4.2 Corporate Income Tax Return

1. Filing and Payment of Tax

1) Filing requirements: (C corporation) Form 1120 every year

2) Due date and Extension: (C corporation) by 15th day of the fourth month
Automatic six-month extension by filing Form 7004

3) Taxable year: Form 1128 (application to change a tax year)

4) Accrual Basis: for C corporations, partnerships having a C corporation as a partner, or tax shelters

5) Estimated payments of corporate tax: $500 or more and smaller of
(a) 100% of current year's tax (actual or annualized income basis) or
(b) 100% of prior year's tax (if full 12 months and showed tax liability)
*A large corporation must pay 100% of the tax due for the current year

2. Form 1120 Page 1

Gross income - Deductions = Taxable income

3. Gross Income

Gross profit = Gross sales - Cost of goods sold
+ Dividends
+ Interest
+ Gross rent
+ Gross royalties
+ Net capital gains/other gains
+ Other income

1) Prepaid income (include in GI when received)
(1) Interest Income
(2) Rental Income (nonrefundable deposits, cancellation)
(3) Royalty income

2) Tax-exempt income
(1) Interest from municipal or State obligations/bonds
(2) Proceeds from life insurance on officers

4. Deductions

1) Ordinary, necessary, and reasonable expenses

2) Executive compensation

$1,000,000 to CEO, CFO, and three other most-highly officers in a year (publicly held corporation)

3) Bonus accrual

Accrual basis and paid within 2.5 months after the year-end deductible in the taxable year

4) Taxes

Federal income taxes are not deductible.

5) Penalties and illegal activities: not deductible

6) Lobbying and political expenditures: not deductible

7) Interest Expense

30% of EBITDA: Earnings Before Interest Taxes Depreciation and Amortization (carry forward indefinitely)
* Not apply average annual gross receipts are less than $25 million for the prior three years

8) Charitable contributions

10% of taxable income before the dividends received deduction (carry forward for five years)
Accrual basis and paid within 3.5 months after the year-end deductible in the taxable year

9) Depreciation and depletion: the same rules as individuals

10) Organizational expenditure

The first $5,000 to be expensed and the remainder amortized over 180 months (same as individuals)
(1) Include: drafting the corporate charter, bylaws, minutes of organizational meetings, and terms of original stock certificates
(2) Exclude: issuing or selling shares of stock, commissions, underwriter's fees, and the cost incurred in the transfer of assets (syndication cost)

11) Research and development expense

(1) Deducted currently (before 2022)
(2) Amortized over 60 months or more
(3) Capitalized and written off when the project is abandoned

12) Amortization expense

Straight-line basis over a 15-years
Intangibles: goodwill, franchises, licenses, trademark, and covenants not to compete

13) Life insurance premium

(1) The corporation is the beneficiary: not deductible
(2) The insured employee is beneficiary: deductible (employee fringe benefit)

14) Business meals and gifts

Business meals: 50% deductible
Business gifts: $25 per recipient per year

15) Losses

(1) Related party loss: disallowed between more than 50% share

(2) Capital loss
a) Deductible only to the extent of capital gains
b) Carried back 3 years and then carried forward 5 years (as a short-term capital loss)
c) Regular tax rate (add to ordinary income)

(3) Bad debt loss: ordinary loss (direct write-off method, specific charge-off method)

(4) Casualty loss: any loss is deductible (no limitation)

(5) Net operation loss
After 12/31/2017: indefinite carryforward, 80% deduction of taxable income
Before 12/31/2017: 20 years carryforward, 100% deduction of taxable income

16) Dividends received deduction (DRD)

To partially mitigate the effects of triple (multiple) taxations, corporations are allowed DRD.

(1) Entities for which the DRD does not apply
a) Personal service corporations
b) Personal holding companies
c) S corporation

(2) Holding period: more than 45 days

(3) Percentage
a) 100% DRD: received from affiliated (at least 80% owned) corporations
b) 65% DRD: domestic unaffiliated corporations that are at least 20% owned
c) 50% DRD: domestic corporations that are less than 20% owned

<Taxable income limitation>

65%/50% of taxable income before the DRD, NOL, and capital loss carryback
* Exception: if the full 65%/50% DRD creates or increases NOL

5. Corporate Tax Rate

A corporation's taxable income is subject to a flat tax of 21%.
Personal service corporations are also subject to a flat tax of 21%.

6. Tax Credits

1) Foreign tax credit: same as individual

2) General business credit
(1) Combination credit
(2) Limit: not exceed "net income tax" less 25% of regular tax liability above $25,000