Pub. 542, Corporations |
2008 Tax Year |
Publication 542 - Main Contents
Businesses Taxed as Corporations
The rules you must use to determine whether a business is taxed as a corporation changed for businesses formed after 1996.
Business formed before 1997.
A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as
a corporation.
Business formed after 1996.
The following businesses formed after 1996 are taxed as corporations.
-
A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic.
-
A business formed under a state law that refers to it as a joint-stock company or joint-stock association.
-
An insurance company.
-
Certain banks.
-
A business wholly owned by a state or local government.
-
A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly
traded
partnerships).
-
Certain foreign businesses.
-
Any other business that elects to be taxed as a corporation (for example, a limited liability company (LLC)) by filing Form
8832, Entity
Classification Election. For more information, see the instructions for Form 8832.
S corporations.
Some corporations may meet the qualifications for electing to be S corporations. For information on S corporations,
see the instructions for Form
1120S, U.S. Income Tax Return for an S Corporation.
Personal service corporations.
A corporation is a personal service corporation if it meets all of the following requirements.
-
Its principal activity during the “testing period” is performing personal services (defined later). Generally, the testing period for
any tax year is the prior tax year. If the corporation has just been formed, the testing period begins on the first day of
its tax year and ends on
the earlier of:
-
The last day of its tax year, or
-
The last day of the calendar year in which its tax year begins.
-
Its employee-owners substantially perform the services in (1). This requirement is met if more than 20% of the corporation's
compensation
cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners.
-
Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period.
Personal services.
Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting,
engineering, health
(including veterinary services), law, and the performing arts.
Employee-owners.
A person is an employee-owner of a personal service corporation if both of the following apply.
-
He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he
or she is an
independent contractor for other purposes) on any day of the testing period.
-
He or she owns any stock in the corporation at any time during the testing period.
Other rules.
For other rules that apply to personal service corporations see Accounting Periods, later.
Closely held corporations.
A corporation is closely held if all of the following apply.
-
It is not a personal service corporation.
-
At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is, directly or indirectly,
owned by
or for five or fewer individuals. “Individual” includes certain trusts and private foundations.
Other rules.
For the at-risk rules that apply to closely held corporations, see At-Risk Limitations, later.
Property Exchanged for Stock
If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified
preferred
stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable.
This rule applies both
to individuals and to groups who transfer property to a corporation. It also applies whether the corporation is being formed
or is already operating.
It does not apply in the following situations.
-
The corporation is an investment company.
-
You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors.
-
The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's
debt (including a
security) that accrued while you held the debt.
Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax
returns a complete
statement of all facts pertinent to the exchange. For more information, see section 1.351-3 of the Regulations.
Control of a corporation.
To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least
80% of the total combined
voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting
stock.
Example 1.
You and Bill Jones buy property for $100,000. You both organize a corporation when the property has a fair market value of
$300,000. You transfer
the property to the corporation for all its authorized capital stock, which has a par value of $300,000. No gain is recognized
by you, Bill, or the
corporation.
Example 2.
You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value
of $300,000. This
represents only 75% of each class of stock of the corporation. The other 25% was already issued to someone else. You and Bill
recognize a taxable gain
of $200,000 on the transaction.
Services rendered.
The term property does not include services rendered or to be rendered to the issuing corporation. The value of stock
received for services is
income to the recipient.
Example.
You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at
$38,000. Right after the
exchange, you own 85% of the outstanding stock. No gain is recognized on the exchange of property. However, you recognize
ordinary income of $3,000 as
payment for services you rendered to the corporation.
Property of relatively small value.
The term property does not include property of a relatively small value when it is compared to the value of stock
and securities already owned or
to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of
gain or loss by other
transferors.
Property transferred will not be considered to be of relatively small value if its fair market value is at least 10%
of the fair market value of
the stock and securities already owned or to be received for services by the transferor.
Stock received in disproportion to property transferred.
If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in
proportion to his or her
interest in the property transferred. If a disproportionate transfer takes place, it will be treated for tax purposes in accordance
with its true
nature. It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation
for services, or
satisfy the transferor's obligations.
Money or other property received.
If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other
than stock, you may have to
recognize gain. You must recognize gain only up to the amount of money plus the fair market value of the other property you
receive. The rules for
figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed in Publication
544 under
Like-Kind Exchanges. If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary
income from depreciation. See chapter 3 of Publication 544. No loss is recognized.
Nonqualified preferred stock.
Nonqualified preferred stock is treated as property other than stock. Generally, it is preferred stock with any of
the following features.
-
The holder has the right to require the issuer or a related person to redeem or buy the stock.
-
The issuer or a related person is required to redeem or buy the stock.
-
The issuer or a related person has the right to redeem or buy the stock and, on the issue date, it is more likely than not
that the right
will be exercised.
-
The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices.
For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code.
Liabilities.
If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other
property. There are two
exceptions to this treatment.
-
If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized
up to the
difference. However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest,
no gain is
recognized.
-
If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange
is to avoid
federal income tax, the assumption is treated as if you received money in the amount of the liabilities.
For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code.
Example.
You transfer property to a corporation for stock. Immediately after the transfer, you control the corporation. You also receive
$10,000 in the
exchange. Your adjusted basis in the transferred property is $20,000. The stock you receive has a fair market value (FMV)
of $16,000. The corporation
also assumes a $5,000 mortgage on the property for which you are personally liable. Gain is realized as follows.
FMV of stock received
|
$16,000
|
Cash received
|
10,000
|
Liability assumed by corporation
|
5,000
|
Total received
|
$31,000
|
Minus: Adjusted basis of property transferred
|
20,000
|
Realized gain
|
$11,000
|
The liability assumed is not treated as money or other property. The recognized gain is limited to $10,000, the cash
received.
Loss on exchange.
If you have a loss from an exchange and own, directly or indirectly, more than 50% of the corporation's stock, you
cannot deduct the loss. For more
information, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544.
Basis of stock or other property received.
The basis of the stock you receive is generally the adjusted basis of the property you transfer. Increase this amount
by any amount treated as a
dividend, plus any gain recognized on the exchange. Decrease this amount by any cash you received, the fair market value of
any other property you
received, and any loss recognized on the exchange. Also decrease this amount by the amount of any liability the corporation
or another party to the
exchange assumed from you, unless payment of the liability gives rise to a deduction when paid.
Further decreases may be required when the corporation or another party to the exchange assumes from you a liability
that gives rise to a
deduction when paid after October 18, 1999, if the basis of the stock would otherwise be higher than its fair market value
on the date of the
exchange. This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or
the trade or business with
which the liability is associated.
The basis of any other property you receive is its fair market value on the date of the trade.
Basis of property transferred.
A corporation that receives property from you in exchange for its stock generally has the same basis you had in the
property, increased by any gain
you recognized on the exchange. However, the increase for the gain recognized may be limited. For more information, see section
362 of the Internal
Revenue Code.
Election to reduce basis.
In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market
value, the transferor and
transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal
to the fair market
value of the property transferred. The transferor and transferee must make this election by attaching a statement to their
tax returns filed by the
due date (including extensions) for the tax year in which the transaction occurred. For more information on making this election
see section
362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70, 2005-41 I.R.B. 694.
This section explains the tax treatment of contributions from shareholders and nonshareholders.
Paid-in capital.
Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. These contributions
are not taxable to the
corporation.
Basis.
The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder
had in the property, increased
by any gain the shareholder recognized on the exchange. However, the increase for the gain recognized may be limited. For
more information, see
Basis of property transferred, earlier, and section 362 of the Internal Revenue Code.
The basis of property contributed to capital by a person other than a shareholder is zero.
If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce
the basis of any property
acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount
of the contribution. If the
amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other
properties held by the
corporation on the last day of the 12-month period in the following order.
-
Depreciable property.
-
Amortizable property.
-
Property subject to cost depletion but not to percentage depletion.
-
All other remaining properties.
Reduce the basis of property in each category to zero before going on to the next category.
There may be more than one piece of property in each category. Base the reduction of the basis of each property on
the following ratio:
If the corporation wishes to make this adjustment in some other way, it must get IRS approval. The corporation files a request
for approval
with its income tax return for the tax year in which it receives the contribution.
Filing and Paying Income Taxes
The federal income tax is a pay-as-you-go tax. A corporation generally must make estimated tax payments as it earns or receives
income during its
tax year. After the end of the year, the corporation must file an income tax return. This section will help you determine
when and how to pay and file
corporate income taxes.
For certain corporations affected by Presidentially declared disasters relating to Hurricanes Katrina, Rita, and Wilma, the
due dates for filing
returns, paying taxes, and performing other time-sensitive acts may be extended. The IRS may also forgive the interest and
penalties on any underpaid
tax for the length of any extension. For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes
Katrina, Rita, and
Wilma; and Publication 553, Highlights of 2005 Tax Changes.
This section will help you determine when and how to report a corporation's income tax.
Who must file.
Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part
of a tax year (including
corporations in bankruptcy) must file an income tax return whether or not they have taxable income.
Which form to file.
A corporation generally must file Form 1120 to report its income, gains, losses, deductions, credits, and to figure
its income tax liability. A
corporation may file Form 1120-A if its gross receipts, total income, and total assets are each under $500,000 and it meets
certain other
requirements. Also, certain organizations must file special returns. For more information, see the Instructions for Forms
1120 and 1120-A.
Electronic filing.
Corporations can generally file Form 1120 and certain related forms, schedules, and attachments electronically. Certain
corporations must
electronically file Form 1120. However, these corporations can request a waiver. For more information regarding electronic
filing, visit
www.irs.gov/efile.
When to file.
Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax
year. A new corporation filing a
short-period return must generally file by the 15th day of the 3rd month after the short period ends. A corporation that has
dissolved must generally
file by the 15th day of the 3rd month after the date it dissolved.
Example 1.
A corporation's tax year ends December 31. It must file its income tax return by March 15th.
Example 2.
A corporation's tax year ends June 30. It must file its income tax return by September 15th.
If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
Extension of time to file.
File Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information
and Other Returns, to request
a 6-month extension of time to file a corporation income tax return. The IRS will grant the extension if you complete the
form properly, file it, and
pay any tax due by the original due date for the return.
Form 7004 does not extend the time for paying the tax due on the return. Interest, and possibly penalties, will be
charged on any part of the final
tax due not shown as a balance due on Form 7004. The interest is figured from the original due date of the return to the date
of payment.
For more information, see the instructions for Form 7004.
How to pay your taxes.
A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year.
The two methods of depositing
taxes are discussed below.
Electronic Federal Tax Payment System (EFTPS).
The corporation must use EFTPS in the current tax year to make deposits of all tax liabilities (including social security,
Medicare, withheld
income, excise, and corporate income taxes) if:
-
The corporation paid more than $200,000 in federal depository taxes in the second preceding tax year; or
-
The corporation was required to make electronic deposits in the prior tax year.
For example, if the corporation made more than $200,000 in federal depository taxes in 2004, or the corporation was required
to use EFTPS in 2005,
it would be required to use EFTPS in 2006.
Once a corporation is required to use EFTPS it must continue to do so in all subsequent tax years. If the corporation
is required to use EFTPS
because of the $200,000 threshold it must continue to use EFTPS in later years even if subsequent deposits are less than the
$200,000. If the
corporation fails to use EFTPS, it may be subject to a 10% penalty.
If the corporation is not required to use EFTPS, it may voluntarily make deposits using EFTPS. However, if the corporation
is voluntarily using
EFTPS it will not be subject to the 10% penalty if it makes deposits using a paper coupon.
For more information on EFTPS and enrollment, visit
www.eftps.gov or call 1-800-555-4477. Also see Publication 966,
The Secure Way to Pay Your Federal Taxes.
Deposits with Form 8109.
If the corporation does not use EFTPS, it must deposit its income tax payments with an authorized financial institution
using Form 8109, Federal
Tax Deposit Coupon. For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Publication
583, Starting a Business
and Keeping Records.
Late filing of return.
A corporation that does not file its tax return by the due date, including extensions, may be
penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid
tax. If the corporation is
charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced
by the amount of the
penalty for late payment. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100.
The penalty will not be
imposed if the corporation can show the failure to file on time was due to a reasonable cause. A corporation that has a reasonable
cause to file late
must attach a statement to its tax return explaining the reasonable cause.
Late payment of tax.
A corporation that does not pay the tax when due may be penalized ½ of 1% of the unpaid
tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not
be imposed if the
corporation can show that the failure to pay on time was due to a reasonable cause.
Trust fund recovery penalty.
If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld
or are not deposited or paid
to the United States Treasury, the trust fund recovery penalty may apply. The penalty is the full amount of the unpaid trust
fund tax. This penalty
may apply to you if these unpaid taxes cannot be immediately collected from the business.
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for
collecting, accounting for, and
paying these taxes, and who acted willfully in not doing so.
A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee.
A responsible person also may
include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds.
Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if the person knows
the required actions are not
taking place.
For more information on withholding and paying these taxes, see Publication 15 (Circular E), Employer's Tax Guide.
Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements,
and fraud. See sections
6662, 6662A, and 6663 of the Internal Revenue Code.
Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. If
the corporation does
not pay the installments when they are due, it could be subject to an underpayment penalty. This section will explain how
to avoid this penalty.
When to pay estimated tax.
Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.
Example 1.
Your corporation's tax year ends December 31. Installment payments are due on April 15, June 15, September 15, and December
15.
Example 2.
Your corporation's tax year ends June 30. Installment payments are due on October 15, December 15, March 15, and June 15.
If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day.
How to figure each required installment.
Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure each required installment of estimated tax.
You will generally use one of
the following two methods to figure each required installment. You should use the method that yields the smallest installment
payments.
Note.
In these discussions, “return” generally refers to the corporation's original return. However, an amended return is considered the original
return if it is filed by the due date (including extensions) of the original return.
Method 1.
Each required installment is 25% of the income tax the corporation will show on its return for the current year.
Method 2.
Each required installment is 25% of the income tax shown on the corporation's return for the previous year.
To use Method 2:
-
The corporation must have filed a return for the previous year,
-
The return must have been for a full 12 months, and
-
The return must have shown a positive tax liability (not zero).
Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only.
A large corporation is one with at least $1 million of modified taxable income in any of the last 3 years. Modified
taxable income is taxable
income figured without net operating loss or capital loss carrybacks or carryovers.
Other methods.
If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may
be able to lower the amount of
one or more required installments by using one or both of the following methods.
-
The annualized income installment method.
-
The adjusted seasonal installment method.
Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any required installments.
Refiguring required installments.
If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will
be more or less than originally
estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. An immediate catchup
payment should be made
to reduce any penalty resulting from the underpayment of any earlier installments.
Underpayment penalty.
If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty.
The penalty is figured
separately for each installment due date. The corporation may owe a penalty for an earlier due date, even if it paid enough
tax later to make up the
underpayment. This is true even if the corporation is due a refund when its return is filed.
Form 2220.
Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty
for underpayment of estimated
tax and to figure the amount of the penalty.
If the corporation is charged a penalty, the amount of the penalty depends on the following three factors.
-
The amount of the underpayment.
-
The period during which the underpayment was due and unpaid.
-
The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin.
A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any
penalty and bill the
corporation. However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax
return if any of the
following apply.
-
The annualized income installment method was used to figure any required installment.
-
The adjusted seasonal installment method was used to figure any required installment.
-
The corporation is a large corporation figuring its first required installment based on the prior year's tax.
How to pay estimated tax.
If the corporation is required to use EFTPS to pay its taxes, it must also use EFTPS to make its estimated tax deposits.
If the corporation does
not use EFTPS it should make its estimated tax deposits with an authorized financial institution using Form 8109.
Quick refund of overpayments.
A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Use Form
4466, Corporation Application
for Quick Refund of Overpayment of Estimated Tax, to apply for a quick refund of an overpayment of estimated tax. A corporation
can apply for a quick
refund if the overpayment is:
Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax.
File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income
tax return. Do not
file Form 4466 before the end of the corporation's tax year. An extension of time to file the corporation's income tax return
will not extend the time
for filing Form 4466. The IRS will act on the form within 45 days from the date you file it.
U.S. Real Property Interest
If a domestic corporation acquires a U.S. real property interest from a foreign person or firm, the corporation may have to
withhold tax on the
amount it pays for the property. The amount paid includes cash, the fair market value of other property, and any assumed liability.
If a domestic
corporation distributes a U.S. real property interest to a foreign person or firm, it may have to withhold tax on the fair
market value of the
property. A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. For more
information, see section
1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288,
U.S. Withholding Tax
Return for Dispositions by Foreign Persons of U.S. Real Property Interest; and Form 8288-A, Statement of Withholding on Dispositions
by Foreign
Persons of U.S. Real Property Interests.
An accounting method is a set of rules used to determine when and how income and expenses are reported. Taxable income should
be determined using
the method of accounting regularly used in keeping the corporation's books and records. In all cases, the method used must
clearly show taxable
income.
Generally, permissible methods include:
Accrual method.
Generally, a corporation (other than a qualified personal service corporation) must use the accrual method of accounting
if its average annual
gross receipts exceed $5 million. A corporation engaged in farming operations also must use the accrual method.
If inventories are required, the accrual method generally must be used for sales and purchases of merchandise. However,
qualifying taxpayers and
eligible businesses of qualifying small business taxpayers are excepted from using the accrual method for eligible trades
or businesses and may
account for inventoriable items as materials and supplies that are not incidental.
Under the accrual method, an amount is includable in income when:
-
All the events have occurred that fix the right to receive the income, which is the earliest of the date:
-
The required performance takes place,
-
Payment is due, or
-
Payment is received and
-
The amount can be determined with reasonable accuracy.
Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when:
-
All events that determine the liability have occurred,
-
The amount of the liability can be figured with reasonable accuracy, and
-
Economic performance takes place with respect to the expense.
There are exceptions to the economic performance rule for certain items, including recurring expenses. See section
461(h) of the Internal Revenue
Code and the related regulations for the rules for determining when economic performance takes place.
Nonaccrual experience method.
Accrual method corporations are not required to maintain accruals for certain amounts from the performance of services
that, on the basis of their
experience, will not be collected, if:
-
The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts,
or consulting;
or
-
The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million.
This provision does not apply if interest is required to be paid on the amount or if there is any penalty for failure
to pay the amount timely.
Percentage of completion method.
Long-term contracts (except for certain real property construction contracts) must generally be accounted for using
the percentage of completion
method described in section 460 of the Internal Revenue Code.
Mark-to-market accounting method.
Generally, dealers in securities must use the mark-to-market accounting method described in section 475 of the Internal
Revenue Code. Under this
method any security held by a dealer as inventory must be included in inventory at its FMV. Any security not held as inventory
at the close of the tax
year is treated as sold at its FMV on the last business day of the tax year. Any gain or loss must be taken into account in
determining gross income.
The gain or loss taken into account is treated as ordinary gain or loss.
Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method.
Change in accounting method.
A corporation can change its method of accounting used to report taxable income (for income as a whole or for the
treatment of any material item).
The corporation must file Form 3115, Application for Change in Accounting Method. For more information, see Form 3115 and
Publication 538.
Section 481(a) adjustment.
The corporation may have to make an adjustment under section 481(a) of the Internal Revenue Code to prevent amounts
of income or expense from being
duplicated or omitted. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years
for a net positive
adjustment. However, a corporation can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the
change is less than
$25,000. The corporation must complete the appropriate lines of Form 3115 to make the election.
A corporation must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a corporation
uses to keep its
records and report its income and expenses. Generally, corporations can use either a calendar year or a fiscal year as its
tax year. A corporation
must adopt a tax year by the due date (not including extensions) of its first income tax return.
Personal service corporation.
A personal service corporation must use a calendar year as its tax year unless:
-
It elects to use a 52-53 week tax year that ends with reference to the calendar year;
-
It can establish a business purpose for a different tax year and obtains approval of the IRS. See Form 1128, Application To
Adopt, Change,
or Retain a Tax Year, and Publication 538; or
-
It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. Use Form 8716, Election
to Have a
Tax Year Other Than a Required Tax Year, to make the election.
If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners
may be limited. See
Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction.
Change of tax year.
Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. However,
under certain conditions, a
corporation can change its tax year without getting the consent. For more information see Form 1128 and Publication 538.
A corporation should keep its records for as long as they may be needed for the administration of any provision of the Internal
Revenue Code.
Usually records that support items of income, deductions, or credits on the return must be kept for 3 years from the date
the return is due or filed,
whichever is later. Keep records that verify the corporation's basis in property for as long as they are needed to figure
the basis of the original or
replacement property.
The corporation should keep copies of all filed returns. They help in preparing future and amended returns.
Income, Deductions, and Special Provisions
Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. However, the following
special provisions
apply only to corporations.
Costs of Going Into Business
When you go into business, treat all costs you incur to get your business started as capital expenses. See Capital Expenses in chapter 1
of Publication 535 for a discussion of how to treat these costs if you do not go into business.
However, a corporation can elect to deduct a limited amount of start-up or organizational costs. Any cost not deducted can
be amortized.
Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active
trade or business.
Organizational costs are the direct costs of creating the corporation.
For more information on deducting or amortizing start-up and organizational costs, see the Instructions for Forms 1120 and
1120-A and chapters 8
and 9 of Publication 535.
A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person
who uses the cash
method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's
gross income.
Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise
be deductible. If a
deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the
expense or interest is
includible in the gross income of that person. These rules also deny the deduction of losses on the sale or exchange of property
between related
persons.
Related persons.
For purposes of this rule, the following persons are related to a corporation.
-
Another corporation that is a member of the same controlled group as defined in section 267(f) of the Internal Revenue Code.
-
An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation.
-
A trust fiduciary when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding
stock
of the corporation.
-
An S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation.
-
A partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50%
of the capital or
profits interest in the partnership.
-
Any employee-owner if the corporation is a personal service corporation (defined earlier), regardless of the amount of stock
owned by the
employee-owner.
Ownership of stock.
To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the
following rules apply.
-
Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is treated as being owned proportionately
by or
for its shareholders, partners, or beneficiaries.
-
An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. Family includes
only brothers
and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants.
-
Any individual owning (other than by applying rule (2)) any stock in a corporation is treated as owning the stock owned directly
or
indirectly by that individual's partner.
-
To apply rule (1), (2), or (3), stock constructively owned by a person under rule (1) is treated as actually owned by that
person. But stock
constructively owned by an individual under rule (2) or (3) is not treated as actually owned by the individual for applying
either rule (2) or (3) to
make another person the constructive owner of that stock.
Reallocation of income and deductions.
Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions,
credits, or allowances
between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests.
Complete liquidations.
The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating
distributions.
More information.
For more information about the related person rules, see Publication 544.
Income From Qualifying Shipping Activities
A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. If a corporation
makes this
election it may exclude income from qualifying shipping activities from gross income. Also if the election is made, the corporation
generally may not
claim any loss, deduction, or credit with respect to qualifying shipping activities. A corporation making this election may
also elect to defer gain
on the disposition of a qualifying vessel.
A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative
tax. For more
information regarding the election, see Form 8902.
Election to Expense Qualified Refinery Property
A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50%
of the cost of
qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed into service after August 8,
2005, and before January 1,
2012. The deduction is allowed the year the property is placed in service.
A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate
this deduction to its
owners based on their ownership interest.
For more information see section 179C of the Internal Revenue Code.
Deduction to Comply With EPA Sulfur Regulations
A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to
deduct up to 75% of
qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection
Agency (EPA).
A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to
allocate the deduction to
its owners based on their ownership interest.
For more information, see sections 45H and 179B of the Internal Revenue Code.
Energy-Efficient Commercial Building Property Deduction
A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service
after December 31,
2005, and before January 1, 2008. In order to qualify for the deduction:
-
The costs must be associated with depreciable or amortizable property in a Standard 90.1-2001 domestic building;
-
The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system,
or the building
envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and
-
The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50%.
The deduction is limited to $1.80 per square foot of the building less the total amount of deductions taken for this property
in prior tax years.
The corporation must reduce the basis of any property by any deduction taken. The deduction is subject to recapture if the
corporation fails to fully
implement an energy savings plan.
For more information see section 179D of the Internal Revenue Code.
Corporate Preference Items
A corporation must make special adjustments to certain items before it takes them into account in determining its taxable
income. These items are
known as corporate preference items and they include the following.
-
Gain on the disposition of section 1250 property. For more information, see Section 1250 Property under
Depreciation Recapture in chapter 3 of Publication 544.
-
Percentage depletion for iron ore and coal (including lignite). For more information, see Mines and Geothermal Deposits
under Mineral Property in chapter 10 of Publication 535.
-
Amortization of pollution control facilities. For more information, see Pollution Control Facilities in chapter 9 of
Publication 535 and section 291(a)(5) of the Internal Revenue Code.
-
Mineral exploration and development costs. For more information, see Exploration Costs and Development Costs
in chapter 8 of Publication 535.
For more information on corporate preference items, see section 291 of the Internal Revenue Code.
Dividends-Received Deduction
A corporation can deduct a percentage of certain dividends received during its tax year. This section discusses the general
rules that apply. For
more information, see the instructions for Forms 1120 and 1120-A.
Dividends from domestic corporations.
A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend
owns less than 20% of the
corporation distributing the dividend. If the corporation owns 20% or more of the distributing corporation's stock, it can,
subject to certain limits,
deduct 80% of the dividends received.
Ownership.
Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other
than certain preferred
stock) the receiving corporation owns.
Small business investment companies.
Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations.
Dividends from regulated investment companies.
Regulated investment company dividends received are subject to certain limits. Capital gain dividends received from
a regulated investment company
do not qualify for the deduction. For more information, see section 854 of the Internal Revenue Code.
Dividends from a controlled foreign corporation.
A corporation can make a one-time election to deduct 85% of the dividends received from a controlled foreign corporation.
The corporation may make
the election for either its last tax year that begins before October 22, 2004, or its first tax year that begins during the
one-year period beginning
on October 22, 2004. The corporation makes the election by completing and attaching Form 8895, One-Time Dividends Received
Deduction for Certain Cash
Dividends from Controlled Foreign Corporations, to its return by the due date (including extensions). This deduction only
applies to dividends
included in gross income. Form more information on making this election and figuring the deduction, see Form 8895.
No deduction allowed for certain dividends.
Corporations cannot take a deduction for dividends received from the following entities.
-
A real estate investment trust (REIT).
-
A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution
or the
preceding tax year.
-
A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend
with
respect to the dividend. Ex-dividend means the holder has no rights to the dividend.
-
A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock
became
ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 360 days.
-
Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments
with respect to
positions in substantially similar or related property.
Dividends on deposits.
Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative
banks, and similar
organizations are interest, not dividends. They do not qualify for this deduction.
Limit on deduction for dividends.
The total deduction for dividends received or accrued is generally limited (in the following order) to:
-
80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations,
or by a
small business investment company, for dividends received or accrued from 20%-owned corporations, then
-
70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations,
or by a
small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable
income by the total
dividends received from 20%-owned corporations).
For exceptions, see Schedule C on Form 1120 and the Instructions for Forms 1120 and 1120-A.
Figuring the limit.
In figuring the limit, determine taxable income without the following items.
-
The net operating loss deduction.
-
The domestic production activities deduction.
-
The deduction for dividends received.
-
Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below).
-
Any capital loss carryback to the tax year.
Effect of net operating loss.
If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not
apply. To determine whether a
corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit.
Example 1.
A corporation loses $25,000 from operations. It receives $100,000 in dividends from a 20%-owned corporation. Its taxable income
is $75,000
($100,000 - $25,000) before the deduction for dividends received. If it claims the full dividends-received deduction of $80,000
($100,000
× 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Therefore, the 80% of taxable
income limit does not
apply. The corporation can deduct the full $80,000.
Example 2.
Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. Its taxable income
is $85,000 before the
deduction for dividends received. After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable
income is $5,000.
Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received
deduction is limited
to 80% of its taxable income, or $68,000 ($85,000 × 80%).
If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it
generally must reduce
its basis in the stock by the nontaxed part of the dividend. The nontaxed part is any dividends-received deduction allowable
for the dividends.
Extraordinary dividend.
An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's
adjusted basis in the stock.
The percentages are:
-
5% for stock preferred as to dividends, or
-
10% for other stock.
Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. Treat all dividends
received that
have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds
20% of the corporation's
adjusted basis in the stock.
Disqualified preferred stock.
Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time
the corporation held the
stock.
Disqualified preferred stock is any stock preferred as to dividends if any of the following apply.
-
The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future.
-
The issue price of the stock exceeds its liquidation rights or stated redemption price.
-
The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce
tax through
a combination of dividends-received deductions and loss on the disposition of the stock.
These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect
on that date, and
thereafter, before the issuance of the stock.
More information.
For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code.
If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the
forgone interest.
A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable
federal rate. A
below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received
both the following:
-
A loan in exchange for a note that requires payment of interest at the applicable federal rate, and
-
An additional payment in an amount equal to the forgone interest.
Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending
on the
substance of the transaction.
Foregone interest.
For any period, forgone interest is equal to:
-
The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was
payable annually
on December 31, minus
-
Any interest actually payable on the loan for the period.
See Below-Market Loans in chapter 5 of Publication 535 for more information.
A corporation can claim a limited deduction for charitable contributions made in cash or other property. The contribution
is deductible if made to,
or for the use of, a qualified organization. For more information on qualified organizations, see Publication 526, Charitable
Contributions, and
Publication 78, Cumulative List of Organizations.
Note.
You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder
or individual.
Cash method corporation.
A corporation using the cash method of accounting deducts contributions in the tax year paid.
Accrual method corporation.
A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the
board of directors authorizes
them if it pays them by the 15th day of the 3rd month after the close of that tax year. Make the choice by reporting the contribution
on the
corporation's return for the tax year. A declaration stating that the board of directors adopted the resolution during the
tax year must accompany the
return. The declaration must include the date the resolution was adopted.
Limitations on deduction.
A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Figure
taxable income for this purpose
without the following.
-
The deduction for charitable contributions.
-
The dividends-received deduction (for example line 29b of the 2006 Form 1120).
-
The deduction allowed under section 249 of the Internal Revenue Code.
-
The domestic production activities deduction.
-
Any net operating loss carryback to the tax year.
-
Any capital loss carryback to the tax year.
Carryover of excess contributions.
You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during
the current year that exceed
the 10% limit. You lose any excess not used within that period. For example, if a corporation has a carryover of excess contributions
paid in 2005 and
it does not use all the excess on its return for 2006, it can carry the rest over to 2007, 2008, 2009, and 2010. Do not deduct
a carryover of excess
contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). You
cannot deduct a carryover
of excess contributions to the extent it increases a net operating loss carryover.
Substantiation requirements.
Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement
from the donee
organization. The acknowledgement should show the amount of cash contributed, a description of the property contributed,
and either gives a
description and a good faith estimate of the value of any goods or services provided in return for the contribution or states
that no goods or
services were provided in return for the contribution. The acknowledgement should be received by the due date (including
extensions) of the return,
or, if earlier, the date the return was filed. Keep the acknowledgement with other corporate records. Do not attach the acknowledgement
to the
return.
Contributions of property other than cash.
If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500
for contributions of property
other than cash, a schedule describing the property and the method used to determine its fair market value must be attached
to the corporation's
return. In addition the corporation should keep a record of:
Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions,
to their returns if they claim
a deduction of more than $500 for non-cash contributions. For all other corporations, if the deduction claimed for donated
property exceeds $5,000,
complete Form 8283 and attach it to the corporation's return.
A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. A qualified
appraisal is not required
for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without
any significant
intervening use or material improvement. The appraisal should be maintained with other corporate records and only attached
to the corporation's
return when the deduction claimed exceeds $500,000; $20,000 for donated art work.
See Form 8283 for more information.
Qualified conservation contributions.
If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the
legal interest being donated,
the fair market value of the underlying property before and after the donation, and a description of the conservation purpose
for which the property
will be used. For more information, see section 170(h) of the Internal Revenue Code.
Contributions of used vehicles.
A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. The deduction
is limited to the gross
proceeds from the sale of the vehicle, if it is sold without any intervening use or material improvement by the donee organization.
An acknowledgement
from the donee organization for deductions claimed in excess of $500 must be attached to the corporation's return. The acknowledgement
must include
the vehicle identification number or similar number, gross proceeds from the sale of the vehicle, and a statement that the
deductible amount cannot
exceed the gross proceeds from the sale. For more information, see Publication 526.
Reduction for contributions of certain property.
For a charitable contribution of property, the corporation must reduce the contribution by the sum of:
-
The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and
-
For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.
The reduction for the long-term capital gain applies to:
-
Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the
basis for its
exemption;
-
Contributions of any property to or for the use of certain private foundations except for stock for which market quotations
are readily
available; and
-
Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section
197 intangible),
or similar property, or applications or registrations of such property.
Larger deduction.
A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis
of the donated inventory or
property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at
fair market value on the
date of the donation), or (b) two times basis of the donated inventory or property. This deduction may be allowed for certain
contributions of:
-
Inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants.
-
Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service
corporation)
and donated no later than 2 years after substantial completion of the construction. The property must be donated to a qualified
organization and its
original use must be by the donee for research, experimentation, or research training within the United States in the area
of physical or biological
science.
-
Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial
completion of construction to an educational organization for educational purposes within the United States.
Contributions to the Hurricane Katrina, Rita, or Wilma relief effort.
Special provisions apply for charitable contributions made for the Hurricane Katrina, Rita, or Wilma relief effort.
See Publication 4492,
Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, and Publication 526.
Contributions to organizations conducting lobbying activities.
Contributions made to an organization that conducts lobbying activities are not deductible if:
-
The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
-
The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would
have been
nondeductible under the lobbying expense rules if conducted directly by the donor.
More information.
For more information on charitable contributions, including substantiation and recordkeeping requirements, see section
170 of the Internal Revenue
Code, the related regulations, and Publication 526.
A corporation can deduct capital losses only up to the amount of its capital gains. In other words, if a corporation has an
excess capital loss, it
cannot deduct the loss in the current tax year. Instead, it carries the loss to other tax years and deducts it from any net
capital gains that occur
in those years.
A capital loss is carried to other years in the following order.
-
3 years prior to the loss year.
-
2 years prior to the loss year.
-
1 year prior to the loss year.
-
Any loss remaining is carried forward for 5 years.
When you carry a net capital loss to another tax year, treat it as a short-term loss. It does not retain its original identity
as long term or
short term.
Example.
A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. The short-term
gain offsets
some of the long-term loss, leaving a net capital loss of $6,000. The corporation treats this $6,000 as a short-term loss
when carried back or
forward.
The corporation carries the $6,000 short-term loss back 3 years. In year 1, the corporation had a net short-term capital gain
of $8,000 and a net
long-term capital gain of $5,000. It subtracts the $6,000 short-term loss first from the net short-term gain. This results
in a net capital gain for
year 1 of $7,000. This consists of a net short-term capital gain of $2,000 ($8,000 - $6,000) and a net long-term capital gain
of $5,000.
S corporation status.
A corporation may not carry a capital loss from, or to, a year for which it is an S corporation.
Rules for carryover and carryback.
When carrying a capital loss from one year to another, the following rules apply.
-
When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. In
other words, you
can carry capital losses only to years that would otherwise have a total net capital gain.
-
If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first.
-
You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you
carry it back.
Refunds.
When you carry back a capital loss to an earlier tax year, refigure your tax for that year. If your corrected tax
is less than the tax you
originally owed, use either
Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return, to
apply for a refund.
Form 1139.
A corporation can get a refund faster by using Form 1139. It cannot file Form 1139 before filing the return for the
corporation's capital loss
year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss.
Form 1120X.
If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. The corporation must file
the Form 1120X within 3 years
of the due date, including extensions, for filing the return for the year in which it sustains the capital loss.
A corporation generally figures and deducts a net operating loss (NOL) the same way an individual, estate, or trust does.
The same 2-year carryback
and up to 20-year carryforward periods apply, and the same sequence applies when the corporation carries two or more NOLs
to the same year. For more
information on these general rules, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
A corporation's NOL generally differs from individual, estate, and trust NOLs in the following ways.
-
A corporation can take different deductions when figuring an NOL.
-
A corporation must make different modifications to its taxable income in the carryback or carryforward year when figuring
how much of the
NOL is used and how much is carried over to the next year.
-
A corporation uses different forms when claiming an NOL deduction.
The following discussions explain these differences.
A corporation figures an NOL in the same way it figures taxable income. It starts with its gross income and subtracts its
deductions. If its
deductions are more than its gross income, the corporation has an NOL.
However, the following rules for figuring the NOL apply.
-
A corporation cannot increase its current year NOL by carrybacks or carryovers from other years.
-
A corporation cannot use the domestic production activities deduction to create or increase its current year NOL, including
any carryback or
carryover.
-
A corporation can take the deduction for dividends received, explained later, without regard to the aggregate limits (based
on taxable
income) that normally apply.
-
A corporation can figure the deduction for dividends paid on certain preferred stock of public utilities without limiting
it to its taxable
income for the year.
Dividends-received deduction.
The corporation's deduction for dividends received from domestic corporations is generally subject to an aggregate
limit of 70% or 80% of taxable
income. However, if a corporation has an NOL for a tax year, the limit based on taxable income does not apply. In determining
if a corporation has an
NOL, the corporation figures the dividends-received deduction without regard to the 70% or 80% of taxable income limit.
See Dividends-Received Deduction under Income, Deductions, and Special Provisions, earlier, for an example.
Claiming the NOL Deduction
Generally, a corporation must carry an NOL back 2 years prior to the year the NOL is generated, if the NOL is not used in
the prior 2 years the
remaining NOL can be carried forward for up to 20 years after the tax year in which the NOL was generated.
A corporation can make an election to waive the 2 year carryback period and use only the 20 year carryforward period. To make
the election attach a
statement to the original return filed by the due date (including extensions) for the NOL year.
NOL carryback.
The following rules apply.
-
If a corporation carries back the NOL, it can use either Form 1120X
or Form 1139.
A corporation can get a refund faster by using Form 1139. It cannot file Form 1139 before filing the return for the
corporation's NOL year, but it must file Form 1139 no later than 1 year after the year it sustains the NOL.
-
If the corporation does not file Form 1139, it must file Form 1120X within 3 years of the due date, plus extensions, for filing
the return
for the year in which it sustains the NOL.
-
A personal service corporation may not carryback an NOL to or from any tax year in which a section 444 election to have a
tax year other
than a required tax year applies.
-
Certain electric utility companies may elect a 5 year carryback period for NOLs arising in tax years 2003, 2004, and 2005.
The NOL carryback
amount is limited to 20% of the total capital expenditures for electric transmission property and pollution control facilities.
The election may be
made during any tax year ending after December 31, 2005, and before January 1, 2009.
-
A corporation can elect to treat a casualty loss arising in tax years ending after August 27, 2005, from the loss of public
utility property
used predominantly in a rate-regulated trade or business as a specified liability loss treated as a separate NOL subject to
a 10 year carryback
period. The loss must be the result of Hurricane Katrina. For more information see the Instructions for Form 1139.
NOL carryforward.
If a corporation carries forward its NOL, it enters the carryover on Schedule K, Form 1120, line 12. It also enters
the deduction for the carryover
(but not more than the corporation's taxable income after special deductions) on line 29(a) of Form 1120 or line 25(a) of
Form 1120-A.
Carryback expected.
If a corporation expects to have an NOL in its current year, it can automatically extend the time for paying all or
part of its income tax for the
immediately preceding year. It does this by filing Form 1138.
It must explain on the form why it expects the loss.
The payment of tax that may be postponed cannot exceed the expected overpayment from the carryback of the NOL.
Period of extension.
The extension is in effect until the end of the month in which the return for the NOL year is due (including extensions).
If the corporation files Form 1139 before this date, the extension will continue until the date the IRS notifies the
corporation that its Form 1139
is allowed or disallowed in whole or in part.
Figuring the NOL Carryover
If the NOL available for a carryback or carryforward year is greater than the taxable income for that year, the corporation
must modify its taxable
income to figure how much of the NOL it will use up in that year and how much it can carry over to the next tax year.
Its carryover is the excess of the available NOL over its modified taxable income for the carryback or carryforward year.
Modified taxable income.
A corporation figures its modified taxable income the same way it figures its taxable income, with the following exceptions.
The modified taxable income for any year cannot be less than zero.
Modified taxable income is used only to figure how much of an NOL the corporation uses up in the carryback or carryforward
year and how much it
carries to the next year. It is not used to fill out the corporation's tax return or figure its tax.
Ownership change.
A loss corporation (one with cumulative losses) that has an ownership change is limited on the taxable income it can
offset by NOL carryforwards
arising before the date of the ownership change. This limit applies to any year ending after the change of ownership.
See sections 381 through 384, and 269 of the Internal Revenue Code and the related regulations for more information
about the limits on corporate
NOL carryovers and corporate ownership changes.
The at-risk rules limit your losses from most activities to your amount at risk in the activity. The at-risk limits apply
to certain closely held
corporations (other than S corporations).
The amount at risk generally equals:
-
The money and the adjusted basis of property contributed by the taxpayer to the activity, and
-
The money borrowed for the activity.
Closely held corporation.
For the at-risk rules, a corporation is a closely held corporation if, at any time during the last half of the tax
year, more than 50% in value of
its outstanding stock is owned directly or indirectly by, or for, five or fewer individuals.
To figure if more than 50% in value of the stock is owned by five or fewer individuals, apply the following rules.
-
Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered owned proportionately
by its
shareholders, partners, or beneficiaries.
-
An individual is considered to own the stock owned, directly or indirectly, by or for his or her family. Family includes only
brothers and
sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants.
-
If a person holds an option to buy stock, he or she is considered to be the owner of that stock.
-
When applying rule (1) or (2), stock considered owned by a person under rule (1) or (3) is treated as actually owned by that
person. Stock
considered owned by an individual under rule (2) is not treated as owned by the individual for again applying rule (2) to
consider another the owner
of that stock.
-
Stock that may be considered owned by an individual under either rule (2) or (3) is considered owned by the individual under
rule (3).
More information.
For more information on the at-risk limits, see Publication 925, Passive Activity and At-Risk Rules.
The passive activity rules generally limit your losses from passive activities to your passive activity income. Generally,
you are in a passive
activity if you have a trade or business activity in which you do not materially participate during the tax year, or you have
a rental activity.
The passive activity rules apply to personal service corporations and closely held corporations other than S corporations.
Corporations subject to the passive activity limitations must complete Form 8810, Corporate Passive Activity Loss and Credit
Limitations. For more
information on the passive activity limits, see the Instructions for Form 8810 and Publication 925.
After you figure a corporation's taxable income, you figure its tax. This section discusses the tax rates, credits, recapture
taxes, and
alternative minimum tax.
If the corporation elects to deduct the one-time dividends received deduction under section 965 of the Internal Revenue Code,
see the Instructions
for Form 8895 before figuring its tax.
Most corporations figure their tax by using the following tax rate schedule. An exception to that rule applies to qualified
personal service
corporations. Other exceptions are discussed in the instructions for Schedule J, Form 1120, or Part I, Form 1120-A.
Tax Rate Schedule
If taxable income (line 30, Form 1120, or line 26, Form 1120-A) is: |
Over— |
But not over— |
Tax is: |
Of the amount over— |
$0
|
50,000
|
15% |
-0-
|
50,000
|
75,000
|
$ 7,500 + 25% |
$50,000
|
75,000
|
100,000
|
13,750 + 34% |
75,000
|
100,000
|
335,000
|
22,250 + 39% |
100,000
|
335,000
|
10,000,000
|
113,900 + 34% |
335,000
|
10,000,000
|
15,000,000
|
3,400,000 + 35% |
10,000,000
|
15,000,000
|
18,333,333
|
5,150,000 + 38% |
15,000,000
|
18,333,333
|
—
|
35% |
-0-
|
Qualified personal service corporation.
A qualified personal service corporation is taxed at a flat rate of 35% on taxable income. A corporation is a qualified
personal service
corporation if it meets both of the following tests.
-
Substantially all the corporation's activities involve the performance of personal services (as defined earlier under Personal
services).
-
At least 95% of the corporation's stock, by value, is owned, directly or indirectly, by any of the following.
-
Employees performing the personal services.
-
Retired employees who had performed the personal services.
-
An estate of the employee or retiree described above.
-
Any person who acquired the stock of the corporation as a result of the death of an employee or retiree (but only for the
2-year period
beginning on the date of the employee's or retiree's death).
Alternative Minimum Tax (AMT)
The tax laws give special treatment to some types of income and allow special deductions and credits for some types of expenses.
These laws enable
some corporations with substantial economic income to significantly reduce their regular tax. The corporate alternative minimum
tax (AMT) ensures that
these corporations pay at least a minimum amount of tax on their economic income. A corporation (other than a small corporation
exempt from the AMT)
owes AMT if its tentative minimum tax is more than its regular tax.
The tentative minimum tax of a small corporation is zero. This means that a small corporation will not owe AMT.
Small corporation exemption.
A corporation is treated as a small corporation exempt from the AMT for its current tax year if that year is the corporation's
first tax year in
existence (regardless of its gross receipts for the year) or:
-
It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997, and
-
Its average annual gross receipts for the 3-tax-year period (or portion thereof during which the corporation was in existence)
ending before
its current tax year did not exceed $7.5 million ($5 million if the corporation had only 1 prior tax year).
Form 4626.
Use Form 4626, Alternative Minimum Tax - Corporations, to figure the tentative minimum tax of a corporation that is
not a small corporation
for AMT purposes. For more information, see the Instructions for Form 4626.
A corporation's tax liability is reduced by allowable credits. The following list includes some credits available to corporations.
-
Credit for federal tax on fuels used for certain nontaxable purposes (see Publication 378, Fuel Tax Credits and Refunds).
-
Credit for prior year minimum tax (see Form 8827).
-
Foreign tax credit (see Form 1118).
-
General business credit.
A corporation's general business credit consists of its carryforward of business credits from prior years plus the total current
year business
credits. For a list of allowable business credits, see Form 3800.
-
Nonconventional source fuel credit (see Form 8907).
For tax years ending after December 31, 2005, the nonconventional source fuel credit is a general business credit included
on Form 3800.
-
Possessions corporation tax credit (see Form 5735).
The Small Business Job Protection Act of 1996 repealed the possessions credit. However, existing credit claimants may qualify
for a credit under
the transitional rules for tax years ending before January 1, 2006. For guidance regarding continuation of business after
December 31, 2005, see
Notice 2005-21 in Internal Revenue Bulletin 2005-11.
-
Qualified electric vehicle credit (see Form 8834).
-
Qualified zone academy bond credit (see Form 8860).
-
Clean renewable bond credit (see Form 8912).
-
Gulf bond credit (see Form 8912).
A corporation's tax liability is increased if it recaptures credits it has taken in prior years. The following list includes
credits a corporation
may need to recapture.
-
Employer-provided childcare facilities and services credit (see the instructions for Form 8882).
-
Indian employment credit (see the instructions for Form 8845).
-
Investment credit (see the instructions for Form 4255).
-
Low-income housing credit (see the instructions for Form 8611).
-
New markets credit (see the instructions for Form 8874).
-
Qualified electric vehicle credit (see the instructions for Form 8834).
A corporation can accumulate its earnings for a possible expansion or other bona fide business reasons. However, if a corporation
allows earnings
to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax of 15%. If the
accumulated earnings tax
applies, interest applies to the tax from the date the corporate return was originally due, without extensions.
To determine if the corporation is subject to this tax, first treat an accumulation of $250,000 or less generally as within
the reasonable needs of
most businesses. Treat an accumulation of $150,000 or less as within the reasonable needs of a business whose principal function
is performing
services in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary
services), law, and the
performing arts.
In determining if the corporation has accumulated earnings and profits beyond its reasonable needs, value the listed and readily
marketable
securities owned by the corporation and purchased with its earnings and profits at net liquidation value, not at cost.
Reasonable needs of the business include the following.
-
Specific, definite, and feasible plans for use of the earnings accumulation in the business.
-
The amount necessary to redeem the corporation's stock included in a deceased shareholder's gross estate, if the amount does
not exceed the
reasonably anticipated total estate and inheritance taxes and funeral and administration expenses incurred by the shareholder's
estate.
The absence of a bona fide business reason for a corporation's accumulated earnings may be indicated by many different circumstances,
such as a
lack of regular distributions to its shareholders or withdrawals by the shareholders classified as personal loans. However,
actual moves to expand the
business generally qualify as a bona fide use of the accumulations.
The fact that a corporation has an unreasonable accumulation of earnings is sufficient to establish liability for the accumulated
earnings tax
unless the corporation can show the earnings were not accumulated to allow its individual shareholders to avoid income tax.
Distributions to Shareholders
This section discusses corporate distributions of money, stock, or other property to a shareholder with respect to the shareholder's
ownership of
stock. However, this section does not discuss the special rules that apply to the following distributions. See the applicable
sections of the Internal
Revenue Code.
-
Distributions in redemption of stock — section 302.
-
Distributions in complete liquidation of the corporation — sections 331 through 346.
-
Distributions in corporate organizations — section 351. Also see Property Exchanged for Stock, earlier.
-
Distributions in corporate reorganizations — section 351 through 368.
-
Certain distributions to 20% corporate shareholders — section 301(e).
Money or Property Distributions
Most distributions are in money, but they may also be in stock or other property. For this purpose, “property” generally does not include
stock in the corporation or rights to acquire this stock. However, see Distributions of Stock or Stock Rights, later.
A corporation generally does not recognize a gain or loss on the distributions covered by the rules in this section. However,
see Gain from
property distributions, later.
Amount distributed.
The amount of a distribution is generally the amount of any money paid to the shareholder plus the fair market value
(FMV) of any property
transferred to the shareholder. However, this amount is reduced (but not below zero) by the following liabilities.
-
Any liability of the corporation the shareholder assumes in connection with the distribution.
-
Any liability to which the property is subject immediately before, and immediately after, the distribution.
The FMV of any property distributed to a shareholder becomes the shareholder's basis in that property.
Gain from property distributions.
A corporation will recognize a gain on the distribution of property to a shareholder if the FMV of the property is
more than its adjusted basis.
This is generally the same treatment the corporation would receive if the property were sold. However, for this purpose, the
FMV of the property is
the greater of the following amounts.
If the property was depreciable or amortizable, the corporation may have to treat all or part of the gain as ordinary
income from depreciation
recapture. For more information on depreciation recapture and the sale of business property, see Publication 544.
Distributions of Stock or Stock Rights
Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as “stock options”) are
distributions by a corporation of rights to acquire its stock. Distributions of stock dividends and stock rights are generally
tax-free to
shareholders. However, stock and stock rights are treated as property under the rules discussed earlier under Money or Property
Distributions if any of the following apply to their distribution.
-
Any shareholder has the choice to receive cash or other property instead of stock or stock rights.
-
The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's
assets or
earnings and profits to other shareholders.
-
The distribution is in convertible preferred stock and has the same result as in (2).
-
The distribution gives preferred stock to some common stock shareholders and gives common stock to other common stock shareholders.
-
The distribution is on preferred stock. (An increase in the conversion ratio of convertible preferred stock made solely to
take into account
a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right is not a distribution
on preferred
stock.)
For this purpose, the term “stock” includes rights to acquire stock and the term “shareholder” includes a holder of rights or
convertible securities.
Constructive stock distributions.
You must treat certain transactions that increase a shareholder's proportionate interest in the earnings and profits
or assets of a corporation as
if they were distributions of stock or stock rights. These constructive distributions are treated as property if they have
the same result as a
distribution described in (2), (3), (4), or (5) of the above discussion. Constructive distributions are described later.
This treatment applies to a change in your stock's conversion ratio or redemption price, a difference between your
stock's redemption price and
issue price, a redemption that is not treated as a sale or exchange of your stock, and any other transaction having a similar
effect on a
shareholder's interest in the corporation.
Expenses of issuing a stock dividend.
You cannot deduct the expenses of issuing a stock dividend. These expenses include printing, postage, cost of advice
sheets, fees paid to transfer
agents, and fees for listing on stock exchanges. The corporation must capitalize these costs.
Constructive Distributions
The following sections discuss transactions that may be treated as distributions.
Below-market loans.
If a corporation gives a shareholder a loan on which no interest is charged or on which interest is charged at a rate
below the applicable federal
rate, the interest not charged may be treated as a distribution to the shareholder. For more information, see Below-Market Loans under
Income, Deductions, and Special Provisions, earlier.
Corporation cancels shareholder's debt.
If a corporation cancels a shareholder's debt without repayment by the shareholder, the amount canceled is treated
as a distribution to the
shareholder.
Transfers of property to shareholders for less than FMV.
A sale or exchange of property by a corporation to a shareholder may be treated as a distribution to the shareholder.
For a shareholder who is not
a corporation, if the FMV of the property on the date of the sale or exchange exceeds the price paid by the shareholder, the
excess may be treated as
a distribution to the shareholder.
Unreasonable rents.
If a corporation rents property from a shareholder and the rent is unreasonably more than the shareholder would charge
to a stranger for use of the
same property, the excessive part of the rent may be treated as a distribution to the shareholder. For more information, see
chapter 4 in Publication
535.
Unreasonable salaries.
If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services
actually performed by the
shareholder-employee, the excessive part of the salary may be treated as a distribution to the shareholder-employee. For more
information, see chapter
2 in Publication 535.
Reporting Dividends and Other Distributions
A corporate distribution to a shareholder is generally treated as a distribution of earnings and profits. Any part of a distribution
from either
current or accumulated earnings and profits is reported to the shareholder as a dividend. Any part of a distribution that
is not from earnings and
profits is applied against and reduces the adjusted basis of the stock in the hands of the shareholder. To the extent the
balance is more than the
adjusted basis of the stock, the shareholder has a gain (usually a capital gain) from the sale or exchange of property.
For information on shareholder reporting of corporate distributions, see Publication 550, Investment Income and Expenses.
Form 1099-DIV.
File Form 1099-DIV with the IRS for each shareholder to whom you have paid dividends and other distributions on stock
of $10 or more during a
calendar year. You must generally send Forms 1099-DIV to the IRS with Form 1096
by February 28 (March 31 if filing electronically) of the year following the year of the distribution. For more
information, see the general instructions for Forms 1099, 1098, 5498, and W-2G.
Generally, you must furnish Forms 1099-DIV to shareholders by January 31 of the year following the close of the calendar
year during which the
corporation made the distributions. However, you may furnish the Form 1099-DIV to shareholders after November 30 of the year
of the distributions if
the corporation has made its final distributions for the year. You may furnish the Form 1099-DIV to shareholders anytime after
April 30 of the year of
the distributions if you give the Form 1099-DIV with the final distributions for the calendar year.
Backup withholding.
Dividends may be subject to backup withholding. For more information on backup withholding, see the general instructions
for Forms 1099, 1098,
5498, and W-2G.
Form 5452.
File Form 5452, Corporate Report of Nondividend Distributions, if nondividend distributions were made to shareholders.
A calendar tax year corporation must file Form 5452 with its income tax return for the tax year in which the nondividend
distributions were made. A
fiscal tax year corporation must file Form 5452 with its income tax return due for the first fiscal year ending after the
calendar year in which the
nondividend distributions were made.
Current year earnings and profits.
If a corporation's earnings and profits for the year (figured as of the close of the year without reduction for any
distributions made during the
year) are more than the total amount of distributions made during the year, all distributions made during the year are treated
as distributions of
current year earnings and profits. If the total amount of distributions is more than the earnings and profits for the year,
see Accumulated
earnings and profits, later.
Example.
You are the only shareholder of a corporation that uses the calendar year as its tax year. In January, you use the worksheet
in the Form 5452
instructions to figure your corporation's current year earnings and profits for the previous year. During the year, the corporation
made four $1,000
distributions to you. At the end of the year (before subtracting distributions made during the year), the corporation had
$10,000 of current year
earnings and profits.
Since the corporation's current year earnings and profits ($10,000) were more than the amount of the distributions it made
during the year
($4,000), all of the distributions are treated as distributions of current year earnings and profits.
The corporation must issue a Form 1099-DIV to you by January 31 to report the $4,000 distributed to you during the previous
year as dividends. The
corporation must use Form 1096 to report this information to the IRS by February 28 (March 31 if filing electronically). The
corporation does not
deduct these dividends on its income tax return.
Accumulated earnings and profits.
If a corporation's current year earnings and profits (figured as of the close of the year without reduction for any
distributions made during the
year) are less than the total distributions made during the year, part or all of each distribution is treated as a distribution
of accumulated
earnings and profits. Accumulated earnings and profits are earnings and profits the corporation accumulated before the current
year.
If the total amount of distributions is less than current year earnings and profits, see Current year earnings and profits, earlier.
Used with current year earnings and profits.
If the corporation has current year earnings and profits, figure the use of accumulated and current earnings and profits
as follows.
-
Divide the current year earnings and profits by the total distributions made during the year.
-
Multiply each distribution by the percentage figured in (1) to get the amount treated as a distribution of current year earnings
and
profits.
-
Start with the first distribution and treat the part of each distribution greater than the allocated current year earnings
and profits
figured in (2) as a distribution of accumulated earnings and profits.
-
If accumulated earnings and profits are reduced to zero, the remaining part of each distribution is applied against and reduces
the adjusted
basis of the stock in the hands of the shareholders. To the extent that the balance is more than the adjusted basis of the
stock, it is treated as a
gain from the sale or exchange of property.
Example.
You are the only shareholder of a corporation that uses the calendar year as its tax year. In January, you use the worksheet
in the Form 5452
instructions to figure your corporation's current year earnings and profits for the previous year. At the beginning of the
year, the corporation's
accumulated earnings and profits balance was $20,000. During the year, the corporation made four $4,000 distributions to you
($4,000 × 4 =
$16,000). At the end of the year (before subtracting distributions made during the year), the corporation had $10,000 of current
year earnings and
profits.
Since the corporation's current year earnings and profits ($10,000) were less than the distributions it made during the year
($16,000), part of
each distribution is treated as a distribution of accumulated earnings and profits. Treat the distributions as follows.
-
Divide the current year earnings and profits ($10,000) by the total amount of distributions made during the year ($16,000).
The result is
.625.
-
Multiply each $4,000 distribution by the .625 figured in (1) to get the amount ($2,500) of each distribution treated as a
distribution of
current year earnings and profits.
-
The remaining $1,500 of each distribution is treated as a distribution from accumulated earnings and profits. The corporation
distributed
$6,000 ($1,500 × 4) of accumulated earnings and profits.
The remaining $14,000 ($20,000 - $6,000) of accumulated earnings and profits is available for use in the following year.
The corporation must issue a Form 1099-DIV to you by January 31 to report the $16,000 distributed to you during the previous
year as dividends. The
corporation must use Form 1096 to report this information to the IRS by February 28 (March 31 if filing electronically). The
corporation does not
deduct these dividends on its income tax return.
Used without current year earnings and profits.
If the corporation has no current year earnings and profits, figure the use of accumulated earnings and profits as
follows.
-
If the current year earnings and profits balance is negative, prorate the negative balance to the date of each distribution
made during the
year.
-
Figure the available accumulated earnings and profits balance on the date of each distribution by subtracting the prorated
amount of current
year earnings and profits from the accumulated balance.
-
Treat each distribution as a distribution of these adjusted accumulated earnings and profits.
-
If adjusted accumulated earnings and profits are reduced to zero, the remaining distributions are applied against and reduce
the adjusted
basis of the stock in the hands of the shareholders. To the extent that the balance is more than the adjusted basis of the
stock, it is treated as a
gain from the sale or exchange of property.
Example.
You are the only shareholder of a corporation that uses the calendar year as its tax year. In January, you use the worksheet
in the Form 5452
instructions to figure your corporation's current year earnings and profits for the previous year. At the beginning of the
year, the corporation's
accumulated earnings and profits balance was $20,000. During the year, the corporation made four $4,000 distributions to you
on March 31, June 30,
September 30, and December 31. At the end of the year (before subtracting distributions made during the year), the corporation
had a negative $10,000
current year earnings and profits balance.
Since the corporation had no current year earnings and profits, all of the distributions are treated as distributions of accumulated
earnings and
profits. Treat the distributions as follows.
-
Prorate the negative current year earnings and profits balance to the date of each distribution made during the year. The
negative $10,000
can be spread evenly by prorating a negative $2,500 to each distribution.
-
The following table shows how to figure the available accumulated earnings and profits balance on the date of each distribution.
The corporation must issue a Form 1099-DIV to you by the end of January to report $12,000 of the $16,000 distributed to you
during the previous
year as dividends. The corporation must use Form 1096 to report this information to the IRS by February 28 (March 31 if filing
electronically). The
corporation does not deduct these dividends on its income tax return. However, the corporation must attach Form 5452 to this
return to report the
nondividend distribution.
For more information about figuring earnings and profits, see the Worksheet for Figuring Current Year Earnings and Profits
in the Form
5452 instructions.
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from
the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Contacting your Taxpayer Advocate.
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.
The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights
and resolving problems that
have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision,
they can clear up
problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.
To contact your Taxpayer Advocate:
-
Call the Taxpayer Advocate toll free at
1-877-777-4778.
-
Call, write, or fax the Taxpayer Advocate office in your area.
-
Call 1-800-829-4059 if you are a
TTY/TDD user.
-
Visit the website at
www.irs.gov/advocate.
For more information, see Publication 1546, How To Get Help With Unresolved Tax Problems (now available in Chinese,
Korean, Russian, and Vietnamese
in addition to English and Spanish).
Free tax services.
To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. It contains a list of
free tax publications and an
index of tax topics. It also describes other free tax information services, including tax education and assistance programs
and a list of TeleTax
topics.
Internet. You can access the IRS website 24 hours a day, 7 days a week, at
www.irs.gov to:
-
E-file. Find out about commercial tax preparation and e-file services available for free to eligible taxpayers.
-
Check the status of your refund. Click on Where's My Refund. Be sure to wait at least 6 weeks from the date you filed your return
(3 weeks if you filed electronically). Have your tax return available because you will need to know your social security
number, your filing status,
and the exact whole dollar amount of your refund.
-
Download forms, instructions, and publications.
-
Order IRS products online.
-
Research your tax questions online.
-
Search publications online by topic or keyword.
-
View Internal Revenue Bulletins (IRBs) published in the last few years.
-
Figure your withholding allowances using our Form W-4 calculator.
-
Sign up to receive local and national tax news by email.
-
Get information on starting and operating a small business.
Phone. Many services are available by phone.
-
Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications
and prior-year forms and instructions. You should receive your order within 10 days.
-
Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
-
Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An
employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local
Taxpayer Assistance Center
for an appointment. To find the number, go to
www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
-
TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and
publications.
-
TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
-
Refund information. If you would like to check the status of your refund, call 1-800-829-4477 and press 1 for automated refund
information or call 1-800-829-1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if you filed
electronically) and
have your tax return available because you will need to know your social security number, your filing status, and the exact
whole dollar amount of
your refund.
Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers,
we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to
sometimes listen in on or
record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
-
Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and
publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions,
and office supply stores
have a collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices
and libraries have the
Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
-
Services. You can walk in to your local Taxpayer Assistance Center every business day for face-to-face tax help. An employee can
explain IRS letters, request adjustments to your account, or help you set up a payment plan. If you need to resolve a tax
problem, have questions
about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit
your local Taxpayer
Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is
necessary, but if you
prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative
will call you
back within 2 business days to schedule an in-person appointment at your convenience. To find the number, go to
www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the address below and receive a response within 10 business
days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
CD-ROM for tax products. You can order IRS Publication 1796, IRS Tax Products on CD-ROM, and obtain:
-
A CD that is released twice so you have the latest products. The first release ships in late December and the final release
ships in late
February.
-
Current-year forms, instructions, and publications.
-
Prior-year forms, instructions, and publications.
-
Tax Map: an electronic research tool and finding aid.
-
Tax law frequently asked questions (FAQs).
-
Tax Topics from the IRS telephone response system.
-
Fill-in, print and save features for most tax forms.
-
Internal Revenue Bulletins.
-
Toll-free and email technical support.
Buy the CD-ROM from National Technical Information Service (NTIS) on the Internet at
www.irs.gov/cdorders for $25 (no handling fee) or call 1-877-233-6767 toll free to buy the CD-ROM for $25 (plus a $5 handling fee).
CD-ROM for small businesses. IRS Publication 3207, The Small Business Resource Guide CD-ROM, has a new look and enhanced navigation
features. The CD includes:
-
Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
-
All the business tax forms, instructions, and publications needed to successfully manage a business.
-
Tax law changes for the current year.
-
IRS Tax Map to help you find forms, instructions, and publications by searching on a keyword topic.
-
Web links to various government agencies, business associations, and IRS organizations.
-
“Rate the Product” survey — your opportunity to suggest changes for future editions.
An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or
by visiting the website
at
www.irs.gov/smallbiz.
Other Useful Forms for Corporations
Other Useful Forms
|
Form |
Use this form to— |
W-2 and W-3—Wage and Tax Statement; and Transmittal of Wage and Tax Statements
|
Report wages, tips, and other compensation, and withheld income, social security, and Medicare taxes for employees.
|
W-2G—Certain Gambling Winnings
|
Report gambling winnings from horse racing, dog racing, jai alai, lotteries, keno, bingo, slot machines, sweepstakes, wagering
pools,
etc.
|
926—Return by a U.S. Transferor of Property to a Foreign Corporation
|
Report certain transfers to foreign corporations under section 6038B.
|
940 or 940-EZ—Employer's Annual Federal Unemployment (FUTA) Tax Return
|
Report and pay FUTA tax if the corporation either:
-
Paid wages of $1,500 or more in any calendar quarter during the calendar year (or the preceding calendar year), or
-
Had one or more employees working for the corporation for at least some part of a day in any 20 different weeks during the
calendar year (or
the preceding calendar year).
|
952—Consent To Extend the Time To Assess Tax Under Section 332(b)
|
Extend the period of assessment of all income taxes of the receiving corporation on the complete liquidation of a subsidiary
under section
332.
|
966—Corporate Dissolution or Liquidation
|
Report the adoption of a resolution or plan to dissolve the corporation or liquidate any of its stock.
|
1042 and 1042-S—Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; and Foreign Person's U.S. Source
Income Subject to Withholding
|
Report withheld tax on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations
to the
extent these payments or distributions constitute gross income from sources within the United States that is not effectively
connected with a U.S.
trade or business. See Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
|
1042-T—Annual Summary and Transmittal of Forms 1042-S
|
Transmit paper Forms 1042-S to the IRS.
|
1096—Annual Summary and Transmittal of U.S. Information Returns
|
Transmit paper Forms 1099, 1098, 5498, and W-2G to the IRS.
|
1099-A, B, C, CAP, DIV, INT, LTC, MISC, OID, PATR, R, S and, SA
Important: Every corporation must file Forms 1099-MISC if, in the course of its trade or business, it makes payments of rents,
commissions, or other fixed or determinable income (see section 6041) totaling $600 or more to any one person during the calendar
year.
Also use these returns to report amounts received as a nominee for another person. For more details, see the General Instructions
for Forms 1099,
1098, 5498, and W-2G.
|
Report the following:
-
Acquisitions or abandonments of secured property;
-
Proceeds from broker and barter exchange transactions;
-
Cancellation of debts;
-
Changes in corporate control and capital structure;
-
Dividends and distributions;
-
Interest payments;
-
Payments of long-term care and accelerated death benefits;
-
Miscellaneous income payments to certain fishing boat crew members, to providers of health and medical services, of rent or
royalties, of
nonemployee compensation, etc.;
-
Original issue discount;
-
Taxable distributions received from cooperatives;
-
Distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc.;
-
Proceeds from real estate transactions; and
-
Distributions from an HSA, Archer MSA, or Medicare Advantage MSA.
|
1122—Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return
|
For the first year a subsidiary corporation is being included in a consolidated return, attach this form to the parent's consolidated
return.
Attach a separate Form 1122 for each subsidiary being included in the consolidated return.
|
1138—Extension of Time for Payment of Taxes by a Corporation Expecting a Net Loss Carryback
|
For a corporation expecting a net operating loss for the current year use Form 1138 to request an extension of time for payment
of tax for the
immediately preceding tax year.
|
3520—Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
|
Report a distribution received from a foreign trust; or, if the corporation was the grantor of, transferor of, or transferor
to, a foreign
trust that existed during the tax year. See Question 5 of Schedule N (Form 1120).
|
3520-A—Annual Information Return of Foreign Trust With a U.S. Owner
|
Report information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any
portion of the
foreign trust.
|
4562—Depreciation and Amortization
|
Use Form 4562 to claim a deduction for depreciation or amortization, to make the section 179 election to expense certain property,
and to
provide information on the business/investment use of cars and other listed property.
|
5471—Information Return of U.S. Persons With Respect to Certain Foreign Corporations
|
A corporation may have to file Form 5471 if it:
-
Controls a foreign corporation; or
-
Acquires, disposes of, or owns 10% or more in value or vote of the outstanding stock of a foreign corporation; or
-
Owns stock in a corporation that is a controlled foreign corporation for an uninterrupted period of 30 days or more during
any tax year of
the foreign corporation, and it owned that stock on the last day of that year. See Question 4 of Schedule N (Form 1120).
|
5498—IRA Contribution Information
|
Report contributions (including rollover contributions) to any IRA, including a SEP, SIMPLE, or Roth IRA, and to report Roth
IRA conversions,
IRA recharacterizations, and the fair market value (FMV) of the account.
|
5498-ESA—Coverdell ESA Contribution Information
|
Report contributions (including rollover contributions) to and the FMV of a Coverdell education savings account (ESA).
|
5498-SA—HSA, Archer MSA, or Medicare Advantage MSA Information
|
Report contributions to an HSA or Archer MSA and the FMV of an HSA, Archer MSA, or Medicare Advantage MSA. For more information,
see the
general and specific instructions for Forms 1099, 1098, 5498, and W-2G.
|
5713—International Boycott Report
|
Report operations in, or related to, a “boycotting” country, company, or national of a country and to figure the loss of certain tax
benefits.
|
8023—Elections Under Section 338 for Corporations Making Qualified Stock Purchases
|
Make elections under section 338 for a “target” corporation if the purchasing corporation has made a qualified stock purchase of the
target corporation.
|
8027—Employer's Annual Information Return of Tip Income and Allocated Tips
|
Report receipts from large food or beverage operations, tips reported by employees, and allocated tips.
|
8264—Application for Registration of a Tax Shelter
|
Until further guidance is issued, material advisors who provide material aid, assistance, or advice with respect to any reportable
transaction
after October 22, 2004, must use Form 8264 to disclose reportable transactions in accordance with interim guidance provided
in Notice 2004-80, 2004-50
I.R.B. 963; Notice 2005-17, 2005-8 I.R.B. 606; and Notice 2005-22, 2005-12 I.R.B. 756.
|
8271—Investor Reporting of Tax Shelter Registration Number
|
Report the registration number for a tax shelter that is required to be registered. Attach Form 8271 to any tax return (including
Forms 1139
and 1120X) on which a deduction, credit, loss, or other tax benefit attributable to a tax shelter is taken or any income attributable
to a tax shelter
is reported.
|
8275—Disclosure Statement
|
Disclose items or positions, except those contrary to a regulation, that are not otherwise adequately disclosed on a tax return.
The
disclosure is made to avoid the parts of the accuracy-related penalty imposed for disregard of rules or substantial understatement
of tax. Also use
Form 8275 for disclosures relating to preparer penalties for understatements due to unrealistic positions or disregard of
rules.
|
8275-R—Regulation Disclosure Statement
|
Disclose any item on a tax return for which a position has been taken that is contrary to Treasury regulations.
|
8281—Information Return for Publicly Offered Original Issue Discount Instruments
|
Report the issuance of public offerings of debt instruments (obligations).
|
8300—Report of Cash Payments Over $10,000 Received in a Trade or Business
|
Report the receipt of more than $10,000 in cash or foreign currency in one transaction or a series of related transactions.
|
8594—Asset Acquisition Statement Under Section 1060
|
Report a sale of assets that make up a trade or business if goodwill or going concern value attaches, or could attach, to
such assets and if
the buyer's basis is determined only by the amount paid for the assets. Both the seller and buyer must use this form.
|
8806—Information Return for Acquisition of Control or Substantial Change in Capital Structure
|
Report an acquisition of control or a substantial change in the capital structure of a domestic corporation.
|
8817—Allocation of Patronage and Nonpatronage Income and Deductions
|
Figure and report patronage and nonpatronage income and deductions (used by taxable cooperatives).
|
8842—Election To Use Different Annualization Periods for Corporate Estimated Tax
|
Elect one of the annualization periods in section 6655(e)(2) for figuring estimated tax payments under the annualized income
installment
method.
|
8849—Claim for Refund of Excise Taxes
|
Claim a refund of certain excise taxes.
|
8858—Information Return of U.S. Persons With Respect To Foreign Disregarded Entities
|
This form is required if the corporation directly or indirectly owns a foreign disregarded entity. See Question 1 of Schedule
N (Form
1120).
|
8865—Return of U.S. Person With Respect To Certain Foreign Partnerships
|
Report an interest in a foreign partnership. A domestic corporation may have to file Form 8865 if it:
-
Controlled a foreign partnership (owned more than a 50% direct or indirect interest in the partnership).
-
Owned at least a 10% direct or indirect interest in a foreign partnership while U.S. persons controlled that partnership.
-
Had an acquisition, disposition, or change in proportional interest of a foreign partnership that:
a. Increased its direct interest to at least 10% or reduced its direct interest of at least 10% to
less than 10% or
b. Changed its direct interest by at least a 10% interest.
-
Contributed property to a foreign partnership in exchange for a partnership interest if:
a. Immediately after the contribution, the corporation directly or indirectly owned at least a 10%
interest in the foreign partnership or
b. The FMV of the property the corporation contributed to the foreign partnership in exchange for a
partnership interest exceeds $100,000 when added to other contributions of property made to the foreign partnership during
the preceding 12-month
period.
The domestic corporation may also have to file Form 8865 to report certain dispositions by a foreign partnership of property
it previously
contributed to that partnership if it was a partner at the time of the disposition. For more details, including penalties
for failing to file Form
8865, see Form 8865 and its separate instructions.
|
8873—Extraterritorial Income Exclusion
|
To figure the amount of extraterritorial income excluded from gross income for the tax year.
|
8876—Excise Tax on Structured Settlement Factoring Transactions
|
Report and pay the 40% excise tax imposed under section 5891.
|
8883—Asset Allocation Statement Under Section 338
|
Report information about transactions involving the deemed sale of corporate assets under section 338.
|
8886—Reportable Transaction Disclosure Statement
|
Disclose information for each reportable transaction in which the corporation participated. Attach Form 8886 to the corporation's
income tax
return for each tax year in which it participated in a reportable transaction. The corporation may have to pay a penalty if
it is required to file
Form 8886 and does not do so. Other penalties may also apply. For more details, see the Instructions for Form 8886.
|
8903 — Domestic Production Activities Deduction
|
To calculate and report the domestic production activities deduction.
|
Previous | Index | Next
SEARCH:
You can search for information in the entire Tax Prep Help section, or in the entire site. For a more focused search, put your search word(s) in quotes.
Publication Index | Tax Prep Help Main | Home
|