Corporate Income Tax
Imposed using graduated bracket rate system.
Two built in surtaxes that phase out of benefits of lower bracketed tax rates.
Flat Rate
Taxable income over $18,333,333 is taxed at a flat rate of 35%
Long-Term Capital Gains of Corporations
Taxed at ordinary tax rates
Personal Service Corporations Tax Rate
Taxed at a flat rate of 35%
Foreign Tax Credit (FTC) election options
May elect to take a credit or deduction for foreign taxes paid or accrued.
FTC Application
Applied against tax liability after AMT but before other credits
May offset AMT liability
Not creditable against accumulated earnings tax or personal holding company tax.
FTC for Non-US Taxpaper
FTC is allowed only for foreign taxes paid on effectively connected income against US Tax
FTC Limit
Lesser of US tax attributable to foreign source taxable income or foreign taxes paid.
FTC Carryover
Foreign tax paid in excess of limit may be carried back 1 year and forward 10 years.
FTC Limit Computation
FTC=US Income Tax X (Foreign source taxable income/Worldwide taxable income
FTC for Pass-through Entities
Apportion the foreign taxes among the partners, shareholders (of an S Corporation, or beneficiaries (of an estate).elect and compute a credit or deduction on individual returns.
Excluded from Includible Corporations (for consolidated returns)
- Tax exempt corporations
- S Corporations
- Foreign sales corporations
- Insurance corporations
- Real Estate Investments Trusts (REITs)
- Regulated investment companies
- Domestic International Sales Corporations (DISCs)
Affiliated Groups (for Consolidated returns) Requirements
- Other group members must own 80% by vote and value
- Parent must directly own 80% of at least one includible corporation
Consolidation Election
- election to file is made by filing return.
- Consent of each included corporation required
- Consent of IRS required to terminate election
Consolidated Taxable Income
Must remove separately consolidated and specially treated items.
Net taxable income consolidated, then adjusted for items removed after separate consolidation.
Separately stated items on consolidated taxable income
- charitable contributions
- dividends received and paid deductions
- percentage depletion of mineral properties
- NOL deductions
- Section 1231 gains and losses
- Capital gains and losses
Consolidated Losses
Losses of one corporation may offset income of another.
Any NOL generated must be used in a consolidated tax year.
Intercompany transactions
Gain/loss on transaction is deferred.
Buyer assumes same basis and holding period as selling member.
Controlled Groups
Corporations with a specified relationship by stock ownership.
Parent-Subsidiary Controlled Group
Parent owning stock that represents 80% by voting power or value of another corporation
Brother-Sister Controlled Group
stock of each owned by the same 5 or fewer persons and that ownership:
Owns 80% by vote or value, and special 50% rule of 50% voting power or value of all classes.
Constructive Ownership of Controlled Groups
Family member: spouse, child, grandchild, parent, or grandparent or
Entity: corporation, partnership, estate, or trust with a 5% or more interest or proportion to that interest.
Limit on Tax Benefits of Controlled Groups
Benefits most be shared. May choose any method to allocate the amounts among the group.
- Low tax brackets
- Section 179 expensing max of $500k
- AMT exemption bas of $40k
- General business credit $25k offset.
- AET deduction base of $250k
Intergroup Transactions of Controlled Groups
Anti-avoidance rules:
- Loss not recognized on related party sale
- Expenditure to group member not deductible until included in other member’s income.
- Gain on sale/exchange to member in whose hands the property is depreciable is ordinary income
IRS may redetermine price for property transferred between group members called arm’s-length price. The methods include comparable uncontrolled prices, resale prices, and cost plus return.
