Chapter
11
Entity Choice: The C
Corporate Taxpayer
Computing Regular Tax
Tax rate schedule:
15%, 25%, 34%, 39%, 35%, 38%, 35%
The surtax rates of 39% and 38% eliminate bracket
benefits for ‘rich’ corporations.
Corporations with taxable income > $18.33 million
just pay a flat rate of 35% on all income.
Personal service corporations are taxed at a flat
35% rate.
Service firms such as law, accounting, medicine
Affiliated Groups and Consolidations
Parent + all >= 80% domestic subsidiaries.
Affiliated groups may elect to file a consolidated tax
return - applies to all members of affiliated group.
Advantage: losses and profits of affiliated members
offset. Like financial accounting, intercompany
transactions are eliminated.
Brother – Sister Corporations: If 5 or fewer
individual(s) own more than 50% of two or more
corporations, these corporations are a ‘controlled group’
(see Ch 12 end). They may not file a consolidated
return, but the tax bracket benefits are limited.
Must also share the accumulated earnings tax (AET) and AMT
exemptions (what are those????)
The Net Operating Loss Deduction
Net operating losses (NOLs) may be carried back and
forward:
Carryback 2 years, to receive refund of prior taxes;
Remaining NOL carried forward 20 years, reducing tax
liability in those years.
Example:
Taxable income in prior year
Tax paid
NOL carryback
Recomputed taxable income
Recomputed tax liability
Refund in current year (year of loss)
$10,000,000
3,400,000
( 2,000,000)
8,000,000
2,720,000
680,000
Tax Credits
Credits directly reduce computed tax. Deductions only
reduce the income subject to tax. Thus, $1 of credit
provides $1 of tax benefit (reducing tax liability a $1 for a
$1).
$1 of deduction only provides $1 benefit x the tax rate so not
as good as a credit.
Tax credits are generally limited to some % limit of the
associated cost incurred. Often a provision permits carry
back or carry forward of excess credits.
Example: Ch 11 Rehabilitation credit = Limited to 10% of
commercial building rehabilitation costs)
Biggest credits: R&D credit, foreign tax credit (see Chapter
13).