Chapter
3
The Corporate Income Tax
Filing Requirements and
Computing the Tax
Slide C3-3
Filing Requirements
C corporations are separate tax-paying and taxreporting entities from their owners
Annual tax returns required
Form 1120 or Form 1120-A (corporations with gross
receipts, total income and total assets < $500,000)
Original due date is the 15th day of the third month
following the fiscal year-end [IRC §6072(b)]
Can obtain an automatic 6 month extension of time to
file using Form 7004 [IRC §6081]
Extension of time to file the tax return does not extend
the time for paying the tax
Slide C3-4
The Corporate Tax Formula
For C Corporations:
Total Income
- Allowable Deductions
Taxable Income before NOLs
and Special Deductions
- NOLs and Special Deductions
=Taxable Income
Slide C3-5
Corporate Tax Rates [IRC §11(b)(1)]
If TI is over
$0
50,000
75,000
100,000
But not over The tax is:
Of TI less:
50,000
75,000
100,000
335,000
15%
$7,500 + 25%
13,750 + 34%
22,250 + 39%
$0
50,000
75,000
100,000
335,000 10,000,000
10,000,000 15,000,000
15,000,000 18,333,333
113,900 + 34%
3,400,000 + 35%
5,150,000 + 38%
335,000
10,000,000
15,000,000
18,333,333 ---------------
6,416,667 + 35%
18,333,333
Slide C3-6
Corporate Tax Rates
Exception: Personal Service Corporations
Taxed at a flat 35% [IRC §11(b)(2)]
Definition [IRC §448(d)(2)]
Slide C3-7
Example 1a: Computing the Tax
The Purple Corporation has taxable income of
$125,000. What is the tax before credits if this
corporation is not a personal service corporation?
Answer:
22,250 + (125,000 – 100,000) x 39% = $32,000
Slide C3-8
Example 1b: Computing the Tax
The Purple Corporation has taxable income of
$125,000. What is the tax before credits if this
corporation is a personal service corporation?
Answer:
125,000 x 35% = $43,750
Slide C3-9
Example 2a: Computing the Tax
The Green Corporation has taxable income of
$425,000. What is the tax before credits if this
corporation is not a personal service corporation?
Answer:
113,900 + (425,000 – 335,000) x 34% = $144,500
Alternatively: 425,000 x 34% = $144,500
Slide C3-10
Example 2b: Computing the Tax
The Green Corporation has taxable income of
$425,000. What is the tax before credits if this
corporation is a personal service corporation?
Answer: 425,000 x 35% = $148,750
Tax Accounting Periods
Slide C3-12
Accounting Periods
Generally, a corporation’s tax period is the same
as its fiscal period for financial accounting
purposes [IRC §441(b)(1) and (c)]
Can be any 12 month period ending on the last day of
any month [IRC §441(d) and (e)]
Can elect a 52/53 week around the end of any month
[IRC §441(f)]
Short tax periods (less than 12 months) may occur in
a corporation’s first or last years of business, or in the
year of a change in accounting period
Slide C3-13
Accounting Periods
Exception: Personal Service Corporations
Definition [IRC §441(i)(2)]
 Principal activity is performance of personal services
 By owner-employees who own more than 10% of stock
Must use a calendar year unless can establish, to the
satisfaction of the IRS, a business purpose for using a
different fiscal year [IRC §441(i)(1)]
Can elect a different year-end if deferral period is not
longer than 3 months [IRC §444(a) and (b)(1)]
 If minimum distribution requirements are not met, deductions
for payments to owner/employees of PSCs are limited of
deferred to future years [IRC §280H]
Slide C3-14
Changing Accounting Periods
Corporation can just pick a year-end for its first tax
return but after that, IRS approval is generally
required to change tax years [IRC §442]
Regulations and Rev. Proc 2002-37 allow an automatic
approval of a change in accounting period if certain
conditions are strictly met [Reg. §1.442-1(c)]
Slide C3-15
Changing Accounting Periods
If a short period return results from a change in
accounting period, the tax is calculated using the
“annualized” taxable income method [IRC §443]
Slide C3-16
Example 3a: Short Periods
The Blue Corporation (not a PSC) files a tax
return for the short period September 1st to
December 31st. Taxable income reported in the
short period return is $82,000. What is the tax for
the short-period if this is the corporation’s first year
of business?
Answer:
13,750 + (82,000 – 75,000) x 34% = $16,130
Slide C3-17
Example 3b: Short Periods
The Blue Corporation (not a PSC) files a tax
return for the short period September 1st to
December 31st. Taxable income reported in the
short period return is $82,000. What is the tax for
the short-period if the corporation changed its
fiscal year from August to December?
Answer:
Annualized TI = 82,000 x 12/4 = $246,000
Tax on ATI = 22,250 + (246,000 – 100,000) x 39%
= $79,190
Tax due for the short period = 79,190 x 4/12 = $26,397
Tax Accounting Methods
Slide C3-19
Accounting Methods
Accounting method determines when an item of
income or expense is included in taxable income
Method is selected in the corporation’s first tax return
Must get IRS consent to change accounting methods
once established [IRC §446(e) and (f)]
Method taxpayer regularly uses to compute income in
per books [IRC §446(a)]
Method must “clearly reflect income” or IRS can impose
a different method [IRC §446(b)]
Slide C3-20
Accounting Methods
Overall accounting methods that are generally
permissible include [IRC §446]:
Cash method
Accrual method
Hybrid method
Slide C3-21
Accounting Methods
Exception: C corporations generally cannot use
the cash method [IRC §448(a)(1)]
Exception 1: Qualified farming businesses may use
cash method [IRC §448(b)(1) and (d)(1)]
Exception 2: Qualified personal service corporations
may use cash method [IRC §448(b)(2) and (d)(2)]
Exception 3: Corporations with gross receipts of not
more than $5,000,000 may use cash method
[IRC §448(b)(3)]
Slide C3-22
Cash Method
Income is generally taxable when it is received or
constructively received [Reg. §1.446-1(c)(1)(i)]
Exception: Inventory sales must be accounted for using
the accrual method [Reg. §1.446-1(c)(2)(i)]
Slide C3-23
Cash Method
Expenses are generally deductible when they
are actually paid [Reg. §1.446-1(c)(1)(i)]
Exception: Inventory purchases and cost of goods
sold must be accounted for using the accrual method
[Reg. §1.446-1(c)(2)(i)]
Exception: Prepaid interest must be deducted when
accrued rather than when paid [IRC §461(g)]
Exception: Payments creating assets with useful lives
of more than one year must be capitalized [IRC §263]
 These may then be depreciated or amortized