This course provides an introduction to the U.S. federal income taxation of corporations and their shareholders. The course focuses on the relevant provisions of Subchapter C of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing corporate formation, operations, distributions, and liquidation. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.
Income Tax Formulas
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From the course by University of Illinois at Urbana-Champaign
Taxation of Business Entities I: Corporations
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University of Illinois at Urbana-Champaign
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Course 3 of 5 in the Specialization U.S. Federal Taxation
From the lesson
Module 2: Corporate Income Taxation
In this module, you will compare the tax formula for C corporations with the tax formula for individuals. Next, you will examine special tax deductions available only to corporations, such as the dividends received deduction, and the organizational expenditures deduction. You will learn how to calculate corporate income tax liability and compute the corporate Alternative Minimum Tax (AMT). This module will also discuss book-tax differences, and finally, it will discuss compliance procedures.
Meet the Instructors
Michael P Donohoe, PhD, CPAAssociate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business
In this lesson, you will learn about the federal income tax formula for C corporations.
But first, let's review something more familiar to you,
the individual income tax formula,
so that you can understand some of the similarities and
differences between the two tax structures.
The formula we will discuss reflects recent tax law changes.
In federal taxation, the concept of income is very broadly conceived
with some courts defining income as any increase in wealth.
However, for several reasons,
congress excludes or defer some types of
income from taxation such as municipal bond interests,
child support payments, and life insurance proceeds.
Thus, Code Section 61A states that,
except is otherwise stated in this subtitle,
gross income meets 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 the taxpayer's gross income.
In contrast to the all-inclusive concept of income,
deductions fall in all-exclusive concept.
That is no deductions are generally permitted unless
explicitly authorized by legislative grace and 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 which are similar to expenses reduce the taxpayer's gross income.
In contrast to the all-inclusive concept of income,
deductions fall in all-exclusive concept.
That is no deductions are permitted unless
explicitly authorized by legislative grace in 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.
Before 2018 from AGI deductions included itemized deductions or the standard deduction,
whichever was greater, and personal and dependency exemptions.
As of 2018 however,
the Tax Cuts and Jobs Act added a new from AGI deduction that largely equates
to 20 percent of
a taxpayer's qualified business income and
eliminated personal and dependency exemptions altogether.
Note that the 20 percent qualified business income deduction
is not an itemized deduction.
Thus, it does not influence whether
itemized deductions are greater or less than the standard deduction.
The difference between gross income and allow 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 see that the overall structure of the two formulas is quite similar.
For instance, both formulas began with
the all-inclusive concept of income under Code Section 61A.
Each formula then applies deductions to arrive at
taxable income which is then used to determine tax liability.
From there, tax credits and prepayments are
applied to compute the net amount due or refunded.
At a more detailed level however,
there are obvious differences in the types of deductions.
In contrast to individuals,
corporations do not compute AGI.
Itemized deductions receive a standard deduction
or consider the deduction for qualified business income.
Instead, as legal entity separate from their owners,
corporations deduct ordinary and necessary business expenses under Code Section 162.
If qualified, they also receive deductions for net operating losses
or NOLs and dividends received from other corporations.
You will 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 several of
the more prominent issues concerning accounting periods and methods,
charitable contributions, property transactions,
capital losses, NOLs, tax rates, and tax credits.
Accounting periods helped 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, unlike individuals, corporations are generally required to
use the accrual method of accounting unless certain exceptions are met.
For example, for tax years beginning after 2017,
corporations with average gross receipts of $25 million or less
for the most recent three year period can adopt the cash method of accounting.
Both individuals and corporations can deduct qualified charitable contributions.
The corporate deduction is capped at 10 percent of taxable income,
computed without regard to a variety of special deductions.
Individuals, however, are currently limited to 60 percent of AGI for
cash contributions and 30 percent of AGI for certain capital gain property.
Corporations generally deduct charitable contributions according to
their accounting method while individuals deduct them when paid.
In general, gains and losses from property transactions for
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 Sections 291 and 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 forward and definitely.
Similar to individuals, for tax years beginning after 2017,
a corporation can generally carry a net operating loss
forward and definitely to offset taxable income in those years.
The deduction for any NOL carry over year is limited to 80 percent of
taxable income determined without regard for
the NOL deduction for both individuals and corporations.
Note that prior to the Tax Cuts and Jobs Act,
a corporation could carry an NOL back two years and for 20 years,
and there was no taxable income limitation on the deductability of the carry overs.
Although individuals make several adjustments when computing NOLs,
a corporation typically computes the excess of deductions over income.
Individuals and corporations are subject to several different tax rates.
For example, in 2018,
the tax rate on ordinary income for individuals ranges from 10 percent to 37 percent,
while the corporate tax rate for all income levels is a flat 21 percent.
Note however that before 2018,
that is prior to the enactment of the Tax Cuts and Jobs Act,
the tax rate on ordinary income for individuals was as high as 39.6 percent,
while the corporate tax rate range from 15 percent to effectively 35 percent.
In other words, the 21 percent flat tax rate for corporations is fairly different.
As in the prior years,
capital gains tax rates for non-corporate taxpayers are zero percent, 15 percent,
20 percent, 25 percent,
or 28 percent, depending on tax bracket and type of property involved.
In some cases, a net investment income tax of
3.8 percent applies to certain high-income individuals.
For corporations however, capital gains are taxed at ordinary income tax rates.
In other words, there is no preferential corporate tax rate for capital gains.
Finally, some of the tax credits available to individual taxpayers
such as the foreign tax credit can also be claimed by corporate taxpayers.
However, other credits such as the dependent care credit and
earned income tax credit are not applicable to business entities.
Overall, you should now understand the general structure of
the corporate tax formula and how it compares to the formula for individuals.
The remaining lessons in this module will focus on
more specific features of the federal corporate income tax.
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