Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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Wisteria Corporation’s Schedule M-1, Form 1120, is illustrated below.
40,000
4,000
65,000
interest
16,000
5,000
9,000
9,000
3,500
12,500
52,500
3,500
In 2010, a new tax form will be required for certain large corporations: Schedule
UTP, Uncertain Tax Position Statement. This form has rattled the accounting
world, since it requires corporations to disclose the uncertain tax positions taken
on corporate tax returns directly to the IRS. The IRS is expected to use Schedule
UTP to make audits of corporations more pointed and efficient and to generate
more tax revenue. However, corporations will likely fight back through the
courts, and they may win the right to keep ‘‘privileged’’ information private.
Only time will tell how Schedule UTP will affect IRS audits of large corporations.
SECTION 11.5
FILING REQUIREMENTS AND ESTIMATED TAX
The tax return form for a regular corporation is Form 1120; for an S corporation, the tax
return form is Form 1120S. Corporate tax returns are due on or before the fifteenth day of
the third month following the close of the corporation’s tax year, but corporations may
receive an automatic 6-month extension by filing Form 7004. A corporation must pay
any tax liability by the original due date of the return.
Corporations must make estimated tax payments in a m anner similar to those made by
self-employed individual taxpayers. The payments are made in four installments due on the
fifteenth day of the fourth, sixth, ninth, and twelfth months of the corporation’s tax year.
Self-Study Problem 11.4
Redwood Corporation has net income from its books of $104,0 00. For the cur-
rent year, the corporation had federal income tax expense of $41,000, a net
capital loss of $9,100, and tax-exempt interest income of $4,700. The company
deducted depreciation of $17,000 on its tax return and $13,000 on its books.
Using Schedule M-1 below, calculate Redwood Corporation’s taxable income,
before any net operating loss or special deductions, for the current year.
N
Section 11.5
Filing Requirements and Estimated Tax 11-7
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Small corporations with less than $250,000 in gross receipts and less than
$250,000 in assets do not have to complete Schedule L (Balance Sheet) or Sched-
ules M-1 and M-2. The rule applies to both S and C corporations, and allows
small businesses to keep records based on their checkbook or cash receipts and
disbursements journal. This makes the reporting requirements for a small corpo-
ration similar to the reporting requirements for a Schedule C sole proprietorship.
Self-Study Problem 11.5
Aspen Corporation was formed and began operations on January 1, 2010.
Aspen Corporation
Income Statement
For the Year Ended December 31, 2010
Gross income from operations $285,000
Qualified dividends received from a 10 percent
owned domestic corporation
10,000
Total gross income $295,000
Cost of goods sold
(80,000)
Total income $215,000
Other expenses:
Compensation of officers $ 90,000
Salaries and wages 82,000
Repairs 8,000
Depreciation expense 5,000
Payroll taxes
11,000
Total other expenses
(196,000)
Net income (before federal income tax expense)
$ 19,000
Aspen Corporation
Balance Sheet
as of December 31, 2010
Assets:
Cash $ 35,000
Accounts receivable 10,000
Land 18,000
Building 125,000
Less: accumulated depreciation
(5,000)
Total assets
$183,000
Liabilities and owners’ equity:
Accounts payable $ 25,800
Common stock 140,000
Retained earnings
17,200
Total liabilities and owners’ equity
$183,000
Aspen Corporation made estimated tax payments of $2,000.
Based on the above information, complete Form 1120 on pages 11-9
through 11-13. Assume the corporation’s federal income tax expense is equal
to its 2010 federal income tax liability and that any tax overpayment is to be
applied to the next year’s estimated tax. Schedule UTP is not required.
11-8 Chapter 11
The Corporate Income Tax
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Section 11.5
Filing Requirements and Estimated Tax 11-9
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
11-10 Chapter 11
The Corporate Income Tax
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Section 11.5
Filing Requirements and Estimated Tax 11-11
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
11-12 Chapter 11
The Corporate Income Tax
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Section 11.5
Filing Requirements and Estimated Tax 11-13
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11-14 Chapter 11
The Corporate Income Tax
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
SECTION 11.6
S CORPORATIONS
Certain qualified small business corporations (S corporations) may elect to be taxed in a manner
similar to partnerships. An S corporation does not generally pay tax, and each shareholder
reports his or her share of corporate income. The S corporation election is designed to relieve
small corporations of certain corporate tax disadvantages, such as the double taxation of income.
To elect S corporation status, a corporation must be a small business corporation with
the following characteristics:
1. The corporation must be a domestic corporation;
2. The corporation must have 100 or fewer shareholders who are all either individuals,
estates, certain trusts, certain financial institutions, or certain exempt organizations;
3. The corporation must have only one class of stock; and
4. All shareholders m ust be U.S. citizens or resident aliens.
The S corporation election must be made during the prior year or the first two and one-
half months of the current tax year to obtain the status for the current year.
EXAMPLE Laurel Corporation is a calendar year corporation that makes an S cor-
poration election on April 2, 2010. The corporation is not an S corpo-
ration until the 2011 tax year; it is a regular corporation for 2010. N
After electing S corporation status, the corporation retains the status until the election is
voluntarily revoked or statutorily terminated. If the corporation ceases to be a small busi-
ness corporation (for exam ple, it has 102 sharehol ders in 2010), the election is statutorily
terminated. Also, the election is terminated when a corporation receives 25 percent
or more of its gross income from passive investments for 3 consecutive tax years and the
corporation has accumulated earnings and profits at the end of each of those years. If a cor-
poration experiences an involuntary termination of S corporation status, the election is ter-
minated on the day the status changes. For example, the loss of S corporation status on
June 1, 2010, causes the corporation to be a regul ar corporation from that day on.
Upon consent of shareholders owning a majority of the voting stock, an S corporation
election can be voluntarily revoked. If the consent to revoke the election is made during
the first two and one-half months of the tax year, the S corporation status will be considered
voluntarily terminated effective at the beginning of that year. Shareholders may specify a date
on or after the date of the revocation as the effective date for the voluntary termination of the
S corporation election. If a prospective revocation date is not specified, and the consent to
revoke the election is made after the fifteenth day of the third month of the tax year, the ear-
liest that the S corporation status can be terminated is the first day of the following tax year.
EXAMPLE On January 20, 2010, Juniper Corporation, a calendar year corpora-
tion, files a consent to revoke its S corporation election. No date is
specified in the consent as the effective date of the revocation. The
corporation is no longer an S corporation effective January 1, 2010.
If the election were made after March 15, the corporation would not
become a regular corporation until the 2011 tax year. N
Reporting Income
Each shareholder of an S corporation reports his or her share of corporate income based on
his or her stock ownership during the year. The taxable income of an S corporation is com-
puted in the same manner as for a partnership.
Each shareholder of an S corporation takes into account separately his or her share of
items of income, deductions, and credits on a per share per day basis. Schedule K-1 of
Section 11.6
S Corporations 11-15
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Form 1120S is used to report the allocation of ordinary income or loss, plus all separately
stated items of income or loss, to each of the shareholders. Each shareholder’s share of
these items is included in the shareholder’s computation of taxable income for the tax
year during which or with which the corporation’s year ends. In the case of the death of
a shareholder, the shareholder’s portion of S corporation items will be taken into account
on the shareholder’s final tax return.
EXAMPLE Freda is the sole shareholder of the Freda Corporation, which has an
S corpo ration election in effect. During calendar year 2010, the corpo-
ration has ordinary taxable income of $100,000. Freda must report
$100,000 on her individual income tax return for 2010 as income from
the Freda Corporation. N
S Corporation Losses
Losses from an S corporation also pass through to the shareholders. However, the amount of
loss from an S corporation that a shareholder may report is limited to his or her adjusted
basis in the corporation’s stock plus the amount of any loans from the shareholder to the cor-
poration. Any loss in excess of the shareholder’s basis in the stock of the corporation plus
loans is a carryforward. If a shareholder was not a shareholder for the entire tax year, losses
must be allocated to the shareholder on a daily basis. This prevents a shareholder from sell-
ing losses late in the year to another taxpayer by selling the stock of an S corporation.
EXAMPLE Lawson and Mary are equal shareholders in L&M Corporation, an
S corporation. On December 1, 20XX, Mary sells her interest to
Connley for $15,000. Lawson’s basis in his L&M Corporation stock
is $10,000. For the 20XX tax year, the corporation has a loss of
$24,000. Lawson can deduct only $10,000 of his half of the loss
($12,000), since that is the amount of his stock basis. Even though
she is not a sha reholde r at yea r end, Mary may deduct $1 0,981 of
the loss, which is 334/365 of $12,000, assuming her basis w as at least
that amount. Connley may deduct $1,019, 31/365 of $12,000. In leap
years, the amounts would be $10,984 (335/366 $12,000) and
$1,016 (31/366 $12,000), respectively. N
Pass-through Items
Certain items pass through from an S corporation to the shareholders and retain their tax
attributes on the shareholders’ tax returns. The following are examples of pass-through items:
1. Capital gains and losses
2. Section 1231 gains and losses
3. Dividend income
4. Charitable contributions
5. Tax-exempt interest
6. Most credits
Special Taxes
S corporations are not subject to the corporate income tax on their regular taxable income.
Under certain circumstances, an S corporation may be liable for tax at the corporate level. An
S corporation may be subject to a tax on gains attributable to appreciation in the value of
assets held by the corporation prior to the S corporation electi on, the built-in gains tax.
In addition, a tax may be imposed on certain S corporations that have large amounts of pas-
sive investment income, such as income from dividends and interest. The rules for the appli-
cation of these taxes are complex.
11-16 Chapter 11
The Corporate Income Tax
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.