Tax Ch. 16
•Deduction is limited to the lesser of: -Dividend × DRD%, or -DRD modified taxable income × DRD%. §Modified taxable income = Taxable income before deducting______________
DRD, NOL, or capital loss carrybacks.
•Corporations report taxable income on ______ -Small corporations complete Schedule _____ (Less than $10 million of total assets). -Large corporations complete Schedule________ -Book-tax differences referred to as ______ •Corporate returns are due three and one-half months after the close of the tax year (June 30 year-end exception, only two and one-half months). -Automatic six-month extension for filing (__________for calendar-year corporations). •Consolidated tax returns -Affiliated groups essentially treated as one corporation.
Form1120. M-1 M-3. M adjustments. October 15
Corporate tax Formula Individual tax formula
gross income - deductions = taxable income * tax rates = regular income tax liability + other taxes = total tax - credits - prepayments = tax due (or refund) gross income - For AGI deductions = adjusted gross income - From AGI deductions (1) greater of: (a) standard deductions or (b) itemized deductions (2) deduction for qualified business income = taxable income * tax rates = regular income tax liability + other taxes = total tax - credits - prepayments = tax due (or refund)
PCC determined its taxable income at the close of the first, second, and third quarters as follows: quarter end/cumulative taxable income 1, 1,000,000 2, 3,200,000 3, 5,000,000 what is its annual estimated taxable income for estimated tax payment purposes as of the end of the first, second, third, and fourth quarters?
installment, 1. taxable income, 2. annualization factor, 3. (1*2) annual estimated taxable income 1, 1,000,000, 12/3 =4, 4,000,000 2, 1,000,000, 12/3=4, 4,000,000 3, 3,200,000, 12/6=2, 6,400,000 4, 5,000,000, 12/9 = 1.333, 6,666,667
Estimated taxable income computation under annualized income method Installment, 1. annual estimated taxable income, 2. tax on estimated taxable income, 3. percentage if tax required to be paid, 4. (2*3) required cumulative payment, 5. prior cumulative payment, (4-5) required estimated tax payment
installment, 3. percentage if tax required to be paid first quarter, 25% second quarter, 50 third quarter, 75 fourth quarter 100
•Corporations report ___________book-tax differences to the extent that the 10 percent limitation restricts the amount of charitable contribution deduction. •Corporations report ___________ book-tax differences when they deduct charitable contribution carryovers because they deduct theterm-29 carryovers for tax purposes, but not book purposes.
unfavorable temporary favorable temporary
•For financial reporting purposes, corporations report losses in the year they incur them. •Consequently, they report ________ book-tax differences in the year they generate NOLs. •Because corporations do not deduct NOL carryovers in determining book income, they report ___________book-tax differences in the year they deduct the NOL carryovers for tax purposes.
unfavorable temporary favorable temporary
•Corporations with a federal income tax liability of ____ or more are required to pay their estimated income tax in quarterly installments. -Installments due on the ___ day of §4th month (25% of required annual payment) §6th month (50% of required annual payment) §9th month (75% of required annual payment) §12th month (100% of required annual payment) •Corporations may owe a penalty for underpayment. -Payments based on required annual payment.
$500 15th
Assume that PCC owns 30% of the stock of BCS, a U.S. corporation, and applies the equity method of accounting for book purposes. During 2020, BCS distributed a 40,000 divided to PCC. BCS reported 100,000 of net income for 2020. Based on this information, what is PCC's 2020 book-tax difference relating to the divided and its investment in BCS (ignore the dividends-received deduction)? is the difference favorable or unfavorable? Assume the same facts as above, except that PCC owns 10% of BCS rathe than 30%. What would be PCC's 2020 book-tax difference relating to the dividend and its investment in BCS (ignore the dividends-received deduction)? Assume that PCC's basis in its BCS stock on January 1 is 1,000,000 and its value in its BCS stock on Dec 31 is 1,050,000.
1. divided received in 2020 (included in 2020 taxable income but not in book income) 40,000 2. BCS 2020 net income 100,000 3. PCC's ownership in BCS stock 30% 4. PCC's book income from BCS investment 30,000 (2*3) unfavorable book-tax difference associated with divided 10,000 (1-4) 0 book-tax difference on the dividend because PCC includes the 40,000 dividend in income for both book and tax purposes. 50,000 favorable book-tax difference for the unrealized gain in PCC's BCS stock that is recognized for book purposes but not for tax purposes.
Let's assume that PCC reports gross income of 80,000 including 40,000 of dividend income from TOU Corp. PCC owns 25% of TOU Corp. stock so its applicable DRD percentage is 65%. Finally, let's consider two alternative scenarios. Scenario A, PCC reports 54,000 of business expenses deductible in determining its DRD modified taxable income. In scenario B, PCC reports 55,000 of business expenses deductible in determining its DRD modified taxable income. For each scenario, what is PCC's DRD modified taxable income? For each scenario what is PCC's DRD?
1. gross income other than dividends 40,000/40,000 2. dividend income 40,000/40,000 3. gross income 80,000/80,000 4. business expenses deductible in determing the DRD modified taxable income 54,000/55,000 (1+2) 5. DRD modified taxable income (taxable income before the DRD) 26000/25000 (3-4) 6. full DRD 26,000/26,000 (2*65%) 7. DRD modified taxable income limitation 16,900/16250 (5*65%) 8. taxable income (loss) after deducting full DRD 0/(1000) (5-6) DRD deductible 16900/26000 (lessor of 6 or 7 unless 8 is negative then 6)
From her review of PCC's dividend income computations, Elise determined that the only dividend PCC received during the year was 300,000 dividend from Apple a U.S. corporation. Because PPC owns a very small percentage of Apple stock (less than 1%), Elise determined that PCC was entitled to a 50% DRD. PCC's modified taxable income before any NOL and DRD is 5,660,700. What is PCC's book-tax difference associated with its DRD? is the difference favorable or unfavorable? permanent or temporary?
1. taxable income before NOL and DRD (DRD modified taxable income) 5,660,700 2. dividend income 30,000 3. applicable DRD percentage 50% (owns less than 20%) 4. full DRD 15,000 (2*3) 5. DRD taxable income limitation 2,830,350 (1*3) 6. book DRD deduction 0 (no book DRD) 7. taxable deductible DRD 15,000 (lessor of 4 or 5) favorable permanent book-tax difference (15000) (6-7)
in 2020 PCC donated a total of 700,000 of cash to the ARC. Elise knew she had to apply the 10% taxable income limitation to verify the amount PCC deducted for tax purposes. For 2020, PCC's taxable income before any charitable contribution, NOL carryovers from prior years, and DRD was 6,287,000. What is PCC's charitable contribution deduction for the year? what is its charitable contribution carryover to next year, if any? What is PCC's book-tax difference associated with its charitable contribution? favorable or unfavorable? temporary or permanent?
1. taxable income before any charitable contributions, NOL carryover from previous year, and DRD 6,287,000 2. NOL carryover from previous years (24,000) given 3. charitable contribution limit modified taxable income 6,263,000 (1+2) 4. total charitable contributions for year 700,000 5. tax deduction limitation percentage 10% 6. charitable contribution deduction limitation 626,300 (3*5) 7. charitable contribution deduction for year 626300 (lessor of 4 or 6) charitable contribution carryover 73700 (4-7) unfavorable temporary
assume that PCC's 2020 taxable income before considering the charitable contribution limitation was 100,000. The taxable income computation includes 18,000 charitable contribution deduction, a 20,000 DRD, a 24,000 NOL carryover from 2018, a 4000 capital loss carryover (offsets 4000 of capital gain), and 25,000 of deprecation expense. Under these circumstances, what would be PCC's 2020 deductible charitable contribution?
1. taxable income before charitable contribution limitation 100,000 2. charitable contribution deduction before limitation 18,000 3. DRD 20,000 4. charitable contribution limit modified taxable income 138,000 (1+2+3) 5. tax deduction limitation percentage 10% 6. charitable contribution deduction limitation 13800 (4*5) 7. charitable contribution deduction for year 13800 (lessor of 2 or 6) charitable contribution carryover 4200 (2-7)
suppose that during 2020, PCC received a 30,000 dividend from Apple and that PCC owns less than 1% of Apples stock. Assume that PCC's taxable income before the DRD was 50,000 in scenario A and 25000 in scenario B. To arrive at the taxable income under both scenarios (before the DRD) PCC deducted a 3000 NOL carryover and a 4000 capital loss carryover. What is PCC's DRD associated with the dividend in scenario A and B?
1. taxable income before the DRD (includes dividend income) 50,000/25,000 2. NOL carryover 3,000/3,000 3. DRD modified taxable income 53,000/28,000 (1+2) 4. dividend income 30,000/30,0000 5. DRD percentage based on ownership 50%/50% 6. DRD before limitation 15,000/15,000 (4*5) 7. DRD limitation 26500/14000 (3*5) DRD deductible 15,000/14,000 (lessor of 6 or 7)
•Deduction is limited to ___ percent of taxable income before deducting any of the following: -Any _______ contributions. -The ________ deduction (DRD). -____________ carrybacks. •Carry forward excess contributions for ______ years.
10 charitable dividends-received Capital loss five
On January 1, 2020, PCC granted 20,000 NQOs with an estimated $10 fair value per option (200,000 total fair value). Each option entitled the recipient to purchase one share of PCC stock for 10 a share (the per-share price of PCC stock on January 1, 202020, when the options were granted). The options vested at the end of the day on Dec 31, 2021. No options were exercised in 2020 or 2021. For 2020 and 2021, PCC deducts compensation expense of 100,000 for book purposes. What is PCC's book-tax difference associated with the nonqualified options in 2020? in 2021? IS the difference favorable or unfavorable? Is it permanent or temporary? Assume the same facts as above and that on march 1 2022 employees exercised all 20,000 options at a time when the PCC stock was trading at 25 a share. What is PCC's book-tax difference associated with the stock options in 2022? Favorable or unfavorable? permanent or temporary?
100,000 unfavorable temporary book-tax difference in both 2020 and 2021. PCC reports 100,000 of compensation expense for book purposes in 2020 and 2021 and 0 for tax purposes (no potions were exercised om 2020 or 2021). 200,000 favorable temporary book tax difference in 2022 and a 10000 favorable permanent book-tax difference. PCC claims a 300,000 tax deduction in 20222 equal to the number of shares purchased (20,000) times the bargain element of 15 per option exercised (25-10). PCC does not deduct any additional compensation expense for book purposes in 2022 because the vesting period ended in 2021. 200,000 of the tax deduction is a reversal of the total 2020-2021 unfavorable, temporary book-tax difference. The excess 100,000 tax deduction is a favorable permanent difference.
Under the assumptions provided in the previous example, we determined that the PCC has a 4200 charitable contribution carryover (it was not able to deduct 42000 of its 18000 contribution from 2020). assume that in 2021 PCC contributed 10000 to a qualified charity, and its charitable contribution limit modified taxable income is 110,000. What would be PCC's deductible charitable contribution in 2021? what would its charitable contribution carryover be at the end of 2021? when would it expire?
11,000 charitable contribution deduction. This is the lesser of the charitable contribution limit of 11,000 (110,000*10%) or 142000 (10000 current year contribution plusv42000 carryover from prior year). The carryover is 32000 (14200-11000). because the current year contribution uses the limit first the 3200 carryover is from the excess contribution in 2020, and it will expire if it has not been used by the end of 2025.
•Corporations compute their pre-credit federal income tax liability by applying a flat rate of ____ percent to taxable income. Elise determine that PCC's taxable income is 5,621,700. What is its income tax liability?
21 1,180,557 (5,621,700*21%)
•When corporations receive dividends from other corporations, the dividends are included in taxable income and taxed at the ___ percent corporate rate. •However, corporations are allowed to claim a dividends-received deduction (DRD) that reduces the actual ___ they pay on the dividends. •The DRD is designed to mitigate the extent to which corporate earnings are subject to three or more levels of taxation.
21 tax
Assume that last year (2019) PCC incurred a 24,000 net operating loss. Last year's NOL becomes an NOL carryover to this year that is available to reduce its current-year taxable income of 100,000. What is PCC's current-year book-tax difference associated with its NOL carryover? Is the difference favorable or unfavorable? temporary or permanent?
24,000 favorable temporary. The NOL carryover from the prior year is deductible for tax purposes but not for book purposes. The NOL carryover is fully deductible because it is less than 80% of current-year taxable income before the NOL deduction.
During 2020, PCC sold intel stock at a 12,000 gain and also reported a 40,000 capital loss on the disposition of land held for investment. PCC has not recognized a net capital gain or loss since 2016. PCC has a net operating loss carryover from 2019. What is PCC's net capital loss for the year? what amount of book-tax difference does this loss trigger? favorable or unfavorable? permanent or temporary? assume that in 2020, PCC reported a net capital loss of 28,000 and that it reported a 7000 net capital gain in 2017, no net capital gain or loss in 2018, and a 4000 net capital gain in 2019. what is the amount of its net capital loss carryover to 2021? PCC reported a net operating loss in 2019 but did not report a net operating loss in either 2017 or 2018. Suppose PCC did not recognize any net capital gains in prior years but that next year (2021) it recognizes a net capital gain of 5,000 (before considering any net capital loss carryovers). What will be its book-tax difference associated with capital gains and losses next year? favorable or unfavorable? permanent or temporary?
28,000 loss (12000 + -40,000). bc PCC did not recognize any net capital gains in 2017,2018, or 2019, it may not carry back the loss (note that PCC could not carry back the loss to 2019 in any event because it recognized a net operating loss in that year as evidenced by its net operating loss carryover from 2019). 28,000 unfavorable temporary 21,000. PCC first carries back the 28,000 loss to 2017 offsetting the 7000 net capital gain in that year. PCC then carries the remaining 21,000 loss (-28,000 +7000) back to 2019. However,, because PCC reported a net operating loss in 2019, it is not allowed to offset the 4,000 net capital gain with the capital loss carryback. Consequently, the 21,000 unused capital loss carryover is carried forward to 21,000. Next year, PCC would report a 5000 favorable temporary book-tax difference because it would be allowed to deduct 5000 of its 28,000 capital loss carryover for tax purposes. This is a reversal of 5,000 of the 28,000 unfavorable temporary book-tax difference from the prior year.
-If ownership is at least 20 percent but not more than ___ percent of the distributing corporation's stock, the receiving corporation reports its pro rata share of distributing corporation's income (equity method) but the receiving corporation does not include the dividend in book income. §This results in a _______ favorable or unfavorable book-tax difference for the difference between the pro rata share of equity income reported on the books and the dividend amount reported on the tax return. -If ownership >____percent, consolidated financial reporting and the intercompany dividends are eliminated for ____ purposes.
50 temporary 50 book
•Corporations generally compute their DRD by multiplying the dividend by 50 percent, 65 percent, or 100 percent, depending on the receiving corporation's level of ownership in the distributing corporation's stock. -Own less than 20 percent: ____percent DRD. -Own at least 20 percent but less than 80 percent: _____ percent DRD. -Own 80 percent or more: ______ percent DRD.
50 65 100
Assume that in 2020 PCC reported a 300,000 net operating loss. In 2021, PCC reported taxable income of 250,000 before any NOL carryovers. What is PCC's 2021 taxable income and its NOL carryover to 2022? Assume that the 300,000 NOL arose in 2017 and PCC broke even in 2018, 2019, and 2020. What are the PCC's 2021 taxable income and NOL carryover to 2022? Assume that in 2020 PCC reported 120,000 of deductions and 90,000 of gross income (including 6,000 of net capital gain). PCC also has a 15,000 NOL carryover from 2019 and an 8,000 net capital loss carryover from 2019. What are PCC's net operating loss and capital loss carryovers to 2021, and when do they expire?
50,000 taxable income with a 100,000 NOL carryover to 2022. PCC can deduct the 2020 NOL carryover against 80% of 2020 taxable income (250,000*80% = 200,000 limitation on the NOL carryforward). 0 taxable income with a 500,000 NOL carryforward to 2022. PCC can deduct 100% of the pre-2018 NOL against taxable income in carryover years. 15,000 net operating loss carryover from 2019 that can be carried forward indefinitely, a 36,000 net operating loss carryover from 2020 that can be carried forward indefinitely, and a 2000 net capital loss carryover from 2019 that expires at the end of 2024 if unused. PCC's 2019 NOL is unused in 2020 because PCC reports a NOL in 2020 and does not deduct NOL carryovers in determining ts 2020 NOL. In 2020, PCC is able to offset the 6,000 net capital gain included in gross income with the 6,000 of the 8,000 net capital loss carryover from 2019. This reduces PCC's gross income to 84,000 (90,000 -6,000) and increases its deductions in excess of gross income (its current year NOL) to 36,000 (120,000-84,000). Finally, PCC's 2019 capital loss carryover is reduced by the 6,000 absorbed portion to 2,000 (8,000-6,000 used in 2020).
•Unfavorable differences -_____ to book income to compute taxable income. Unfavorable because it _______taxable income (and taxes payable) relative to book income. •Favorable differences -______ from book income to compute taxable income. Favorable because it _______ taxable income (and taxes payable) relative to book income. •In addition to unfavorable or favorable, book-tax differences can also be categorized as _____________
Add-back increases Subtract decreases permanent or temporary.
Based on the estimated taxable income in the previous example, what are PCC's required estimated tax payments for the year under the annualized income method? Can PCC use its prior-year tax liability to determine its current-year estimated tax payments? Can PCC use its current-year tax liability to determine its current-year estimated tax payments?
Installment, 1. annual estimated taxable income, 2. tax on estimated taxable income (flat 21%), 3. parentage of tax required to be paid, 4. (2*3) required cumulative payment, 5. prior cumulative payments, 4-5 required estimated tax payment 1, 4,000,000, 840,000, 25%, 210,000, 0, 210,000 2, 4,000,000, 840,000, 50%, 420,000, 210,000, 210,000 3, 6,400,000, 1,344,000, 75%, 1,008,000, 420,000, 588,000 4, 6,666,667, 1,400,000, 100%, 1,400,000, 1,008,000, 392,000 No. PCC reported a net operating loss last year and did not pay taxes so it may not use its prior-year tax liability to determine its current-year estimated tax payments. Yes. PCC's actual tax liability for the year is 1,180,557. So, PCC could have avoided estimated tax penalties by paying in 295,139 each quarter (1,180,557*25%). However, it did not know this amount when it was required to make its estimated tax payments so it would likely have used the annualized income method of determining its estimated tax payments to protect itself from penalties.
assume the same facts as above, except that last year PCC paid 200,000 in tax and PCC is not a large corporation. What would be PCC's required minimum estimated tax payments for each quarter (ignore the current-year tax requirement)?
Installment, 1. estimated tax payment under prior year tax exception (200,000/4), 2. estimated tax payment under annualized method, 3. required cumulative payment for quarter time [sum of the lessor of (1) or (2) through quarter], 4. prior cumulative payments, 5. (3-4) required estimated tax payment first quarter, 50,000, 210,000, 50,000, 0, 50,000 second quarter, 50,000. 210,000, 100,000, 50,000, 50,000 third quarter 50,000, 588,000, 150,000, 100,000, 50,000 fourth quarter 50,000, 320,000, 200,000, 150,000, 50,000
assume that in 2019 PCC reported taxable income of 2,000,000 and a tax liability of 420,000. Further, PCC determined its required estimated tax payments under the annualized method as described in the previous example. What would be PCC's required minimum estimated tax payments for each quarter for 2020? (ignore the current-year tax requirement because PCC is unsure what its current-year tax will be.)
Installment, 1. estimated tax payment under prior-year tax exception, 2. estimated tax payment under annualized method, 3. required cumulative payment for quarter * [sum of the lessor of (1) or (2) through quarter], 4. prior cumulative payments, 5. (3-4) required estimated tax payment. 1, 105,000, 210,000, 105,000 0, 105,000 2, not applicable, 210,000, 420,000, 105,000, 315,000 3, not applicable, 588,000, 1,008,000, 420,000, 588,000 4,not applicable, 320,000, 1,400,000, 1,008,000, 392,000 Because PCC is a large corporation it may determine its first quarter tax payment using its prior year liability (420,000*25% = 105,000). However it must use the annualized method to determine the others. With its second installment, PCC must have paid in 420,000 because it only paid in 105,000 with the 1st quarter installment, it must pay 315,000 with its second quarter payment.
•The modified income limitation does not apply if, after deducting the full DRD, a corporation reports a current-year ____ •In other words, if, after deducting the full DRD, the corporation has an NOL, the corporation is allowed to deduct the full ___ no matter the amount of the modified taxable income limitation.
NOL. DRD
•Under ________ income method, corporations measure their taxable income at the end of each quarter and then annualize (project) the amount to calculate their estimated taxable income and liability for the year. •Corporations use the ______quarter taxable income to project their annual tax liability for the _____ and _____ quarter estimated payments. •They use the second quarter to calculate the third quarter payment and the third quarter to calculate the fourth quarter payment.
annualized first first second
•To compute taxable income, most corporations begin with ____(financial reporting) income after income tax expense and then make adjustments for book-tax differences to reconcile to the tax number. •Many items of income and expense are accounted for differently for book and tax purposes. •Each book-tax difference can be classified as ____________depending on its effect on taxable income relative to book income.
book unfavorable or favorable
•Permanent differences arise from that are income or deduction during the year for either ____ purposes but not both. -They do not reverse _________. •Temporary differences ____ over time such that corporations recognize the same amount of income or deductions for the items on their income statements as they recognize on their tax returns. -Temporary differences that are initially favorable (unfavorable) become unfavorable (favorable) when they reverse.
book or tax reverse over time
•Stock options allow recipients to acquire stock in the corporation at a predetermined price over a specified time period. •To acquire the stock, employees exercise the options and pay the ____ any time after the options___ •Stock options become valuable to employees when the stock price appreciates above the exercise price, and they can purchase the stock at below-market price.
exercise price vest.
•Similar to individuals, corporations are allowed to deduct charitable contributions to qualified charitable organizations. However, the limitations and timing rules are different. •Amount of deduction -Capital gain property §Generally ___ value -Ordinary income property §Generally ____ •_______corporation can deduct contributions in the year before they actually pay the contribution when: -Approved by board of directors before______ -Paid within three and one-half months after end of year (two and one-half months if June 30 year end).
fair market adjusted basis Accrual-method year-end.
Common Permanent Book-Tax Differences Interest income from municipal bonds: income included in book income but excluded from taxable income death benefit from life insurance on key employees: income included in book income but excluded from taxable income interest expense on loans to acquire interments generating tax-exempt income: deductible for book purposes, but expenses incurred to generate tax-exempt income are not deductible for tax purposes life insurance premiums for which corporation is beneficiary: deductible for book purposes, but expenses incurred to generate tax-exempt income (life insurance death benefit) are not deductible for tax purposes Meals expense: fully deductible for book purposes but generally only 50% deductible for tax purposes fines and penalties and political contributions: deductible for book purposes but not for tax purposes entertainment expense: deductible for book purposes but not deductible for tax purposes federal income tax expense: deductible for book purposes but not deductible for tax purposes
favorable favorable unfavorable unfavorable unfavorable unfavorable unfavorable unfavorable
Common Temporary Book-Tax Differences depreciation expense: difference between depreciation expense for tax purposes and depreciation expense for book purposes gain or loss on disposition of depreciable assets: difference between gain or loss for tax and book purposes when a corporation sells or disposes of depreciable property. Difference generally arises because depreciation expense, and thus the adjusted basis of the asset, is different for tax and book purposes. The difference is essentially the reversal of the book-tax difference for the depreciation expense on the asset sold or disposed of bad debt expense unearned rent revenue deferred compensation organizational expenditures and start-up costs warranty expense and other estimated expenses UNICAP Interest expense
favorable unfavorable unfavorable unfavorable unfavorable unfavorable unfavorable unfavorable unfavorable
•Because the DRD is strictly a tax deduction and not a book deduction, any DRD creates a ____________ book-tax difference.
favorable permanent
•The corporation recognizes a _________ difference if the tax deduction exceeds the total book expense and an ________ difference if the total book expense exceeds the tax deduction.
favorable permanent unfavorable permanent
Estimated income computation under annualized income method Installment, 1. taxable income first ___ months of year), 2 (annualization factor), 1*2 annual estimated taxable income
first quarter,3, 12/3 =4 second quarter,3, 12/3 =4 third quarter,6, 12/6 =2 fourth quarter,9, 12/9 = 1.3333
On Dec 1 2020 the PCC board of directors approved a 110,000 cash contribution to the American red cross. for finical reporting purposes, PCC accrued an expensed the donation in 2020. PCC transferred the cash to ARC on March 1, 202. Does PCC report a book-tax difference associated with the charitable contribution (assume the taxable income limitation does not apply)? Assume the same facts as above, except the PCC transferred the cash to ARC on April 30, 2021. Does PCC report a book-tax difference associated with the charitable contribution (assume the taxable income limitation does not apply)?
no book-tax difference. For tax purposes, as an accrual method taxpayer, PCC may deduct the 110,000 contribution in 2020 because it paid the donation to ARC within three and one-half months after year end. Yes, PCC reports 110,000 unfavorable temporary book tax difference in 2020. a calendar year end corporation such as PCC must pay the charitable contribution by the 15th day of the fourth month after its year-end (April 15th). This will reverse and become a 110,000 favorable temporary difference in 2021 when PCC makes the payment to the ARC and deducts the contribution.
•Corporations compute gross income in the same way as other types of business entities and individual taxpayers. •Similar to other businesses, corporations are permitted to deduct ______________ business expenditures. •In contrast to individuals, corporations cannot claim the deduction for ------------- and corporations do not ---- deductions or deduct a _____ deduct. •Consequently, the formula for computing corporate taxable income is relatively straightforward.
ordinary and necessary qualified business income, itemize standard
•Required annual payment -100 percent of tax liability on ________ return. §Doesn't apply if no liability in prior year. -100 percent of __________tax liability. -100 percent of estimated current-year tax liability using __________method. •Corporations will generally compute the required estimated payment under the prior-year tax method and under the annualized method and pay the lesser of the two.
prior-year current-year annualized
•Large corporations, defined as over $1,000,000 of taxable income in any of the three years prior to the current year, may use the _________ liability to determine their ____ quarter estimated tax payments only.
prior-year tax first
•The excess of deductions over gross income is called a net operating loss (NOL). •No current ____ benefit from current-year loss. •NOLs from tax years beginning after 12/31/17 can be carried forward indefinitely and can offset up to 80 percent of taxable income before the NOL deduction. •NOLs from tax years beginning before 1/1/18 can be carried two years and forward twenty years and can offset 100 percent of taxable income before the NOL deduction. •To compute NOL for the year, there is no deduction for: -NOL carrybacks or carryovers from other years. -Capital loss carrybacks (carryovers are allowed).
tax
•Dividends -Included in gross income for ____ purposes if received from a _____ corporation. -Income included in book income depends on _____ §If ownership < ____percent of the stock of the distributing corporation, the dividend is included in ____ income (same as tax). However, the unrealized gain or loss on the stock is included in _____income but not ___ income. This is a ______ difference that will reverse when the stock is sold.
tax domestic ownership. 20 book book taxable temporary
•For tax purposes, the treatment depends on whether the options are incentive stock options (ISOs) or nonqualified stock options (NQOs). -Corporations issuing ISOs generally do not deduct compensation expense for ___ purposes. -In contrast, for NQOs, corporations deduct the difference between the ____ value of the stock and the _______(bargain element) as compensation expense in the year of exercise. •For book purposes, corporations estimate the ________ at the time of issue and _____ compensation expense.
tax fair market exercise price fair value deduct
•Corporations cannot deduct a net capital loss for the year (excess of capital losses over capital gains for the year). •Corporations can carry net capital losses back ___ years and forward ___ years. -Must use carryover amounts in a specific order. -If a corporation reports a net capital loss in year four, it must first carry back the loss to year one, then year two, then year three. If net capital loss remains, it must carry it forward to year five, then year six, then year seven, then year eight, and finally year nine. If any remains, it expires unused. •Corporations recognizing net capital losses report ______differences in the they incur losses and ______ differences in the year they use carrybacks or carryovers.
three five unfavorable favorable
•NQOs can generate both temporary and permanent book-tax differences. •Corporations recognize ____ differences each year equal to the value of the options that _____ during the year but are not _____ (book deduction but no tax deduction). •The unfavorable differences reverse in the year of ________ •When an NQO is exercised, the tax deduction, which is the difference between the fair market value of the stock purchased and the exercise price, will likely differ from the compensation expensed on the income statement over the service period (i.e., the estimated value of the options for book purposes).
unfavorable vest exercised exercise.
•For ISOs, the book compensation expense is an _____ difference (book deduction but no tax deduction). Assume that on January 1 2020 PCC issued 10,000 incentive stock options (ISOs) with an estimated fair value of $6 per option. The options vest at the end of four years. For 2020, PCC records a $15,000 compensation expense related to the ISOs (10,000 options * $6/4years). What is PCC's 2020 book-tax difference associated with the incentive stock options? would the difference be favorable or unfavorable permanent or temporary?
unfavorable permanent 15,000 unfavorable permanent difference. PCC does not deduct compensation expense related to the ISOs for tax purposes.