may not exceed 10% of taxable income before charitable contributions

Dividends Received DeductionException to double taxation for corporate

shareholdersDRD = 70% of dividends received from

less than 20%-owned corporations, 80% for greater than 20%-owned corporations and 100% for affiliated groups

10-4

Corporate Issues continued

Page 1 of corporate tax return reports taxable income

Balance sheet reported in corporate tax return is typically book (GAAP) basis

Schedule M-1 of corporate tax return requires reconciliation from book (GAAP) income to taxable income before DRD and NOL deductions

10-5

Corporate Issues continued

Consolidated Tax ReturnsAffiliated group may elect to file one returnAn affiliated group exists if:

A parent corporation owns at least 80% of the stock of at least one subsidiary, and

At least 80% of the stock of each other corporation is owned by other group members

Advantages:Offset income and gains of one member

against losses of anotherDefer intercompany gains

10-6

Corporate Tax Liability

Regular tax - progressive rate structureCredits against regular tax

Non-refundable, excess may be carried forwardprovide incentive to invest in socially or

economically desirable activities by reducing tax cost (increasing after tax return) from investment

Personal Service CorporationRegular corporation in which performance of

personal services is the principal activity and the services are performed by owner-employees who own more than 10% of the stock

PSCs are taxed at a flat rate of 35%

10-7

Alternative Minimum Tax

Intent: insure that taxpayers with substantial economic income pay some minimum amount of federal income tax

Approach: dual tax system - compute ‘alternative minimum taxable income’ and ‘alternative minimum tax liability’

Exemption: average annual gross receipts less than $7.5M

10-8C om p are Ten ta tive A M T to R eg u la r Tax L iab ility

If g rea te r, excess is A M T L iab ility

Ten ta tive A M T L iab ility

D ed u c t: Tax C red its

B ase t im es Tax R ateE q u a ls G ross A M T L iab ility

E q u a ls : A M T Tax B ase

D ed u c t E xem p tion

E q u a ls A M TI

A d d /su b trac t A d ju s tm en tsA d d P re fe ren ces

D ed u c t A M T N O L

Taxab le in com e b e fo re N O L

Calculating the AMT

10-9

AMT Adjustments

Represent timing differences between regular taxable income and alternative minimum taxable income - will eventually reverse, perhaps over several periods

Examples:Differences between MACRS and ADS

depreciation amountsCompleted-contract methodAmortization of pollution control facilities

10-10

Tax Preferences

Preferences are always positive additions to AMTI

Examples:Tax-exempt interest income from private

activity bonds - municipal bonds issued to fund non-government activities

Percentage depletion in excess of cost basis

10-11

AMT NOL Deduction

AMT NOL amount computed using alternative taxable income approach

Deduction limited to 90% of AMTI before the AMT NOLExample: If AMTI before consideration of

any NOL is $100,000, the maximum allowable AMT NOL deduction is $90,000.

10-12

AMT Exemptions, Tax Rate, Credits and Liability

Corporate exemption amount: $40,000, phased out for AMTI over $150,000

Corporate AMT tax rate: 20% AMT Tax Credits

Foreign tax credit Credit may only offset 90% of tentative AMT

Tentative AMT is compared to regular tax If Tentative AMT > regular tax, then AMT liability =

Tentative AMT - regular tax Total tax liability equals greater of Tentative AMT

or regular tax

10-13

Minimum Tax Credit

A minimum tax credit is generated in any year in which Tentative AMT exceeds regular tax

A minimum tax credit may be carried forward and used in any year in which regular tax exceeds Tentative AMT, to reduce tax liability at most by the amount of such excess

10-14

Tax Planning Implications of the AMT

Generally, the attractiveness of various tax incentives and the after-tax returns of tax-favored activities are reduced for taxpayers subject to AMT

For decision-making purposes, a taxpayer subject to AMT should consider their marginal AMT tax rate, not the marginal regular tax rate

10-15

Payment and Filing Requirements

Return due 3 1/2 months after end of yearautomatic 6 month extension available

Taxes paid in quarterly installments, due 15th day of 4th, 6th, 9th, and 12th months of taxable yearTo avoid underpayment penalties

required installments must equal at least 100% of final tax liability

safe harbor for small corporations (< $1M taxable income): 100% of previous year’s tax

10-16

Distributions to Investors

Payments to corporate creditors Interest element is tax deductible by

corporation, taxable income to creditor recipient

Payments to corporate shareholdersNot deductible by corporationPayments out of corporate earnings and

profits are taxable to shareholder recipientPayments in excess of corporate earnings

and profits generally treated as nontaxable return of investment to shareholder recipient