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CPA REG Study Unit 8
Corporate Tax Computations
36
Accounting
Professional
01/20/2014

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Term
REGULAR INCOME TAX - Surtax
Definition
a. Two of the rate brackets include surtaxes.
b. A surtax of 5% is charged on taxable income (TI) between $100,000 and $335,000, which eliminates the tax savings on the first $100,000 of taxable income from the benefits of 15% and 25% rates.
c. A 3% surtax is charged on TI between $15,000,000 and $18,333,333, which recaptures the tax savings from $335,000 to $10,000,000 by phasing out the 34% rate.
Term
REGULAR INCOME TAX - Top Rate
Definition
All TI of a corporation with TI over $18,333,333 is taxed at a flat rate of 35%.
Term
REGULAR INCOME TAX - Personal Service Corporations
Definition
Personal service corporations are taxed at a flat rate of 35% on all taxable income.
Term
REGULAR INCOME TAX - Disallowed Corporate Credits
Definition
Most tax credits are allowable to corporations. However, the following are notpermitted:
1) Earned Income Credit
2) Child and Dependent Care Credit
3) Elderly and Disabled Credit
4) Child Tax Credit
5) Adoption Credit
6) American Opportunity Credit
7) Lifetime Learning Credit
Term
FOREIGN TAX CREDIT (FTC) - Election Options
Definition
A taxpayer may elect either a credit or a deduction for taxes paid to other countries or U.S. possessions.
Term
FOREIGN TAX CREDIT (FTC) - Credit Application
Definition
Generally, the FTC is applied against gross tax liability after the AMT (alternative minimum tax) but before all other credits.
Term
FOREIGN TAX CREDIT (FTC) - Non-U.S. Taxpayer
Definition
For a non-U.S. taxpayer, the FTC is allowed only for foreign taxes paid on income effectively connected with conduct of a trade or business in the U.S. and against U.S. tax on the effectively connected income.
Term
FOREIGN TAX CREDIT (FTC) - Qualified Foreign Taxes
Definition
a. Qualified foreign taxes (QFTs) include foreign taxes on income, war profits, and excess profits.
b. QFTs must be analogous to the U.S. income tax.
Term
FOREIGN TAX CREDIT (FTC) - Carryover
Definition
Foreign tax paid in excess of the FTC limit may be carried back 1 year and forward 10 years in chronological order.
Term
CONSOLIDATED RETURNS
Definition
A single federal income tax return may be filed by two or more includible corporations that are members of an affiliated group.
Term
CONSOLIDATED RETURNS -Includible corporations
Definition
Includible corporations are all corporations except the following:
a. Tax-exempt corporations
b. S corporations
c. Foreign sales corporations (FSCs)
d. Insurance corporations
e. REITs (real estate investment trusts)
f. Regulated investment companies
g. DISCs (domestic international sales corporations)
h. Those corporations that claim Sec. 936 possessions tax credit
Term
CONSOLIDATED RETURNS - Affiliated Groups
Definition
An affiliated group includes each corporation in a chain of corporations under the following conditions:
1) The other group members must directly own stock in the corporation that
represents both
a) 80% or more of total voting power and
b) 80% or more of total value outstanding.
2) A parent corporation must directly own stock as outlined in 1) above (80% voting and value) of at least one includible corporation.
Term
CONSOLIDATED RETURNS - Election
Definition
Election to file a consolidated return is made by the act of filing a consolidated return.
Term
CONSOLIDATED RETURNS - Tax Year
Definition
Each subsidiary included in a consolidated return must adopt the parent’s tax year.
Term
CONSOLIDATED RETURNS - Accounting Methods
Definition
One or more members of a controlled group filing a consolidated return may use the cash method, and one or more others may use the accrual method.
Term
CONSOLIDATED RETURNS - Dividend
Definition
A dividend distributed by one consolidated corporation to another is eliminated.
Term
CONSOLIDATED RETURNS - Losses
Definition
Losses of one consolidating corporation may offset TI of another.
Term
CONSOLIDATED RETURNS - Intercompany Transactions
Definition
An intercompany transaction is a transaction between corporations that are members of the same consolidated group. In the consolidated tax return, any gain or loss realized on the intercompany transaction is deferred.
Term
CONTROLLED GROUPS - Definition
Definition
A controlled group of corporations includes corporations with a specified degree of relationship by stock ownership.
Term
CONTROLLED GROUPS - Parent-Subsidiary Controlled Group
Definition
Two corporations if one of the corporations owns stock that represents
a) 80% or more of total voting power
or
b) 80% or more of total value outstanding of the stock of the other
Term
CONTROLLED GROUPS - Brother-Sister Controlled Group
Definition
Any two or more corporations are considered a brother-sister controlled group if the stock of each owned by the same five or fewer persons (only individuals, trusts, or estates)
1) Represents either
a) 80% or more of voting power of all classes
or
b) 80% or more of value of all classes and
2) Represents either (counting for each person only the smallest amount owned by
that person in any of the corporations)
a) More than 50% of voting power of all classes
or
b) More than 50% of value of all classes.
Term
CONTROLLED GROUPS - Constructive Ownership
Definition
Generally, a person constructively owns stock owned by a
1) Family member [spouse (not legally separated), child, grandchild, parent,
grandparent], and
2) Corporation, partnership, estate, or trust
a) In which (s)he has a 5% or more interest
b) In proportion to that interest
Term
CONTROLLED GROUPS - Intergroup Transactions
Definition
Loss is not recognized when property is sold by one member of a controlled group to another.
1) The loss may be recognized on a subsequent sale to an unrelated third party.
Term
CONTROLLED GROUPS - Intergroup Transactions
Definition
Gain on sale or exchange of property by a controlled group member to a member in
whose hands the property is depreciable is treated as ordinary income.
Term
ALTERNATIVE MINIMUM TAX (AMT) - Definition
Definition
The alternative minimum tax is an income tax in addition to the regular income tax.
Tentative AMT is determined by first multiplying a rate times the AMT base and then subtracting the AMT foreign tax credit.
1) For corporations, a 20% rate applies.
2) For individuals, a two-tiered graduated rate schedule applies.
a) A 26% rate applies to the first $175,000 ($87,500 if married filing
separately) of AMTI (net of the exemption amount).
b) A 28% rate applies to any excess.
AMT is the excess tentative AMT over regular income tax.
Term
ALTERNATIVE MINIMUM TAX (AMT) - Tax Preference Items
Definition
These items generate tax savings by reducing the taxpayer’s taxable income.
Therefore, they must be added back to taxable income when computing AMTI.
Term
ALTERNATIVE MINIMUM TAX (AMT) - Adjustments
Definition
Usually, adjustments eliminate “time value” tax savings from accelerated deductions or deferral of income. An adjustment is an increase or a decrease to TI in computing AMTI.
Accelerated Depreciation
Installment Sales
Long-Term Contracts
Pollution control facilities
Mining Exploration
NOL adjustments
Distributions from a trust or estate
Term
ALTERNATIVE MINIMUM TAX (AMT) - ACE Adjustment
Definition
A corporation must make an additional adjustment (upward or downward) to TI, the adjusted current earnings (ACE) adjustment, in computing AMTI.
Term
ESTIMATED TAX - Due Dates
Definition
a. A corporation is required to make estimated tax payments on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.
b. Any difference between the estimated tax and actual tax is due with the return by the 15th day of the 3rd month following the end of the tax year (March 15 for calendar-year corporations).
Term
ESTIMATED TAX - Estimated Payments
Definition
Each quarterly estimated tax payment required is 25% of the lesser of
1) 100% of the prior year’s tax (provided a tax liability existed and the preceding tax year was 12 months) or
2) 100% of the current year’s tax.
Term
ESTIMATED TAX - Estimated Payments
Definition
A corporation with uneven income flows can make its estimated tax payments by
annualizing its income.
Term
ACCUMULATED EARNINGS TAX (AET) - Application
Definition
The accumulated earnings tax (AET) is imposed only on a corporation that, for the purpose of avoiding income tax at the shareholder level, allows earnings and profits to accumulate instead of distributing them to shareholders.
Term
ACCUMULATED EARNINGS TAX (AET) - Penalty
Definition
The tax of 15% imposed on accumulated taxable income (ATI) is a penalty tax in
addition to the regular income tax and AMT.
Term
PERSONAL HOLDING COMPANY TAX - Penalty
Definition
The tax of 15% imposed on undistributed personal holding company income is a penalty in addition to regular income tax and AMT.
Term
PERSONAL HOLDING COMPANY TAX - Objective Tests
Definition
Every corporation that is not exempt and meets two objective tests (with respect to stock ownership distribution and the nature of its income) is a PHC subject to PHC tax.
1) Stock ownership test. The corporation’s outstanding shares are, directly or indirectly, owned 50% or more by value, by five or fewer shareholders ,at any time during the last half of the year.
2) Nature of income test. Sixty percent or more of adjusted ordinary gross income (AOGI) of the corporation is personal holding company income (PHCI).
Term
CONSOLIDATED RETURNS - To opt in
Definition
A corporation must own 80% of the total voting power and 80% of the total value of the stock in order to file a consolidated return.
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