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Thus code section 61a states that, except as otherwise stated in the subtitle,
gross income means all income from whatever source derived.
In other words gross income includes everything,
unless the code explicitly indicates otherwise deductions,
which are similar to expenses reduce a taxpayer's gross income.
In contrast to the all inclusive concept of income,
deductions follow an all-exclusive concept.
That is no deductions are permitted unless explicitly authorized by the code.
For individuals, there are two categories of deductions.
Deductions for adjusted gross income and deductions from adjusted gross income.
Deductions for adjusted gross income, or AGI as it is known,
are often related to business activities and certain investments.
AGI is important because it is used in many other tax related calculations.
Deductions from AGI tend to be more personal in nature and
include certain itemized deductions, the standard deduction and exemptions.
In a given tax year, individuals choose between itemizing allowed deductions and
deducting a standard amount determined by congress based on filing status.
Exemptions are flat deductions for the taxpayer, his or her spouse, and
each person qualifying as a dependent.
The difference between gross income and allowed deductions is taxable income.
The tax base for determining individual federal income tax.
Individuals calculate their income tax liability by using the applicable tax
rate, based on their filing status and taxable income.
Tax credits which unlike deductions directly reduce taxes payable and
prepayments of tax are then applied to arrive at the net amount due or refunded.
Let's now compare the individual and corporate income tax formulas.
You can easily you see that the overall structure of the two formulas is similar.
For instance,
both formulas begin with the all inclusive concept of income under code section 61 A.
Each formula then applies deductions to arrive at taxable income
which is then used to determine tax liability.
From there tax credits and
pre-payments are applied to compute the net amount due or refunded.
At a more detailed level however there are clear differences in
the types of deductions.
In contrast to individuals, corporations do not compute AGI,
itemize their deductions, receive a standard deduction, or obtain personal and
dependency exemptions.
Instead, as separate legal entities, corporations deduct ordinary and
necessary business expenses under Code Section 162.
They also obtain deductions for net operating losses, or NOLs, and
dividends received.
You'll learn about the dividends received deduction later.
There are other similarities and differences between the two tax
structures that are not obvious from comparing the tax formulas.
Let's briefly discuss some of the prominent issues concerning accounting
periods and methods, charitable contributions, property transactions,
capital losses, NOLs, tax rates and tax credits.
Accounting periods help frame the measurement of taxable income and
define when items of income and deduction are recognized.
For tax purposes, most corporations can choose either a calendar or
fiscal year, whereas individuals typically must use a calendar year end.
The method of accounting determines when and how income and
deductions are recognized.
However, and like individuals corporations are generally required to use the accrual
method of accounting unless certain exceptions are met.
For example, corporations with average gross receipts of $5 million or less for
the three years prior to the current tax year
can adopt the cash method of accounting.
Both individuals and corporations can deduct qualified charitable contributions.
The corporate deduction is capped at 10% of taxable income.
Computed without regard to a variety of special deductions.
Individuals however are limited to 50% of AGI for
cash contributions and 30% of AGI for capital gain property.
Corporations deduct charitable contributions according to their
accounting method while individual deduct them when paid.
in general gains and losses from property transaction from individuals and
corporations are taxed in the same manner.
This is largely because the rules governing such transactions
make little distinction between different types of taxpayers.
One notable exception though is the depreciation recapture provisions under
code section 1250 which impose more depreciation recapture on corporations
than individuals.
You will learn more about this in later modules.
Corporations cannot use capital losses to offset ordinary income.
However they can carry capital losses back three years and
forward five years to offset capital gains in those years.
Individuals can deduct up to $3,000 of net capital losses against ordinary income,
with any excess losses carrying over indefinitely.
Similar to individuals a corporation can carry a net operating loss back 2 years
and forward 20 years to offset taxable income in those years.
Although individuals make many adjustments when computing NOLs,
a corporation simply computes the excess of deductions over income.
Individuals and corporations are subject to several different tax rates.
For example in 2016, the tax rate on ordinary income for individuals,
ranged from 10% to 39.6%, while the corporate tax rate range from 15% to 39%.
Similarly, capital gains tax rates for non-corporate taxpayers were 0%, 15%,
20%, 25%, or 28% depending on the tax bracket and type of property involved.
In some cases,
in that investment income tax of 3.8% apply to certain high income individuals.
For corporations, however, capital gains are taxed at ordinary income tax rates.
That is, there is no preferential corporate tax rate for capital gains.
Finally, some of the tax credits available to individual tax payers,
such as the foreign tax credit can also be claimed by corporate tax payers.
However, other credits such as the dependent care credit and
earned income tax credit are not applicable to business entities.
Michael P Donohoe, PhD, CPAAssociate Professor of Accountancy and PwC Faculty Fellow
