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What corporations are taxable?


Do Corporations accounting year and tax year have to be the same?


When is the tax year elected?

when they file their first return.

What type of corporations can use the cash method?

Corporations with average gross receipts for the three year period prior to the current tax year of $5 million or less.

Can you use your book or financial reporting income number on your taxes?

No because some rules for recognizing revenue differ between financial and tax principles. (However some private companies may write financials at tax rates so no adjustment for tax would be necessary.)

Unfavorable book-tax difference

any book-tax difference that requires adding to the company book income is unfavorable cause it requires more tax be paid.

What are Permanent book-tax differences?

Book-Tax differences that do not reverse the difference over time so the difference is constant between the books and taxes.

temporary book-tax differences

Book-tax differences that do reverse the difference over time so that eventually the book and tax deduction or revenue is equal.

How do temporary book-tax differences occur?

Income or deduction items are included in financial accounting income in one year and in taxable income in a different year.

What do you ahve to disclose in your corporate tax returns?

Permanent and temporary book-tax differences.

What items can create permanent book-tax differences

Municipal bonds; Premium paid for key employee life-insurance; Meals and entertainment; Domestic production activities deductions; fines and penalties

What items can create temporary book-tax differences?

Depreciation; Disposition gain/loss; bad debt expense; unearned rent revenue; deferred compensation; Organizational expenses and start-up costs; warranty expense and other estimated expenses; unicap

How are dividends special in book-tax differneces?

In financial the way that you recognize Dividend income vaires on the percentage of ownership. With Tax A dividend equals income no matter what.

How do you deal with Good will for book-tax differneces?

Amortize over 15 years for tax purposes but recover the cost of goodwill for book purposes only when and to the extent goodwill is impaired.

When is a goodwill book-tax difference favorable?

If the tax amortization exceeds teh book impairment expense, then the difference is favorable. This is a temporary book-tax differnece.

Do corporations deduct ISO's?


DO Corporations deduct NQO's?

Yes - They deduct the difference between the fair market value of the stock and the strike price of the option (The bargain element).

Is there any tax differnece for stock options granted before 2006?

Not for ISO's but they do report favorable Permanent Tax-Book differneces for NQO's granted before 2006 (but only when the options are exercised)

What is ASC 718?

Requires corporations to recognize book expense for stock options they grant after 2005

When is a permanent Book-Tax Difference recognized in regards to stock options?

In the year that post-2005 stock options are exercised. For ISO's, the amount of the permanent difference is the estimated value of the stock that vests during the year.

Is the book-tax differnece for ISO's unfavorable or favorable?

it is always unfavorable.

How do you find the amount of the permanent difference for ISO's that vest in the year?

The estimated value of the stock.

Do corporations prefer capital gains or Ordinary income?

Capital gains

At what rare are capital gains taxed at for corporations?

Ordinary rates

Why do corporations prefer Capital gains over ordinary income?

You can only recognize capital losses to the extent that ordinary gains are are recognized.

How far back can capital losses be carried back?

3 years.

What is a capital loss carry back?

When a corporation carries a loss back to take back capital gains recognized on a tax return in the prior 3 years.

How many years can corporations carry capital losses be carried forward?

5 years.

Study the treatment of stock options on page 16-12 Exhibit 16-5


Can capital losses be taken back if the company is in a net loss, or if the carry back creates a net loss?


When you recognize a net capital loss, what book-tax difference could this create?

unfavorable book-tax differences in the year they recognize the losses and favorable book-tax differences in the year they utilize capital loss carrybacks or caryovers.

What is NOL

Allows companies to take Deductions when deduction exceed gross profit from one year and carry it back 2 or forward 20 years when deductions is less than Gross profit.

WHy have NOL?

This exists so that when companies have a bad year and all of their deductions can't be used cause they are at a net loss, they can use those deductions in years when their deductions are lower than their Gross profit.

Can a corporation choose when to use the carryback or carryover?


Why would you choose not to do a carryback?

Becuase the marginal tax rate in prior years may be less than the marginal tax rate in the coming years.

What is the book-tax differnece generated by an NOL?

In the year they are generated, it creates an unfavorable temporary book-tax difference.
In the year the NOL is deducted it creates a favorable temporary book-tax difference

Corporations compute agi just like individuals?

False corporations use form 1120 to show the sources of income and expenses.

Do corporations have phaseouts?

No unless you are a small corporation.

What makes a book tax difference favorable?

Increase expense and decreSed income for taxes.

What does sec 263 deal with?

Inventory. Yu capitalize inventory instead of expensing

Does dpad create a favorable or unfVorable difference?

Favorable. You recognize a deduction on greater than what you would see on your books.


Favoravle because you dont have oto recognize some dividend income

Key life insurance premium

Unfavorable cause dfor tax they are nonddeductible.

nQO before ASC 718


ISO under 718

Unfavorable you deduct on book vut you don't get deduction.

Hw mny years can you go back with an NOL?

2 years

Hw many years can you go back with. Capital loss?

3 years

What is the difference between corporate and Individual tax rates?

The corporate tax rates start at 15% then go up to 39%, then they go back down to a flat rate at 34%. This happens so that the benefit the coporation received at the 15 and 20% is offset at the 39% rate. The flat corporate tax rate starts at 18.333 million at 35%

WHen does the corporate tax rate flatten out?

It flattens out when the corporation gets 18.33 million at which point they are taxed at the flat rate of 35%.

which schedule gives more detail 1120 M1 or 1120 M3??

Form 1120 M1 gives more detail.

when does form 1120 M1 not reconcile with the corporations taxable income?

WHen the corporation has DRD's, and/or NEt operating losses.

What is the due date of a january 31 year end corporation's tax return?

April 15.

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