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Deduct From Book Income: - B - T F Dul - .

This document discusses several key aspects of corporate taxation: 1) It explains how to reconcile book income and taxable income by adding back non-deductible expenses on tax returns and deducting items like tax-exempt interest that are reported on books but not tax returns. 2) It provides an example calculation showing how to determine a corporation's taxable income based on information from its financial statements. 3) It discusses how consolidated tax returns can be filed by affiliated corporations to eliminate intercompany dividends and defer gains on intercompany transactions.

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Zeyad El-sayed
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24 views

Deduct From Book Income: - B - T F Dul - .

This document discusses several key aspects of corporate taxation: 1) It explains how to reconcile book income and taxable income by adding back non-deductible expenses on tax returns and deducting items like tax-exempt interest that are reported on books but not tax returns. 2) It provides an example calculation showing how to determine a corporation's taxable income based on information from its financial statements. 3) It discusses how consolidated tax returns can be filed by affiliated corporations to eliminate intercompany dividends and defer gains on intercompany transactions.

Uploaded by

Zeyad El-sayed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as RTF, PDF, TXT or read online on Scribd
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572 MODULE 36 TAXES: CORPORATE

(2) Deduct from book income


(a) Income reported on the books but not on the tax return (e.g., tax-exempt interest, life in-
surance proceeds)
(b) Expenses deducted on the tax return but not on the books (e.g., MACRS depreciation
above straight-line, charitable contribution carryover)
(c) The dividends received deduction
2. When going from taxable income to book income, the above adjustments would be reversed.
3. Schedule M-I of Form 1120 provides a reconciliation of income per books with taxable income
before the NOL and DRD. There are two types of Schedule M-I items:
(1) Permanent differences (e.g., tax-exempt interest)
(2) Temporary differences-items reflected in different periods (e.g., accelerated depreciation on
tax return and straight-line' on books)
EXAMPLE: A corporation discloses that it had net income after taxes of $36,000 per books. Included in the
computation were deductions for charitable contributions of $10,000, a net capital loss of $5,000, and federal
income taxes paid of $9,000. What is the corporation's Tl?
Net income per books after tax $36,000
Nondeductible net capital loss -t-" 5,000
Federal income tax expense + 9,000
Charitable contributions + I O. 000
Taxable income before CC $60;000
CC (limited to 10% x 60,000) - 6.000
Taxable income $54000
4. Schedule M-2 of Form 1120 analyzes changes in a corporation's Unappropriated Retained Earn-
ings per books between the beginning and end of the year.
Balance at beginning of year
Add: Net income per books
Other
increases
Less: Dividends to shareholders
Other decreases (e.g., addition to reserve for contingencies)
Balance at end of year
5. Affiliated and Controlled Corporations
6. An affiliated group is a parent-subsidiary chain of corporations in which at least 80% of the
com-
bined voting power and total value of all stock (except nonvoting preferred) are owned by includible
corporations. .
7. They may elect to file a consolidated return. Election is binding on all future returns.
8. If affiliated corporations file a consolidated return, intercompany dividends are eliminated in the
consolidation process. If separate tax returns are filed, dividends from affiliated corporations are
eligible for a 100% dividends received deduction.
9. Possible advantages of a consolidated return include the deferral of gain on intercompany transac-
tions and offsetting operating/capital losses of one corporation against the profits/capital gains of
another.
EXAMPLE:, P Corp. owns 80% of the stock of A Corp., 40% of the stock of B Corp., and 45% of the stock ofC
Corp. A Corp. owns 40% of the stock of B Corp. A consolidated tax return could be filed by P, A, and B.
EXAMPLE: Parent and Subsidiary file consolidated tax returns using a calendar year. During 2008, Subsidiary
paid a $10,000 dividend to Parent. Also during 2008, Subsidiary sold land with a basis of$20,000 to Parentfor its
FMV of $50,000. During 2009, Parent sold the land to an unrelated taxpayer for $55,000.
The intercompany dividend is eliminated in the consolidation process and is excluded from consolidated tax-
able income. Additionally, Subsidiary's $30,000 of gain from the sale of land to Parent is deferred for 2008. The
$30,000 will be included in consolidated taxable incomefor 2009 when Parent reports $5,000 of income from the
sale of that land to the unrelated taxpayer.

10. A controlled group of corporations is limited to an aggregate of $75,000 of ta~able income


taxed at
less than 35%, one $250,000 accumulated earnings credit, one Sec. 179 expense election, and one
$40,000 AMT exemption. There are three basic types of controlled groups.

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