Corporate Taxation Essentials
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Corporate Taxation Essentials - Mark A. Segal
CORPORATIONS
CHAPTER 1
CORPORATIONS AND TAXATION
1.1 Sources of Tax Law
Sources of tax law include the Constitution, Internal Revenue Code, treaties, administration pronouncements, e.g., revenue rulings and revenue procedures, and judicial decisions.
1.2 Business Formats
There are a variety of types of business formats within which a business can be conducted. These include the sole proprietorship, partnership, regular corporation, S
corporation, trust, and estate. In this book an examination of the major tax rules pertaining to corporations is made.
1.3 Corporate Characteristics
As a general rule a corporation formed in compliance with state law will be recognized for tax purposes. The tax law provides that there are six primary corporate characteristics. These characteristics are:
Associates
An objective to carry on a business and divide the gains thereof
Continuity of life
Centralization on management
Limited liability
Free transferability of interest
1.3.1 Tax Treatment of Unincorporated Organizations
The tax law provides that an unincorporated organization will be treated as a corporation for tax purposes if it possesses more corporate characteristics than noncorporate characteristics, ignoring all characteristics common to both types of organizations.
1.3.2 Tax Treatment of Some Partnerships
In applying this rule a partnership will be subject to corporate taxation if it possesses more than three of the final four corporate characteristics listed. In contrast, a trust will be subject to corporate tax treatment if it possesses each of the first two corporate characteristics listed.
1.4 Major Tax Features of the Corporation
There are many aspects involved with corporate taxation.
1.4.1 Major Disadvantage of CorporationsDouble Taxation
The regular C
corporation is considered a taxpaying entity separate and apart from its shareholders. Frequently the regular corporate form is referred to as subject to double taxation. In this regard income is seen as taxed to the entity when earned by it, and to shareholders upon distribution. This aspect is generally seen as a drawback to use of a regular corporation. The regular corporation does however have a variety of other aspects which are beneficial.
1.4.2 Advantages of Corporations
The following are advantages of corporations:
Limited liability.
Enhanced means of raising capital through the issuance of debt or equity and the admission of new shareholders. In contrast the S
corporation is permitted to have but one class of stock and a limited number and type of shareholders; while the partnership is generally viewed as terminated upon admission of a new partner.
Free transferability of interests.
Flexibility in selecting its taxable year.
Greater flexibility in the type and amount of retirement plans and tax free employee fringe benefits it can devise.
1.5 Procedural Elements
The due date of a regular corporation’s tax return is the 15th day of the third month following the end of the corporation’s tax year. Where the 15th day of such third month falls on a Saturday, Sunday, or legal holiday, the return due date is extended to the next business day thereafter. Filing is considered made when the return is mailed if sent by U.S. postage. The return must be filed with the I.R.S. Service Center that covers the district within which the corporation’s principal business office or agency is situated. An automatic six month extension for filing can be obtained through the filing of a form 7004, and payment of any balance due for the return by the due date of the return for which the extension applies.
1.6 Tax Year
Regular corporations may select a calendar tax year or a fiscal tax year. A calendar tax year is one which begins on January 1 and ends on December 31. A fiscal tax year is one which begins on a date other than January 1 and ends on a date other than December 31. In contrast to regular corporations, personal service corporations and subchapter S
corporations are subject to rules limiting their use of a fiscal tax year. A personal service corporation is a corporation characterized by having its primary activity being the providing of personal services by owner-employees. These services must be in the area of health, law, engineering, accounting, architecture, actuarial services, the performing arts, or consulting.
1.7 Tax Method
As a general rule due to recent changes in the tax law a regular corporation will typically be required to utilize the accrual method of accounting.
1.8 Structure of the Return
Determination of a corporation’s tax is computed pursuant to the following steps:
Gross Income from Operations—This consists of the total of:
Minus Deductions—This category essentially consists of:
The difference between gross income and deductions equals the corporation’s taxable income.
Determine the tax liability by applying the pertinent tax rate schedule to the corporation’s taxable income.
Subtract from the tax the estimated taxes paid for the year, refunds to which the corporation is entitled that can be applied against the tax, and credits to determine the tax due or the amount to