Tax 310 16

16-1
CHAPTER 16 C CORPORATION INCOME TAX TAXABLE INCOME, TAX LIABILITY

Form 1120 - U.S. Corporation Income Tax Return.
Schedule L Balance Sheet.
Schedule M-1 Reconciliation of Income Per Book and Income Per Return.
Schedule M-2 Analysis of Unappropriated Retained Earnings Per Book.
Schedule M-3 Net Income (Loss) Reconciliation for Corporation With Total Assets of $40 Million or More.
Form 8903 Domestic Production Activities Deduction (Form 1120, line 25, or Form 1040, line 35).
Form 4626 - Alternative Minimum Tax - Corporate.
Form 2553 - Election by a Small Business Corporation.
Form 1120S - U.S. Income Tax Return for an S Corporation.
Schedule K-1 (for Form 1120S) - Shareholder's Income, Credit, Deductions.
Form 1065 - U.S. Partnership Return of Income.
Schedule K-1 (for Form 1065) - Partner's Share of Income, Credits, Deductions.
TAX CONSEQUENCES OF DIFFERENT BUSINESS ORGANIZATIONS:
1. SOLE PROPRIETORSHIP: Unlimited liability, single taxation on the owner, capital loss deductible up to $3,000 a
year, not employee but self-employment at 15.3% for social security tax.
2. PARTNERSHIP: Unlimited liability, single taxation on the partner, capital loss deductible up to $3,000 a year, not
employee but self-employment at 15.3% for social security tax.
3. C CORPORATION: Limited liability, double taxation on earnings of the corporation at a maximum rate of 35% and
on qualified dividends of the shareholders at 20%/15%/0%, capital loss not deductible but can be carried back and forward,
as an employee at 7.65% for social security tax, subject to additional "accumulated earnings tax" and "personal holding
company tax," free transfer with unlimited life.
4. S CORPORATION: Limited liability, single taxation on earnings, not dividends, of the corporation, capital gain loss
deductible on the shareholders up to $3,000 a year, as an employee at 7.65% for social security tax, not as selfemployment, subject to "build-in tax" after conversion from C to S corporation, and corporate income tax if there is
excessive passive income. Maximum tax rate:
Individual Tax Rate Versus Corporate Tax Rate
1986 1987
1992
1994
2001
2003
2013
Individual tax rate (Form 1040)
50%
28%** 31%** 39.6% 38.6% 35%** 39.6%
S corporation (Form 1120S)
Partnership (Form 1065)
C corporate tax rate (Form 1120) 46%* 34%
34%
35%*
35%*
35%
35%*
* Corporate tax rate is lower than individual tax rate.
** Individual tax rate is lower than corporate tax rate.
EXAMPLE 1 DOUBLE TAXATION ON A C CORPORATIONS INCOME
Ed has a business that earns a before-tax income of $1,000,000 and pays the entire amount of after-tax income to Ed.
REQUIRED: (a) If he runs his business as a sole proprietorship what is the total tax liability at an individual tax rate of
35%? (b) What if it is a c corporation at a corporate tax rate of 35% and an individual dividend tax rate of 15%? ANSWER
(a) Individual income tax liability = 1,000,000 x 39.6% =
(b) Corporate income tax liability = 1,000,000 x 35% =
+ Individual dividend tax liability= (1,000,000 - 350,000 a) x 20% dividend tax
rate=
396,000 better
350,000
a
+130,000 .
480,000
2015 CORPORATE TAX RATE:

If taxable income is, Y
0
50,000
50,000
75,000
75,000
100,000
100,000
335,000
335,000 10,000,000
10,000,000 15,000,000
15,000,000 18,333,333
18,333,333 over
Tax liability is
0 + 15% x (Y
0).
7,500 + 25% x (Y
50,000).
13,750 + 34% x (Y
75,000).
22,250 + 39% x (Y
100,000).
113,900 + 34% x (Y
335,000) = Y x 34%.
3,400,000 + 35% x (Y 10,000,000).
5,150,000 + 38% x (Y 15,000,000).
6,416,667 + 35% x (Y 18,333,333) = Y x 35%.
The maximum corporate tax rate is 35% on all taxable income, not 39%. Since the corporate tax is a progressive
rate, there is a tax saving for the taxable income below $100,000. However, this saving is denied by adding a 5%
surcharge after the taxable income reaches $100,000. Therefore, after $335,000 of taxable income, this tax saving is
completely wiped out, and the tax liability is a flat rate of 34% on all taxable income. Note that $113,900 is exactly equal
to (34% x 335,000),
16-2
whereas 22,250 is not equal to (34% x 100,000), and 13,750 is not equal to (25% x 75,000). This indicates that there are
tax savings for taxable income below $100,000 due to progressive tax rate. After the taxable income reaches
$10,000,000,
the tax rate is increased from 34% to 35%. In order to wipe out the 34% tax savings, it added a 3% surcharge for the
income between $15,000,000 and $18,333,333. After $18,333,333 it is taxed at a flat rate of 35%. Note that $6,416,667 is
exactly equal to ($18,333,333 x 35%), while $5,150,000 is not equal to (35% x $15,000,000). This indicates that there
were tax savings for taxable income below $18,333,333. Personal service corporation is taxed at a flat rate of 35%.
EXAMPLE 2 CORPORATE TAX LIABILITY
Adams Corporation has the following different cases of taxable income. Determine its tax liability.
# Income
Tax liability
1
60,000
= 7,500 + 25% x (60,000 50,000) = 7,500 + 2,500 = 10,000.
2
100,000
= 13,750 + 34% x (100,000 75,000) = 13,750 + 8,500 = 22,250.
= (50,000 x 15%)+ 25%x(75,000 50,000)+ 34%x(100,000 75,000)=7,500 + 6,250 + 8,500= 22,250
3
335,000
= 22,250 + 39% x (335,000 - 100,000) = 22,250 + 91,650 = 113,900.
= 34% x 335,000.
= (15% x 50,000) + 25% x (75,000 -50,000) + 34% x (100,000 - 75,000) + 39% x (335,000 - 100,000)
= 7,500 + 6,250 + 8,500 + 91,650 = 113,900.
4
400,000
= 113,900 + 34% x (400,000 335,000) = 113,900 + 22,100 = 136,000.
= (50,000 x 15%) + 25 x (75,000 50,000) + 34% x (100,000 75,000) + 39% x (400,000 335,000)
= 7,500 + 6,250 + 8,500 + 91, 650 + 22,100 = 136,000.
5 10,000,000 = 113,900 + 34% x ( (10,000 335,000) = 113,900 + 3,286,100 = 3,400,000.
= 10,000,000 x 34% =
= 3,400,000.
6 18,333,333 = 5,150,000 + 38% x (18,333,333 15,000,000) = 5,150,000 + 1,266,667 = 6,416,667.
= 1,833,333 x 35%.
= ((10,000,000 x 34%) + 35% x (15,000,000 10,000,000) + 38% x (18,333,333 15,000,000)
= 3,400,000 + 1,750,000 + 1,266,667 = 6,416,667.
7 20,000,000 = 6,416,667 + 35% x (20,000,000 18,333,333) = 6,416,667 + 583,333 = 7,000,000.
= 20,000,000 x 35% =
= 7,000,000.
CORPORATE TAX FORMULA (Form 1120)

GROSS INCOME:
1. Sales (must use accrual basis) ...........................
.
2. Cost of goods sold (must use accrual basis) (Form 1125-A) .
3. Dividends (80% deduction below if own domestic company>=20%)
4. Interest, rent, royalty income, other business profit (No interest from state & municipal bonds)
5. Long-term or short-term capital gain from sale of business-use personal property (machine) or real
property (factory) (Form 4797) ............................................
6. Long-term or short-term capital gain from sale of capital asset (for investment, e.g., stock, land for
investment) (Schedule D for Form 1120) ...........................
.
Total gross income
DEDUCTIONS:
7. Wage, rent, repair, interest, tax, bad debt, business expense
8. Salaries paid to owner-employees, officers (Schedule E) .

.
9. Depreciation expense ....................................
10. Employee fringe benefits ...............................

.
11. Contribution to employee pension plan ..................
12. Charitable contribution ( < 10% x adjusted taxable income)
13. Amortization of organization cost, start-up cost (15 years)

..
14. Domestic production activities deduction (9%, Form 8903; Form 1120, line 25; Form 1040, line 35)
1,000
(200)
100 a
100
100
100
1,200
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(0)

15. Long-term or short-term capital loss from sale of business-use personal property (machine) or real
property (factory); there is no restriction (Form 4797) ..................
16. No current year's long-term or short-term capital loss from sale of capital asset (for investment, e.g.
stock, land for investment); the loss can only be carried back for 3 years and carried
forward for 5 years to offset the capital gain only, not the ordinary income (Schedule D)
...
Taxable income before special deductions .....................
- 17. Dividend-received deduction (Schedule C)(100% deduction if own at least 80%,
80% deduction if own less than 80% but at least 20%, 70% deduction if own < 20%). 80% x 100 a
=
- 18. Net operating loss deduction from previous years (carryback 2 years and carryforward 20 years)
TAXABLE INCOME ..........................................
..
X Corporate tax rate (maximum 35%) (Schedule J) .............
Regular tax ..................................................
- 19. Foreign tax credit (Form 1118) ........................

..
- 20. Possessions tax credit (Form 5735) ....................
..
- 21. General business credit (Form 3800) ...................
.
- 22. Investment credit (Form 3468) .........................
.
+ 23. Personal holding company tax (38.6%, Schedule PH) .....
+ 24. Alternative minimum tax (20%, Form 4626) (beyond regular tax)
+ 25. Accumulated earnings tax (38.6%, no form) .............

..
TOTAL TAX LIABILITY ......................................
- 26. Estimated tax payment (Form 1120-W) (at max rate 35%)
Tax refund (due)
300
(80)
(100)
120
x 15%
18
(0)16-3
(0)
(0)
(0)
0
0
0
18
(20)
2
NONTAXABLE INCOME: Interest income from state and municipal bonds. Proceeds from life insurance policies when
the corporation is the beneficiary.
NONDEDUCTIBLE EXPENSE : Interest expense to buy tax-exempt state and municipal bonds, illegal bribe
and kickback, fines and penalties, e.g., parking violation tickets, life insurance premium when the corporation is the
beneficiary. Hobby expenses are fully deductible without the limit to the hobby income only. Passive activity losses
(business activity without active participation and real estate rental property even with material participation) are fully
deductible without limit except personal service corporation and closely held corporation. Investment interest is also
fully deductible without limit to the investment income only. These income and loss can be offset each other.
.
ACCOUNTING INCOME VERSUS TAXABLE INCOME, TEMPORARY DIFFERENCE VERSUS

PERMANENT DIFFERENCE:
Accounting income is determined according the Generally Accepted Accounting Principle, while taxable income on tax
law. Some of the differences can be temporary, while the other permanent. Here are some examples:
EXAMPLE 3 ACCOUNTING INCOME VERSUS TAXABLE INCOME
For each of the following transaction, determine how much goes to determine accounting income and taxable income,
and determine whether that difference is a temporary difference or permanent difference, and also whether that difference
is favorable or unfavorable in determining the taxable income (favorable means decreasing taxable income, while
unfavorable means increasing the taxable income).
Transaction (F = Favorable, U = Unfavorable)
Accountin
Taxable
Temporary Permanent
g Income
Income
Difference
Difference
Sales
40,000
40,000
0
0
1
Straight-line depreciation =1,000, accelerated depreciation
(1,000)
(1,100)
100 F
2
=1,100
FIFO cost of gods sold =1,200, LIFO cost of goods sold = 1,900
(1,200)
(1,900)
700 F
3
Interest income from New Jersey state bonds = 1,400
+1,400
+0
1,400 F
4
Interest expense to purchase New Jersey state bonds = 150
(150)
(0)
(150) U
Federal income tax paid = 1,500
(1,500)
(0)
(1,500) U
Premium for life insurance policy = 1,600
(1,600)
(0)
(1,600) U
Death benefits of life insurance policy = 5,000
+5,000
+0
5,000 F
Parking violation fines = 1,800
(1,800)
(0)
(1,800) U
Business meal = 2,000, but only 50% is deductible

Bad debt expense, allowance method = 1,900, write-off method
=1,400
Gain on sales of factory, under straight-line depreciation = 2,000
under accelerated depreciation method = 1,600
Deferred compensation = 200
TOTAL
(2,000)
(1,000)
(1,000) U
(1,900)
(1,400)
(500) U
+2,000
(200)
37,050 a
+1,600
(0)
36,200 b
(200) U
100 F, c
5
6
7
8
9
10
11
12
13
Income tax expense (+E)(37,050 a accounting income x 15% tax rate =

5,558)
Cash (-A)(36,200 b taxable income x 15% = 5,430)...
Deferred income tax liability (+L)(100 F, c, temporary x 15% = 15)

.
Deferred income tax benefits (+R) (750 F, d, permanent x 15% = 113)
400 F
750 F, d
5,558
5,430
15
113
ORGANIZATIONAL EXPENSE AND START-UP COST:

Start-up cost and organizational cost must be capitalized. However. the corporation may elect to deduct the first
$5,000, but the first $5,000 must be reduced by the expenditure in excess of $50,000, and the remainder can be
amortized in 15 years as a deductible expense. Start-up costs are the expenditure to initiate and develop a new product,
e.g., research and investigation of a new medicine, survey of the market, etc. Organizational costs are the expenditure to
incorporate a business before it starts, e.g., legal fees to draft the corporate charter, accounting fees to set up books,
corporate registration fees, temporary directors' fees, but not regular directors' fees which are charged as ordinary business
expense, and not stock issuing expenses, e.g., stock sales commission, stock certificates printing fees which reduce the
account of paid-in capital..
16-4
EXAMPLE 4 ORGANIZATIONAL COST
Ed Corporation started the operation on 1-1-Year 1. It incurred the following expense. How much is deductible in Year
1?
1
2
3
4
5
6
12-1-Year 0- $45,000 Lawyer's fees to draft the corporate charter.

12-2-Year 0 5,000 Accountant's fees to set up the corporate books.
12-3-Year 0 700Temporary director's fees.
12-4-Year 0 300 Corporate registration fee paid to the state
government
12-5-Year 0- 200 Stock sale commission & stock certificates printing
fee
1-20-Year 1- 100 Regular directors' fees.
Yes, 45,000
Yes, 5,000
Yes,
700
Yes,
300
No, Dr. Paid-in
capital
No, Dr. Expense
51,000 a
Total
ANSWER: Deductible expense in Year 1 = First 5,000 (51,000 a 50,000) = 5,000 1,000 = 4,000 b
+ (51,000 a 4,000 b) / 15 years = 47,000 / 15
= +3,133
= Total 7,133
DOMESTIC PRODUCTION ACTIVITIES DEDUCTION (Form 8903; Form 1120, line 25; Form 1040, line 35).
Production activities have incentives. The domestic production activities deduction is equal to 9% in 2013 of the
lesser of domestic production income or taxable income before the domestic production activities deduction itself.
However, the deduction cannot exceed 50% of W-2 wages. By production activities income it is equal to the production
activities gross receipt minus its cost of goods sold, its directly related expenses and losses, and ratable portion of other
indirect expenses and losses. In other words, expenses and losses from non-production activities can also offset against
production activities income. The domestic production activities gross receipts include sales, rental, lease, exchange of
production property,
computer software, sound recording, film production, electricity, gas, mining, construction, and engineering architectural
services. In the case where production activities and selling activities are mixed up, the gross receipts must be allocated
between these two activities in proportion to their costs. Profit from production activities is entitled to a 3% deduction,
while profit fromo selling activities is not. It is given to both C Corporations and individuals. Form 8903 must be filed and
it is claimed on Form 1120, line 25 or Form 1040, line 35. Since the production activities income deduction creates
permanent difference between book income and taxable income, it must enter into Schedule M-1 and Schedule M-3 for
reconciliation.
EXAMPLE 5 DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
Ford Motor Corporation is a car manufacturing concern, but it is also engaged in car rental business. The revenue
and expenses for these two activities are listed below. Determine Fords taxable income and tax liability (56,400; 9,100).
Car Manufacturing
Car Rental FORM 1120 (Total)
Sales revenue.
100,000
60,000
160,000
- Cost of goods sold.
(30,000)
(0)
(30,000)
- Depreciation expense of rental cars.
(0)
(15,000)
(15,000)
- Wage expense.
(20,000)
(19,000)
(39,000)
- Salaries of Fords president.
(10,000)
(6,000)
(16,000)
NET INCOME
40,000 a
20,000
60,000
- Domestic production activities deduction
(3,600) (40,000 a x
(0)
(3,600) line 25
9%)
TAXABLE INCOME
36,400
20,000
56,400 b
TAX LIABILITY
9,100 c
c = 7,500 + (56,400 b 50,000) x 25% = 7,500 + 1,600 = 9,100 c.
.
(Note that, when production and selling activities are mixed up, the joint cost must be allocated between
them in proportion to a reasonable basis, but not revenue, because revenue may not be proportionate to cost.
The domestic production activities income is entitled to a 9% deduction).
Starbucks Coffee Corporation purchased $100,000 cost of coffee beans from Columbia. After grinding the coffee
beans, 80% were sold to A&P supermarket for sales revenue of $170,000, while the remaining 20% were brewed to
become drinkable coffee and sold to customers in Starbuck Coffee Shop for sales revenue of $50,000. Each activity
incurred wage expenses as listed below. Determine Starbucks Coffee Corporations taxable income and tax liability.
Coffee Grinding
Coffee Brewing
FORM 1120 (Total)
Sales revenue.
170,000
50,000
220,000
- Cost of goods sold.(100,000)
(80,000) (100,000 x 80%)
(20,000) (100,000 x 20%) (100,000)
- Wage expenses
(30,000)
(10,000)
(40,000)
NET INCOME
60,000 a
20,000
80,000
- Domestic production
activities
(5,400) (60,000 a x 9%)
(0)
(5,400) line 25
deduction
TAXABLE INCOME
TAX LIABILITY
54,600
20,000
74,600 b
13,625 c
c = 7,500 + (74,600 b 50,000) x 25% = 7,500 + 6,150 = 13,650 c.
16-5
(Note that, when production and selling activities are mixed up, the joint revenue must be allocated between them
according to their two costs, because cost may be proportionate to revenue. If the non-production activities result in a
loss,
the loss must offset against production activities income, because production activities deduction is limited to the lesser
of production activities income or taxable income. The net production activities income is then entitled to a 9% deduction).
Seaman Furniture Corporation manufactures furniture and sells furniture in its showrooms to customers across the
nation. It purchased $80,000 lumbers and made them to become furniture. It further incurred $20,000 advertising
expenses for its showrooms. All furniture is sold for sale revenue of $200,000. Both the furniture manufacturing and
showrooms selling activities also incurred wage expenses as listed below. Determine Seaman Furniture Corporations
taxable income and tax liability.
Sales revenue (200,000)
- Wage expenses
NET INCOME
Furniture Manufacturing
160,000 (200,000 x 80%)
(80,000) (80%)
(50,000)
30,000 a
Furniture Selling
40,000 (200,000 x 20%)
(20,000) (20%)
(30,000)
(10,000)
FORM 1120 (Total)

200,000
(100,000)
(80,000)
20,000 a
- Domestic production
activity
deduction
TAXABLE INCOME
TAX LIABILITY
? (See total =>)

30,000
(0)
(10,000)
line
25
(1,800) (20,000 a x 9%)
18,200 b
2,730 (18,200 b x
15%)
EMPLOYEE STOCK OPTION:

An employer can give employee stock as a compensation for employment. Is it deductible on the employer? It
depends on the condition attached to the stock.
(A) STOCK SUBSTANTIALLY VESTED: An employee is give a stock and there is no condition attached to the stock.
The employee has earned it. That is, the stock has been substantially vested. Then the value of the stock is deductible at
the time when the stock is granted. The value of the stock is the fair market value at the time when the stock is granted.
In accounting, the entire value of stock is recognized as wage expense on the first date of grant.
(B) RESTRICTED STOCK PLAN: An employee is given the stock, but there is a condition attached to the stock. For
example, the employee must continue to serve for 3 more years to exercise the stock. The stock is not substantially
vested until 3 years later. It is not deductible at the time when the stock option is granted until it is exercised. The value
of the stock option is the fair market value of the stock at the time of exercise, not proportionally every year. In
accounting, the entire value of the stock option is recognized as wage expense on the first date of grant.
(C) EMPLOYEE STOCK PURCHASE PLAN: En employee is given the stock option to purchase the stock at a
discount. There is no condition attached to the stock option. The value of the stock option is not deductible until the date
of exercise. The value of the stock option is the difference between the exercise price after the discount and the fair
market value of the stock at the time of exercise. In accounting, the entire estimated value of the stock option is
recognized as wage expense on the first date of grant.
EXAMPLE 8 STOCK SUBSTANTIALLY VESTED
For the year ending 12-31-Year 1 the employer paid employee wages of $40,000 in cash plus $10,000 fair market value
of stock. How much is deductible on employer? ANSWER: $50,000 = 40,000 + 10,000 stock because it has been
substantially vested. There is no condition attached to it.
12-31-Year 1
Wage expense
50,000
Cash
40,000
Common stock
10,000
EXAMPLE 9 RESTRICTED STOCK PLAN
For the year ending 12-31-Year 1 the employer paid employee wages of $40,000 in cash plus an option to receive
$10,000 fair market value of stock with the condition that the employee must continue to work in the next 3 years up to 1231-Year 4 to receive the stock. Three years later on 12-31-Year 4 the employee now receives the stock. The fair market
value of the stock now is $13,000. How much is deductible on employer in Year 1, 2, 3 and 4, respectively,?
ANSWER: ($40,000; 0; 0; 13,000). On 12-31-Year 1, 40,000 = 40,000 + 0 stock because it has not been substantially
vested. There is a condition attached to it. On 12-31-Year 2 = 0. On 12-31-Year 3 = 0. On 12-31-Year 4 = 13,000 the fair
market value at date of exercise when it is now substantially vested.
16-6
12-31-Year 1
12-31-Year 2
12-31-Year 3
12-31-Year 4
Wage expense
Cash
Wage expense
Common stock
Wage expense
Common stock
Wage expense
Common stock
40,000
40,000
0
0
0
0
13,000
13,000
EXAMPLE 10 EMPLOYEE STOCK PURCHASE PLAN
For the year ending 12-31-Year 1 the employer paid employee wages of $40,000 in cash plus an option to purchase
$10,000 fair market value of stock for a exercise price of $7,000 with no condition that the employee must continue to
work in the next 3 years up to 12-31-Year 4 to receive the stock (The discount is $3,000 = 30% = 3,000/10,000. The
exercise price is only 70% < 85% of the fair market value.) Three years later on 12-31-Year 4 the employee now exercises
the stock option and purchases the stock for a price of $7,000. The fair market value of the stock now is $13,000. How
much is deductible on employer in Year 1, 2, 3 and 4, respectively,? ANSWER: ($40,000; 0; 0; 6,000).
On 12-31-Year 1, 40,000 = 40,000 + 0 stock because it has not been substantially vested. There is a condition attached to
it. On 12-31-Year 2 = 0. On 12-31-Year 3 = 0, On 12-31-Year 3 = 6,000 = 13,000 fair market value at date of exercise 7,000 exercise price.
12-31-Year 1
Wage expense
40,000
Cash
40,000
12-31-Year 2
Wage expense
0
Common stock
0
12-31-Year 3
Wage expense
0
Common stock
0
12-31-Year 3
Cash
7,000
Wage expense
6,000
Common stock
13,000
GAIN OR LOSS FROM SALE OF BUSINESS-USE PROPERTY:

For the sale of business personal property (e.g., machine) or business real property (e.g., factory, building), gain is fully
taxable as an ordinary income at a maximum rate of 35%. Loss is also fully deductible without limit to offset ordinary
income. If a corporation incurs a long-term capital gain from business personal property (Section 1245 property), it is
subject to recapture up to the amount of accumulated depreciation as an ordinary income, and only the remainder is
treated as section 1231 long-term capital gain taxable at a maximum rate of also 35%. In the case of long-term capital
gain from business depreciable real property (e.g., factory, building, but not land, Section 1250 property), it is subject to
recapture up to the excess accelerated depreciation over straight-line depreciation plus 20% of the straight-line
depreciation, as an ordinary income, and only remainder is treated as Section 1231 long-term capital gain. This is the case
of a corporation. In the case of an individual, personal property is subject to recapture for the entire amount of
accumulated depreciation, while the real property is subject to recapture for excess of accumulated depreciation over
straight-line depreciation, i.e.,
Personal property(machine)
Real property(factory)
INDIVIDUAL
Accumulated depreciation
(Accelerated depr Straight-line)
CORPORATION
Accumulated depreciation
(Accelerated Straight-line) + (20% x Straight-line)
GAINS OR LOSS FROM SALE OF CAPITAL ASSET (for investment):

(a) For the sale of investment asset (capital asset, e.g., stock, bonds, land and painting for investment), the gain is
fully taxable as an ordinary income, and the loss can be offset against the gain, and the remaining capital loss is not
deductible in the current year. However, it can only be carried back for 3 years starting from the earliest year, or carried
over for 5 years to offset capital gain; it cannot offset ordinary income. If the capital loss cannot be fully absorbed in the
next 5 years, the corporation lost the benefit of loss deduction forever. For a corporation, there is no consideration for
short-term or long-term capital gains/losses from capital assets. There is also no such thing as 20% tax rate for long-term
capital gains for a corporation. The 20% reduced long-term capital gains tax rate was for individual taxpayers. A
corporations short-term and long-term capital gains all are taxed as ordinary income up to 35%.
(b) In the case of capital loss carryback, if that year already has net operating losses, the capital loss carryback does
not apply, because in doing so it will increases the amount of net operating losses which is not beneficial to the taxpayer.
0 Today
l<------------------------------l--------------------------------l
Carryback 3 years
Carryover 5 years
EXAMPLE 11 CAPITAL GAIN FROM BUSINESS-USE PROPERTY
16-7
Davidson Corporation sold its 2-year old business-use machine (Section 1245 personal property) having an original
cost of $10,000 and accumulated depreciation of $2,000, for a price of $13,000 in cash. Davidson also sold its 3-year
old business-use factory (Section 1250 real property) having an original cost of $20,000 and accumulated depreciation
(straight-line) of $6,000, for a price of $18,000 in cash.
REQUIRED: What are the amounts of ordinary income and long-term capital gain from machine and factory, respectively?
ANSWER: $2,000 ordinary income and 3,000 long-term capital gain from machine; 1,200 and 2,800 from factory.
Realized and recognized long-term capital gain from machine = 13,000 price (10,000 2,000 depreciation) = 5,000 a.
Realized and recognized long-term capital gain from factory = 18,000 price (20,000 6,000 depreciation) = 4,000 b.
Cash...13,000
Accumulated depreciation....2,000 c
Machine..10,000
Recognized Ordinary income2,000 c
Recognized long-term capital gain (5,000 a, realized gain 2,000 c) =3,000
Cash...18,000
Accumulated depreciation (case of straight-line only)..6,000 d
Factory....20,000
Recognized Ordinary income (6,000 b x 20%)...1,200 e
Recognized long-term capital gain (4,000 b, realized gain 1,200 e) =.2,800
EXAMPLE 12 CAPITAL GAIN AND LOSS DEDUCTION CARRYOVER (from investment)
(Note that, for corporation, capital gain from investment is fully taxable. Capital loss is not deductible, but it can be carried
back for 3 years and carried forward for 5 years to offset capital gain only. Capital loss cannot offset ordinary income).
In Year 1, Benson Corporation has revenue and deduction as listed in Column 2 below, but it sold its
investment in IBM stock for a capital loss of ($3,000). In Year 2 and Year 3 Benson has the same
type of operations in different amounts.
REQUIRED: Determine Bensons deductible capital loss (0; 1,000; 2,000) and taxable income in Year 1, Year 2 and
Year 3 (7,000; 7,000; 11,000), respectively
Year 1
Year 2
Year 3
QUESTION:
a. Sales ..
30,140
30,140
30,140
b. Cost of goods sold ..(23,000)
(23,000)
(23,000)
c. Charitable contribution.. (200)
(200)
(200)
d. Dividend received (70% owned).
..+ 300
+ 300
+ 300
e. Dividend-received deduction (d x 80% deduction)=. (240)
(240)
(240)
f. Capital gain (loss) from investment (3,000)
1,000
6,000
ANSWER:
g. Income before capital gain or loss = ab-c+d-e =
7,000
7,000
7,000
h. TAXABLE CAPITAL GAIN = c = ..
0
1,000
6,000
i. DEDUCTIBLE CAPITAL LOSS = Lower of k or h =
(0)
(1,000)
(2,000)
j. TAXABLE INCOME = g + h I =
7,000
7,000
11,000
k. Remaining capital loss carryover = k i =
(3,000)
(2,000)
0
EXAMPLE 13 CAPITAL GAIN AND LOSS DEDUCTION CARRYBACK (from investment)
In Years 1, 2, 3, 4 and 5 Benson Corporation has revenue and deduction and capital gain as listed in Column 2 below,
but in Year 5 it sold its investment in IBM stock for a capital loss of ($900).
REQUIRED: Determine Bensons deductible capital loss (0; 200; 300; 400 ;0) and taxable income in Years 1, 2, 3, 4
and 5 (1,100; 1,000; 1,000; 1,000; 1,000), respectively.
YEAR 1
YEAR 2 YEAR 3 YEAR 4
YEAR 5
Sales
10,000
10,000
10,000
10,000
10,000
- Cost of goods sole
(9,000)
(9,000)
(9,000)
(9,000)
(9,000)
+ Capital gain (loss)
+100
+200
+300
+400
(900)
Taxable income before capital loss
1,100
1,200
1,300
1,400
1,000
- Deductible capital loss carryback
(0)
(200)
(300)
(400)
(0)
Taxable income after capital loss carryback
1,100
1,000
1,000
1,000
1,000
Remaining capital loss carryback (900-0=900;
(900)
(700)
(400)
(0)
(0)
900-200=700; 700-300=400; 400-400=0)
Order of carryback deduction (First-in-first-out
Not eligible
#1
#2
#3
basis)
16-8
EXAMPLE 14 CAPITAL GAIN AND LOSS DEDUCTION CARRYBACK AND CARRYOVER (from investment)
In Years 1, 2, 3, 4, and 6 Benson Corporation has revenue and deduction and capital gain as listed in Column 2 below,
but in Year 5 it sold its investment in IBM stock for a capital loss of ($1,400).
REQUIRED: Determine Bensons deductible capital loss (0; 200; 300; 400 ;0; 500) and taxable income in Years 1, 2,
3, 4, 5 and 6 (1,100; 1,000; 1,000; 1,000; 1,000; 1000), respectively.
YEAR 1
YEAR 5
YEAR 6
Sales
10,000
10,000
10,000
10,000
10,000 10,000
(9,000)
(9,000) (9,000)
(9,000)
(9,000)
+100
+200
+300
+400
(9,000)
+500
(1,400)
Taxable income before capital gain
Remaining capital loss carryback
(1,400-0=1,400; 1,400200=1,200;
1,100
(0)
1,100
(1,400)
1,200
(200)
1,000
(1,200)
1,300
(300)
1,000
(900)
1,400
(400)
1,000
(500)
1,000
(0)
1,000
(500)
1,500
(500)
1,000
(0)
1,200-300=900; 900-400=500; 500-500=0)

Order of carryback deduction (FIFO basis)
Not eligible
#1
#2
#3
#4
EXCEPTION TO CAPITAL GAIN LOSS CARRYBACK DEDUCTION: In following example, it should be noted that
capital losses can only be offset by capital gains. If there are no capital gains, capital losses carryback does not apply.
Capital losses cannot be offset by ordinary income. However, if the year of the capital loss carryback has a net operating
loss, the capital losses carryback does not apply. That is because by doing so it will make the net operating losses even
greater. This result is not beneficial to the taxpayer.
EXAMPLE 15 CAPITAL GAIN AND LOSS DEDUCTION CARRYBACK (from investment)
In Years 1, 2, 3, 4 and 5 Benson Corporation has revenue and deduction and capital gain as listed in Column 2 below.
Year 4 has (600) net operating losses. In Year 5 it sold its investment in IBM stock for a capital loss of ($900).
REQUIRED: Determine Bensons deductible capital loss (0; 200; 0; 0 ;0) and taxable income in Years 1, 2, 3, 4 and 5
(1,100; 1,000; 1,300; (600); 1,000), respectively.
YEAR 1
YEAR 5
Sales
10,000
10,000
10,000
10,000
10,000
(9,000)
(9,000)
(9,000)
(11,000)
(9,000)
+100
+200
+0
+400
(900)
Taxable income before capital gain
1,100
1,200
1,000
1,000
(600)
(0)
(200)
(0)
(0)
(0)
1,100
1,000
1,000
(600)
1,000
Remaining capital loss carryback (900-0=900;
(900)
(700)
(700)
(700)
(700)
900-200=700; 700-0=700; 700-0=700)
Order of carryback deduction (First-in-first-out
Not eligible
#1
#2
#3
basis)
NET OPERATING LOSS DEDUCTION:

"Net operating loss" is defined as the total deduction, without regard to the net operating loss carryback and carryover,
that exceeds the total gross income. The corporation has two options to carry this net operating loss (line 14 of Schedule K
of Form 1120). (a). The corporation can carry back for 2 years to offset previous taxable income including ordinary
income and capital gain and claim tax refund starting from the earliest year (Form 1139 - Corporate Application for a
Tentative Refund), and carry forward for the next 20 years as a deduction. Beyond this time span, the loss deduction is
lost forever.
(b) The corporation can also relinquish the option to carryback 2 years, and simply carry forward to the next 20 years.
Of course, if the tax rate in the last 2 years was higher than the next 20 years, it is more beneficial to adopt option (a). On
the hand, if the tax rate in the next 20 years will be higher than the past 2 years, it is more beneficial to adopt option (b).
0 Today
l------------------------------l---------------------------------l
Carryback 2 years
Carryover 20 years
EXAMPLE 16 NET OPERATING LOSS CARRYOVER DEDUCTION
In Year 1, Carlson Corporation has revenue and deductions in Column 2 as listed below. In Year 2 and Year 3
Carlson has the same type of operations in different amounts.
REQUIRED: Determine Carlsons deductible net operating loss carryover (0; 1,000; 2,000) and taxable income in Year
1, Year 2 (3,000; 2,000; 0) and Year 3, respectively.
16-9
QUESTION:
a. Sales .
b. Cost of goods sold .
c. Long-term capital gain from investment in stock
d. Charitable contribution
e. Dividend received (70% owned)...
f. Dividend-received deduction (e x 80% deduction) =
ANSWER:
g. Income (loss) before net operating loss carryover deduction =ab+c-d+e-f =
h. DEDUCTIBLE NET OPERATING LOSS CARRYOVER = Lower of g or j =
i. TAXABLE INCOME (LOSS) = g h =
j. Net operating loss carryover = j h =
Year 1
Year 2
Year 3
30,040
(33,000)
100
(200)
+ 300
(240)
30,040
(29,000)
100
(200)
+ 300
(240)
30,040
(23,000)
100
(200)
+ 300
(240)
(3,000)
1,000
7,000
0
(3,000)
(1,000)
0
(2,000)
5,000
(3,000)
(2,000)
(0)
EXAMPLE 17 NET OPERATING LOSS CARRYBACK DEDUCTION
In Year 1, Carlson Corporation has revenue and deductions in Column 2 as listed below. In Year 2, Year 3 and Year 4
Carlson has the same type of operations in different amounts.
REQUIRED: Determine Carlsons deductible net operating loss carryback (0; 200; 300; 500) and taxable income in
Year 1, Year 2 and Year 3 after the net operating loss carryback (100; 0; 0, 0), respectively.
YEAR 1
YEAR 2
YEAR 3
YEAR 4
Sales
10,000
10,000
10,000
10,000
(9,900)
(9,800)
(9,700)
(10,500)
Taxable income (Net operating loss)
100
200
300
(500)
- Deductible net operating loss carryback
(0)
(200)
(300)
500
Taxable income after net operating loss carryback
100
0
0
0
Remaining net operating loss (500-0=500; 500-200=300; 300500
300
0
0
300=0)
Order of carryback deduction (First-in-first-out basis)
Not eligible
#1
#2
EXAMPLE 18 NET OPERATING LOSS CARRYBACK
AND CARRYOVER DEDUCTION

In Year 1, Carlson Corporation has revenue and deductions in Column 2 as listed below. In Year 2, Year 3, Year 4 and
Year 5 Carlson has the same type of operations in different amounts.
REQUIRED: Determine Carlsons deductible net operating loss carryback (0; 200; 300; 900; 400) and taxable income
in ;Year 1, Year 2 and Year 3 after the net operating loss carryback (100; 0; 0; 0; 0), respectively.
YEAR 1
YEAR 5
Sales
10,000
10,000
10,000
10,000
10,000
(9,900)
(9,800)
(9,700) (10,900)
(9,600)
Taxable income (Net operating loss)
100
200
300
400
(900)
- Deductible net operating loss carryback
(0)
(200)
(300)
(400)
900
Taxable income after net operating loss carryback
100
0
0
0
0
Remaining net operating loss carryback & carryover
900
700
400
400
0
(900-0=900; 900-200=700;700-300=400;400-0=400;400400=0)
Order of carryback deduction (First-in-first-out basis)
Not eligible
#1
#2
#3
SHOULD THE NET OPERATING LOSS BE CARRIED BACK OR CARRIED OVER?

When the net operating loss occurred, the corporation has two options: (1) carry back for 2 years and carry forward
for the next 20 years, and (2) forgo the carryback, just carry forward for the next 20 years only. If the marginal tax rate in
the past is greater than the marginal rate in the future, it is more beneficial to adopt option (1); otherwise, adopt option (2).
EXAMPLE 19 -
NET LOSS CARRYBACK AND CARRYFORWARD

In 2012 Garrison Corporation incurred a ($10,000) net operating loss. According to its taxable income in 2010 and
2013, should it be carried back to 2010 and apply for refund, or should it carry forward to 2013 to reduce the tax liability?
CASE 1
CASE 2 CASE 3
CASE 4
A. Taxable income in 2010
$30,000
$65,000 $70,000
$120,000
B. Net operating loss in
(10,000)
(10,000) (10,000)
(10,000)
2012
60,000
40,000
80,000
90,000
C. Taxable income in 2013
D. Marginal tax rate in 2010
15%
25%
25%
39%
E. Marginal tax rate in 2013
25%
15%
34%
34%
DECISION?
Forward Back
Forward Back
16-10
CHARITABLE CONTRIBUTION:
The maximum deductible charitable contribution in a given year is limited to 10% of the "adjusted taxable income"
which is the taxable income without regard to the charitable contribution itself, any net operating loss carryback, capital
loss carryback, and any dividends-received deduction. The nondeductible charitable contribution can be carried over in
the next 5 years. Each year's deduction starts from the current year's contribution before considering the carryover. The
nondeductible charitable contribution cannot be carried back. After 5 years of carryover, the benefit of deduction is lost
forever. Usually, short-term capital asset is deductible to cost only, while long-term capital asset is deductible up to its
market value if used for related purpose (education); otherwise (sold), to cost.
0 Today
l-------------------------l------------------------------l
No carryback
Carryover 5 years
EXAMPLE 20 CHARITABLE CONTRIBUTION

In Year 1, King Corporation has $30,000 sale revenue and $23,000 cost of goods sold, but it also gives
$1,000 charitable contribution in cash. In Year 2 and Year 3 Benson has the same type of operations in different amounts.
REQUIRED: Determine Kings deductible charitable contribution and taxable income in Year 1, Year 2 and Year 3,
respectively (Note that King can deduct the charitable contribution, but no more than 10% of its adjusted taxable income
(= taxable income before the charitable contribution deduction itself).
Year 1
Year 2
Year 3
QUESTION:
a. Sales
30,000
30,000
30,000
..
(23,000)
(19,000)
(13,000)
b. Cost of goods sold .. (1,000)
(1,000)
(1,000)
c. Charitable contribution in cash
..
ANSWER:
d. Adjusted taxable income = a - b =
7,000
11,000
17,000
.
(Taxable income before charitable contribution)
700
1,100
1,700
e. Limit = 10% x d =
(700)
(1,000)
(1,000)
.
(0)
(100)
(200)
f. DEDUCTIBLE CHARITY= From this year = Lower of c or e =
.
g.
+ From last year= Lower of (e f) or
i=
h. TAXABLE INCOME = d f - g =
6,300
9,900
15,800
..
i. Charitable contribution carryover = c + i f g =
300
200
0
DIVIDENDS-RECEIVED DEDUCTION (Schedule C of Form 1120):

Dividends received are taxable income. It may results in double or triple taxation. A deduction is warranted:
(a). Dividends received from a less than 20%-owned domestic corporation may deduct 70% of the dividend received,
but no more than 70% of the taxable income without regard to any net operating loss deduction, capital loss carryback
(not carryforward), and the 70% dividends-received deduction itself (adjusted taxable income). However, if the 70%
dividends-received deduction results in net operating loss, the limitation on 70% of adjusted taxable income does not
apply, i.e., a straight 70% deduction prevails.
Ownership
0%
20%
80%
100%
l-----------------------------l----------------------------l-------------------------------l
70% deduction
80% deduction
100% deduction
(b). Dividends received from a 20% or more owned domestic corporation may deduct 80% of the dividends received,
but no more than 80% of the taxable income without regard to any net operating loss deduction, capital loss carryback (not
carryforward), and the 80% dividends reduction itself (adjusted taxable income). However, if the 80% dividends-received
deduction results in net operating loss, the limitation on 80% of adjusted taxable income does not apply, i.e., a straight
80%
deduction prevails.
(c). Dividends received from a 80% or more owned domestic corporation may deduct the entire 100%
of the dividends received, i.e., a consolidated tax return is filed. As a result all dividends and intercompany
profit and loss are completely eliminated. In the case of 100% dividend-received deduction, the taxable
income limitation does not apply. The entire 100% dividend is fully deductible.
(d). If a corporation has both 80% dividends-received deduction and 70% dividends-received deduction, the 80%
deduction applies first, and then the 70%.
(e). If, after the 100%/80%/70% dividend-received deduction, it results in net operating losses, the 100%/80%/70%
limit does not apply, because it may result in a net operating income which is not beneficial to the taxpayer.
16-11
(f). No dividend deduction is allowed for dividends received from (1) foreign corporation because it burdens no tax,
(2) corporation with stock held for 45 days or less because it can manipulate to avoid tax on dividends, and (3) debtfinancing stock, i.e., stock was purchased by borrowing interest-deductible loan because it receives tax savings from two
fronts - interest and dividends.
EXAMPLE 21 DIVIDEND-RECEIVED DEDUCTION (Note that dividend-received deduction is 100% for at least
80% ownership, 80% deduction for less than 80% ownership, and 70% deduction for less than 20% ownership. No
carryback or forward).
Anderson Corporation owns 30% of King Corporations stock. In CASE 1, Anderson has $30,200 sales, $25,000 cost
of goods sold, and $200 of charitable contribution, but also received $10,000 cash dividend from King.
REQUIRED: What is Andersons dividend-received deduction and taxable income? (Note that Anderson is entitled to
80% dividend-received deduction to the extent of 80% of adjusted taxable income).
ANSWER: $8,000 dividend-received deduction, and $7,000 taxable income.
CASE 1
CASE 2
CASE 3
QUESTION:
a. Sales
$30,200
$30,200
$30,200
b. Cost of goods sold
(25,000)
(31,000)
(33,000)
..
10,000
10,000
10,000
c. Dividend received ..
(200)
(200)
(200)
d. Charitable contribution (cash)
ANSWER:
e. Adjusted taxable income = a - b + c =
15,000
9,000
7,000 m
(Taxable income before dividend-received deduction)
f. 80% x c dividend received =
8,000
8,000
8,000 n
..
12,000
7,200
5,600 p
g. Limit = 80% x e adjusted taxable income =
(8,000)
(7,200)
(8,000) q
h. DIVIDEND-RECEIVED DEDUCTION = Lower of f or g =
i. TAXABLE INCOME = e h = .
7,000
1,800
(1,000)
n = After subtracting the 8,000 n, dividend-received deduction, it results in a loss, 7,000 m 8,000 n = (1,000).
Therefore, the limitation of 5,600 p (80% x 7,000 m adjusted taxable income) does not apply. As a result,
the 80% dividend-received deduction is 8,000 p, q.
GAIN (LOSS) IN A RELATED PARTY TRANSACTION : If a shareholder owns at least 50% of a corporation,
it belongs to a related party. Loss is not deductible while gain is taxable, and the long-term capital gain is treated as an
ordinary income. If the property is sold later for a gain, the previous loss is deductible to the extent of the gain.
EXAMPLE 22
GAIN AND LOSS IN A RELATED PARTY TRANSACTION

John owns 100% of King Corporation. King sold a land having $1,000 adjusted basis to John for a price of $800.
Later John sold that land to an unrelated third party for a price of $700 in CASE 1. How much is the recognized gain (loss)
King and John can claim?
CASE 1
CASE 2
CASE 3
QUESTION:
a. Kings adjusted basis
($1,000)
($1,000)
($1,000)
b. Kings selling price to John
800
800
800
c. Johns selling price to an unrelated third party
700
950
1,050
COMPUTATION:
d. Kings realized gain (loss) = b a =
(200) loss
(200) loss
(200) loss
e. Johns realized gain (loss) = c b =
(100) loss
150 gain
250 gain
ANSWER:
f. Kings recognized gain (loss)
(0) loss
(150) loss
(200) loss
g. Johns recognized gain (loss)
(100) loss
0 gain
50 gain
SEQUENCE OF DEDUCTIONS:
The order of deduction affects charitable contribution and net operating loss deductions. The order is:
1. All business deductions other than the charitable deduction, the dividends-received deduction, and
net operating loss carryback and carryover.
2. The charitable deduction (limited to 10% of taxable income before charitable deduction, dividends-received
deduction, capital loss carryback (but not carryover), net operating loss carryback (but not carryover).
3. The dividends-received deduction (limited to 70% or 80% of the cash dividends received).
16-12
4. The net operating loss carryback and carryover (limited to the taxable income after the charitable deduction,
capital loss carryback and carryover, and dividends-received deduction).
5. Domestic production activities deduction, at 9% in 2013.
Summary: (A) In how many years can the nondeductible portion of the following deductions be carried back and
carried forward, and (B) should it be deducted in determining the limit of the charitable deduction?
Charitable contribution
Dividend-received deduction
Capital loss deduction
Net operating loss deduction
Production activity deduction
A. Carryback years (B. Deduct for charity)

0 year (No deduct. in determining charity)
0 year (No deduct. In determining charity)
3 years (No deduct in determining charity)
2 years (No deduction in determining
charitable deduction)
0 year (No deduct in determining charity)
A. Carryover years (B. Deduct for charity)

5 years (No deduct in determining charity)
0 year (No deduct. In determining charity)
5 years(Yes,deduc in determining charity)
20 years (Yes, deduct in determining
charitable deduction)
0 year (No deduct in determining charity).
EXAMPLE 23 SEQUENCE OF DEDUCTION
In the current year, Harrison Corporation has the following revenue and deductions as listed in Column (A).
(A)
(B) Determining
(C)
QUESTION?
Charitable deduction ANSWER
a. Sales
$101,000
101,000
101,000
b. Cost of goods sold
(20,000)
(20,000)
(20,000)
c. Charitable contribution
(10,000)
(0) 10,000
d. Dividend received (70% owned)
+10,000
+10,000
+ 10,000
e. Dividend-received deduction (d x 80% deduction), no
(8,000)
(0)
(8,000)
f. Capital loss carryback, no
(2,000)
(0)
(2,000)
g. Net operating loss carryback , no
(5,000)
(0)
(5,000)
h. Domestic production activities deduction, no
(500)
(0)
(500)
i. Net operating loss carryforward, yes
(1,000)
(1,000)
(1,000)
Adjusted taxable income
90,000 h
Maximum limit on charitable deduction= 90,000 h x 10%=
9,000 j
Deductible charitable contribution = Lesser of c or j =
(9,000)
TAXABLE INCOME
65,500
REQUIRED: Determine (1) Harrisons deductible charitable contribution, and (2) Taxable income.
ANSWER: (1) $9,000 deductible charitable contribution. (2) $65,500 taxable income.
TAX PAYMENT:
The corporate tax Form 1120 must be filed no later than 2.5 months after the closing of the
fiscal or calendar year. Tax liability must be paid in four installments. A penalty of 10% interest a year shall be
imposed if it failed to pay at least (1) 100% of the current year's tax liability, or (2) 100% of preceding year's tax liability.
TAX TREATMENT FOR A GROUP OF CONTROLLED CORPORATIONS
Since the corporate tax is structured on a graduated (progressive) rate, if a corporation's income is spread out to
several corporations, it could result in a substantial tax savings. Therefore, if a person owns more than 50% of a
corporation (related party), loss from a transaction is denied, and the capital gain can be treated as an ordinary income. If
a corporation controls at least 80% of other corporations voting power or stock value (controlled group), their separate
income is combined together and taxed like one corporation; their income is not computed separately. One corporation
must own at least 80% of other corporations voting power and stock value to file a consolidated tax return, in which all
intercompany dividend, profit and loss are offset each other. A corporation cannot file a consolidated tax return with an
individual (John). Therefore, a controlled corporation may not be qualified to file a consolidated tax return because a
controlled group may involve an individual. For example John controls 100% of A Corporation and also 100% of B
Corporation. Although A and B belong to a controlled group through John, A does not own B legally. Therefore A and B are
not qualified to file a consolidated tax return.
When a company owns at least 80%, both companies may have the option to file a consolidated tax return, in which
income and deductions are counted as one company. The intercompany gains and losses can be offset each and thus
dont count. As a result, a consolidated tax return may or may not yield tax savings, depending on the amount of gains
and losses. Two companies can file a consolidated only when one legally owns the other.
EXAMPLE 24
16-13
- INCOME TAX ON A GROUP OF CONTROLLED CORPORATIONS (Income is equal)

Ed owns 100% of each of three corporations - Ali Corporation, Barry Corporation, and Carey Corporation.
Each corporation has $50,000 taxable income with a total taxable income of $150,000 for Ed (in a controlled group, >
80%).
REQUIRED: How should the income be taxed, and what is the tax liability for each corporation?
ANSWER:
INCORRECT = Tax on 50,000 = 15% x 50,000 = 7,500 for each corporation,
or 7,500 x 3 = 22,500 for all three corporations together.
CORRECT = Tax on (3 x 50,000) = Tax on 150,000
= 22,250 + 39% x (150,000 - 100,000) = 22,250 + 19,500 = 41,750 for all three corporations together.
OR = (15% x 50,000) + (25% x 25,000) + (34% x 25,000) + (39% x 50,000) = 7,500 + 6,250 + 8,500 + 19,500
= 41,750 for all three together.
OR = 41,750 / 3 = 13,917 for each corporation.
WHAT IS A GROUP OF CONTROLLED CORPORATIONS?

I. PARENT-SUBSIDIARY CONTROLLED GROUP:
One corporation directly or indirectly controls at least 80% of the other(s).
EXAMPLE 25 PARENT-SUBSIDIARY CONTROLLED CORPORATIONS

1. Company A owns 80% of Company B. Are A and B a controlled group? Can they file a consolidated tax return?
ANSWER: Yes and Yes A+B. Yes, A owns at least 80% of B directly, indirectly or constructively. Their income will be
combined together to determine income liability like one corporation, not separately. Further, both A and B are
corporations. They have the option to file a consolidated tax return.
A
B
80%
2. An individual John owns 80% of Company A and 80% of Company B. Are A and B a controlled group? Can A and
B file a consolidated tax return?
ANSWER: Yes and No. Yes, A and B belong to a controlled group, but they cannot file a consolidated tax return
because A does not legally own B.
John
80%
80%
A
B
3. A owns 80% of B, and B owns 80% of C.
Are A, B and C a controlled group? Who can file a consolidated tax

return?
ANSWER: Yes and Yes A+B+C. Yes, A owns at least 80% of B and C directly, indirectly or constructively. Their
income will be combined together to determine income liability like one corporation, not separately. A, B and C can file
consolidated tax return for all three together.
A
B
C
80%
80%
4. A owns 80% of B and 50% of C. B owns 20% of C. Are A, B and C a controlled group? Who can file a
consolidated tax return?
ANSWER: Yes and No, Yes and No. Only A and B belong to the controlled group, but not C because A and B together
own only 70% (50%+20%) of C (< 80%). Only A and B can file a consolidated tax return, but not B and C; nor is A, B and
C.
A
80%
50%
B
C
20%
ANSWER: Yes, Yes A+B+C. Yes, A, B and C are a controlled group because A and B together own 80% of C. All A, B
and C can file a consolidated tax return for all three together, because A and B own 80% of C.
16-14
A
80%
B
50%
C
30%
ANSWER: No and No. A, B, and C do not belong to a controlled group, because A does not own at least 80% of B,
and A and B together own only 60% ( < 80%) of C. None of A, B, or C can file a consolidated tax return, because none of
them individually or together owns at least 80% of the other. .
A
70%
50%
B
C
10%
7. A owns 90% of B and 80% of C. B owns 50% of D. C owns 30% of D. Are A, B, C and D a controlled group?
Who can file a consolidated tax return?
ANSWER: Yes, Yes A+B+C+D. Yes, A, B, C and D belong a controlled group because B and C together own 80% of
D; A needs not own any of D; in fact A indirectly and constructively own 80% of D. All of the four A, B, C and D can file a
consolidated tax return, because they directly and indirectly own the at least 80% of th other.
A
90%
80%
B
C
50%
30%
D
8. A owns 90% of B and 80% of C. B owns 50% of D. C owns 20% of D. Are A, B, C and D a controlled group?
Who can file a consolidated tax return?
ANSWER: Yes and No, Yes and No. Only A, B and C belong a controlled group, but D is not a member of the
controlled group because neither A, B or C, or any combination of A, B and C own at least 80% of D. Only A, B and C can
file a consolidated tax return, but not D because B and C together do not own at least 80% of C.
A
90%
80%
B
C
50%
20%
D
II. BROTHER-SISTER CONTROLLED GROUP: A brother-sister controlled group exists if five or fewer
individuals own
(1) At least 80% of each corporation, and
(2) At least 50% of the sum of each individual's "lowest identical ownership" of each corporation.
If a member stockholder of the controlled group does not own one of the controlled corporations, he is
immediately excluded from the group in counting the 80% and 50% criteria.
EXAMPLE 26 BROTHER-SISTER CONTROLLED CORPORATIONS
Andy owns 70% of A Corporation and 35% of B corporation. Bob owns 20% of A and 50% of B.
The remaining 10% of A and 15% of B are owned by an unrelated person. Are A and B a controlled group?
Shareholder
Andy
Bob
Total
A Corporation
70%
20%
90% >= 80% a,
Yes, controlled
Andy
70%
A
B Corporation
35%
50%
85% >= 80% b,
Yes, controlled
Lowest identical ownership (lower of A or B)

35%
20%
55% >= 50% c,
Yes, controlled
35%
B
20%
50%
Bob
ANSWER: Yes, A and B are a controlled group, because Andy and Bob together own 90% (> 80%) of A and 85%
16-15
(> 80%) of B, and their lowest identical ownership together is 55% (> 50%). Their income will be combined together to
determine tax liability like a corporation, not separately. If any of the a, b and c test failed, A and B are not a controlled
group. Note that A and B can not legally own each other; A and B do not file a consolidated tax return. And Andy and
Bob are individuals, not corporations; Andy and Bob do not file tax return as a controlled group of corporations. For A
and B to be a member of a controlled group of corporations, A and B must be owned by a common shareholder. However,
A and B cannot file a consolidated tax return, because legally they do not own each other.
III. COMBINED CONTROLLED GROUP: It involves three corporations:

(1). Each corporation must be a member of the parent-subsidiary group or a member of the brother-sister group, and
(2). At least one of the corporations must be the parent corporation of the parent-subsidiary group, and a member of
the brother-sister group.
EXAMPLE 27 COMBINED CONTROLLED CORPORATIONS
Andy owns 70% of A Corporation and 35% of B Corporation. Bob owns 20% of A and 50% of B. A owns 95% of C.
The remaining 10% of A, 15% of B and 5% of C are owned by unrelated persons. Are A, B and C a controlled group?
Lowest identical ownership
Shareholder
A Corporation B Corporation C Corporation (lowest of A or B)
Andy
70%
35%
0%
35%
Bob
20%
50%
0%
20%
A Corporation
0%
0%
95%
0%
Total
90% >= 80% a, 85% >= 80% b, 95% >= 80% c, 55% >= 50% d,
Yes, controlled Yes, controlled
Yes, controlled
Yes, controlled
Andy
70%
35%
A
B
95%
20%
50%
C
Bob
ANSWER: Yes, A, B and C are a controlled group. A and B are brother-sister group because they are owned by Andy
and Bob, and a and b meet the 80% test, and the lowest identical ownership, d, also meets the 50% test. C is not a
member of the A-B brother-sister group because Andy and Bob do not own C. However, A is C's parent corporation
because A owns 95% which is more than 80% requirement. Therefore, through indirect ownership, C is a member of the
A-B-C controlled group. Therefore, it meets all requirements of combined controlled group: A and B are members of the AB brother-sister group, C is a member of the A-C parent-subsidiary group, and A is a member of the A-B brother-sister
group and also the parent corporation of the A-C parent-subsidiary group.
WHO CAN FILE A CONSOLIDATED TAX RETURN?

Only two companies can file a consolidated tax return. One individual (John) and one company cannot file a
consolidated tax return. Only when the parent company owns at least 80% of a subsidiarys voting power and stock value
can they file a consolidated tax return. As a consequence, only the parent-subsidiary group is eligible for filing a
consolidated tax return, but not the brother-sister group. That is because in a brother-sister group two companies belong to
a controlled group through an individual persons controlling power. In fact, these two companies do not own each other
legally. For example, John owns 100% of Company A and 100% of Company B. Company A and Company B belong to a
controlled group through John. However, Company A and Company B cannot file a consolidated tax return with John
because John is a person, not a company. Company A and Company B cannot file a consolidated tax return either
because Company A and Company B do not own each other legally. A consolidated tax return has the advantage fo
offsetting one member corporation's loss against the other's profit. It also can offset the capital gain against the capital
loss between these two companies. It can also eliminate and defer the intercompany profit between these two companies.
HOW TO DETERMINE THE TAX LIABILITY OF A CONTROLLED GROUP

If the parent corporation owns at least 80% of a subsidiary corporation voting power and stock value, a consolidated
tax return is filed, and only one tax liability is determined for all corporations as a whole. If no consolidated tax return is
required (separate tax returns are required) and yet they belong to a controlled group, the tax savings on the lower tax rate
brackets can be taken only once, not by all members of the group, i.e., only one $50,000 at 15%, only one $25,000 at 25%,
and the remaining income at 34%. In the absence of any special apportionment agreement, these tax savings must be
allocated
equally among the members of the corporations. There can be a special apportionment agreement to allow a
member of the group to take advantage of the tax savings, but if the aggregate income exceeds $100,000, the
additional 5% surcharge must be imposed on the member who took that the advantage of tax savings. If the
aggregate taxable income exceeds $15,000,000, the additional 3% tax surcharge is imposed to the corporation
who took the advantage of tax savings.
16-16
EXAMPLE 28 -
TAX LIABILITY OF CONTROLLED GROUP CORPORATIONS (Income is unequal)

Adams Corporation and Benson Corporation belong to a controlled group. Adams has a taxable income of $100,000
and Benson $150,000. There is no special apportionment agreement as to how to divide the tax savings on the lower
tax rate brackets. How should this income be taxed, and how much is the tax liability for each of them?
ANSWER: Total tax = $80,750. Adams tax = $30,625. Bensons tax = $50,125.
INCORRECT:
Adams tax on 100,000 = (50,000 x 15%) + (25,000 x 25%) + (100,000 - 75,000) x 34%)= 7,500 + 6,250 + 8,500= 22,250 .
Bensons tax on 150,000 = (50,000 x 15%) + (25,000 x 25%) + (25,000 x 34%) + (150,000 - 100,000) x 39%
= 7,500 + 6,250 + 8,500 + 19,500 = 41,750
Total tax = 22,250 + 41,750 = 64,000 incorrect.
CORRECT: Tax on 250,000 (100,000 + 150,000)
= (50,000 x 15%) + (25,000 x 25%) + (25,000 x 34%) + (250,000 - 100,000) x 39%
= 7,500 + 6,250 + 8,500 + 58,500 = 80,750 .
OR = 22,250 + (250,000 - 100,000) x 39% = 22,250 + 58,500 = 80,750 correct.
Total
50,000 x 15% = 7,500
25,000 x 25% = 6,250
25,000 x 34% = 8,500
150,000 x 39% = 58,500
250,000
= 80,750
Adams (equally)
25,000 x 15% =
12,500 x 25% =
12,500 x 34% =
50,000 x 39% =
100,000
=
3,750
3,125
4,250
19,500
30,625
Benson (equally)
25,000 x 15% = 3,750
12,500 x 25% = 3,125
12,500 x 34% = 4,250
100,000 x 39% = 39,000
150,000
= 50,125
EXAMPLE 29
- TAX LIABILITY OF A CONTROLLED GROUP WITH LOSS

An individual John owns 100% of Carlson Corporation and 100% of Davis Corporation, Carlson and Davis do not own
each other. Therefore, Carlson and Davis belong to a controlled group but are not qualified to file a consolidated tax return
(filed separately). In the current year Carlson has a net loss of ($25,000) while Davis has a taxable income of $75,000.
There is no special apportionment agreement as to how to divide the tax savings from lower tax brackets (so divided
equally).
REQUIRED: How should the income be taxed and how much is the tax liability for each corporation?
ANSWER: $0 for Carlson and $16,250 for Davis.
Carlson's $25,000 loss cannot be offset by Davis' $75,000 taxable income. Therefore, Davis' tax is not
= (75,000 - 25,000) x 15%
= 50,000 x 15%
= 7,500 INCORRECT.
Carlson owes no tax, but Davis's entire taxable income of $75,000 is subject to tax at a marginal rate of 25%. And since
there is no special apportionment agreement, the tax savings must be divided equally between them. Therefore, Davis's
tax is also not
= (50,000 x 15%) + (75,000 - 50,000) x 25%
= 7,500 + 6,250
= 13,750 INCORRECT.
CORRECT:
Carlson (equally)
Davis (equally)
Total
25,000 x 15% = 0 (loss) 25,000 x 15% = 3,750
3,750
12,500 x 25% = 0 (loss) 12,500 x 25% = 3,125
3,125
0
37,500 x 25% a = 9,375
9,375
0
75,000
16,250 16,250
a = Note that the total taxable income is $75,000 and its marginal tax rate is 25%. Therefore, the remaining
(75,000 - 25,000) = (12,500 + 37,500) is taxed at 25%.
If a special apportionment agreement lets a member of the controlled group take advantage of the entire
tax savings on the lower tax brackets, that member must also burden the additional 5% tax surcharge for the
group's total taxable income in excess of $100,000.
16-17
EXAMPLE 30 - TAX LIABILITY OF A CONTROLLED GROUP

An individual John owns 100% of Edwards Corporation and Farrell Corporation, Edwards and Farrell do not own each
other. Therefore, Edwards and Farrell belong to a controlled group but are not qualified to file a consolidated tax return
(filed separately). In the current year Edwards has a taxable income of $200,000 and Farrell has a taxable income of
$400,000. They also agree to let Farrell take advantage of lower tax bracket savings.
REQUIRED: How should their income be taxed and how much is the tax liability for each of them?
ANSWER: $68,000 for Edwards and $136,000 for Farrell.

For the taxable income between $100,000 and $335,000, there is a 5% tax surcharge. Since Farrell is allowed to take
advantage of the lower tax bracket tax savings, Edwards' 5% tax surcharge from $100,000 to $200,000 is added to Farrell.
INCORRECT:
Edwards on 200,000
= (50,000 x 15%) + (25,000 x 25%) + (25,000) x 34% + (200,000 - 100,000) x 39%
= 7,500 + 6,250 + 8,500 + 39,000
= 22,250 + 39,000
= 61,250 INCORRECT.
= 22,250 + (200,000 - 100,000) x 39%
= 22,250 + 39,000
= 61,250 INCORRECT.
Farrell on $400,000
= (50,000 x 15%) + (25,000 x 25%) + (25,000 x 34%) + (335,000 - 100,000) x 39% + (400,000 - 335,000) x 34%
= 7,500 + 6,250 + 8,500 + 91,650 + 22,100
= 113,900 + 22,100
= 136,000 INCORRECT.
= 113,900 + (400,000 - 335,000) x 34%
= 113,900 + 22,100
Total = 136,000 Edwards + 61,250 Farrell
CORRECT:
Total tax on (400,000 + 200,000)
= (50,000 x 15%) + (25,000 x 25%) + (25,000 x 34%) + (335,000 - 100,000) x 39% + (600,000 - 335,000) x 34%
= 7,500 + 6,250 + 8,500 + 91,650 + 90,100
= 113,900 + 90,100
= 204,000 CORRECT.
= 113,900 + (600,000 - 335,000) x 34%
= 113,900 + 90,100
= 204,000 CORRECT = 600,000 x 34%
Tax on Edwards' $200,000
= 200,000 x 34% flat without lower rate bracket tax savings.
= 68,000 CORRECT..
Tax on Farrell's $400,000
= (50,000 x 15%) + (25,000 x 25%) + (400,000 - 75,000)x 34% + (335,000 - 100,000) x 5%
= 7,500 + 6,250 + 110,500 + 11,750
= 136,000 CORRECT = 400,000 x 34%
Total tax = 68,000 for Edwards + 136,000 for Farrell
= 204,000 CORRECT.
16-18
FORM 1120 + SCHEDULES

SCHEDULE M-1- FOR FORM 1120 - RECONCILIATION OF BOOK INCOME AND INCOME PER RETURN
BOOK INCOME (Accounting income)
+ Federal income tax expense (but not state income tax).
+ Capital loss over capital gain.
+ Rent or interest received in advance (unearned rent or interest).
+ Nondeductible charitable contribution (contribution in excess of 10% of adjusted taxable

income).
+ Book depreciation over taxable depreciation.
+ Life insurance policy premium which corporation is the beneficiary.
+ Interest on the loan to finance the municipal bonds.
+ Estimated product warranty expense.
+ Political contribution.
- Dividends-received deduction (100%, 80% or 70% of dividends received).
- Interest income from state and municipal bonds.
- Life insurance proceeds which the corporation is the beneficiary.
- Tax depreciation over the book depreciation.
- Rent or interest paid in advance (prepaid rent or interest).
- Excess charitable contribution carryover from preceding years.
- Capital loss carryover from the preceding years.
- Domestic production activities deduction (Form 8903) (Form 1120, line 250.
INCOME PER RETURN (Taxable income)
SCHEDULE M-2 - ANALYSIS OF UNAPPROPRIATED RETAINED EARNINGS PER BOOK

Retained earnings (beginning)
+ Net income per book.
+ Federal income tax refund from last year.
- Dividends (cash, property, or stock dividends).
- Appropriation of retained earnings for plant expansion, contingency, sinking fund or treasury
stock).
Retained earnings (ending)
SCHEDULE M-3- NET INCOME (LOSS) RECONCILIATION FOR CORPORATIONS
WITH TOTAL ASSETS OF $10 MILLION OR MORE

PART I NET INCOME (LOSS) RECONCILIATION
Worldwide income.
- Net income from nonincludable domestic and foreign entities (e.g., profit from a foreign corporation).
+ Net loss from uonincludable domestic and foreign entities e.g., loss froma foreign corporation)
.
Net income (loss) per income statement of includible corporations.
PART II RECONCILIATION OF INCOME (LOSS) PER INCOME STATEMENT
OF INCLUDIBLE CORPORATIONS WITH TAXABLE INCOME PER RETURN
Income (Loss) per income statement.
- Temporary difference (e.g., installment sales revenue).
- Permanent difference (e.g., interest income from municipal bonds, dividend-received deduction)
Income (loss) per tax return.
PART III RECONCILIATON OF NET INCOME (LOSS) PER INCOME STATEMENT OF INCLUDIBLE
CORPORATIONS WITH TAXABLINCOME PER RETURN EXPENSE/DEDUCTION ITEMS
Expense per income statement.
+ Temporary difference (e.g., capital loss carryover, accelerated depreciation straight-line deprecation).
+ Permanent difference (e., 50% of meals and entertainment expense)
.
Deductions per tax return.
EXAMPLE 31
- A COMPREHENSIVE PROBLEM
Anderson Corporation is a C-corporation and a non-manufacturing concern. In the current year, its operating results
are listed below.
REQUIRED: Determine its gross income, deductions, taxable income (66,060), tax liability (11,515) and tax refund (485) or
tax due in the current year.
16-19
1
2
3
4
5
6
Sales.
Cost of goods sold.
Interest income from New Jersey state bonds for bridge construction.
Cash dividend income from a 15% owned corporation.
$200,000
(120,000)
950
600
700
800
7
8
9
10
11
12
13
14
15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
4
5
6
15
Short-term capital gain from sale of GM common stock.

Long-term capital loss from sale of GE common stock.
Long-term capital loss from sale of business-use machine.
Interest expense paid for the purchase of New Jersey state bonds in item 3 above.
Corporate income tax paid to the state of New Jersey in the current year
Charitable contribution in cash to a college.
Net operating loss carryback.
Interest penalties paid for late payment of federal income tax.
Estimated federal income tax paid in the current year.
ANSWER: FORM 1120
Sales.
Cost of goods sold.
Interest income from New Jersey state bonds for bridge construction = 950 =>
Short-term capital gain from sale of GM common stock..1,000
Long-term capital loss from sale of GE common stock..(1,300)
Net long-term capital loss =
.. (300) =>
Long-term capital loss from sale of business-use machine.
Interest expense paid for the purchase of New Jersey state bonds in item 3 = (150) =>
Corporate income tax paid to the state of New Jersey in the current year
TOTAL
Charitable contribution in cash to a college (8,000, Limit = (77,600 d x 10%) = 7,760
=>
Net operating loss carryback.
Interest penalties paid for late payment of federal income tax.= (250) =>
Dividend-received deduction, (15%) = 600 a x 70% =
(65%) = 700 b x 80%

=.
(95%) = 800 c x 100%
=...
TABLE INCOME
TAX LIABILITY = 7,500 + 25% x (66,060 50,000) = 7,500 + 4,015 =
- Estimated federal income tax paid in the current year.
Tax refund
1,000
1,300)
(1,500)
(150)
(3,000)
(8,000)
(2,000)
(250)
(12,000)
$200,000
(120,000)
0
600 a
700 b
800 c
(0)
(1,500)
(0)
(3,000)
77,600 d
(7,760)
(2,000)
(0)
(420)
(560)
(800)
66.060
11,515
(12,000)
485
EXAMPLE 32
- A COMPREHENSIVE PROBLEM WITH TAXACT

On 1-1-Year 2 Harrison Manufacturing Corporation has the following beginning trial balance:
Debit
Credit
Cash
$8,000
Inventory
1,000
Common stock
7,000
Retained earnings
2,000
Total
9,000
9,000
TRANSACTIONS: During Year 2 the following transaction occurred:
1. Purchased inventory for a cost of $6,000 in cash.
2. Sold inventory for a price of $9,000 in cash.
3. Paid $800 wages in cash.
4. Received $500 cash dividends from a 30% owned domestic corporation.
5. Received $100 interest in cash from New Jersey state bonds
6. Paid $200 cash dividends to Harrison's stockholders.
7. Paid $50 of fines for parking violation.
8. Paid $500 of federal income tax for Year 2 in cash.
9. Harrison Company is a manufacturing company that is entitled to 9% production activities deduction.
= 9% x (9,000 sales 5,000 cost of goods sold 800 wage expense) = 9% x 3,200 = 288.
10. Physical ending on hand at 12-31-Year 2 is $2,000.
16-20
REQUIRED: Prepare Form 1120, Schedule A, Schedule C, Schedule J, Schedule L, Schedule M-1, and Schedule M-2.
ENTRIES: Year 2
1. Purchase . 6,000
Cash
6,000
2. Cash .9,000
Sales
9,000
3. Wage expense ..... 800
Cash
800
4. Cash 500
Dividends income
500
5. Cash .. .100
Interest income
100
6. Dividends . 200
Cash
200
7. Fines expense . .50
Cash
50
8. Federal tax expense 500
Cash
500
9. Production activities deduction
= 288.
10. Ending inventory = 2,000
TRIAL BALANCE: 12-31-Year 2

Cash
Inventory (beginning)
Common stock
Retained earnings (beginning)
Sales
Dividend income (taxable, 80% deductible)
Interest income (state bonds, nontaxable)
Purchase
Wage expense
Fines expense (nondeductible)
Federal Tax expense (nondeductible)
Dividends (- retained earnings)
Total
Debit
$10,050
1,000
Credit
7,000
2,000 c
9,000
500 f
100
6,000
800
50
500
200
18,600
18,600
Ending inventory at 12-31-Year 2 = $2,000
FORM 8903 DOMESTIC PRODUCTION ACTIVITIES DEDUCTION

Domestic production gross receipts
- Cost of goods sold (Form 1125-A).
- Directly related expense = Wage expense
Domestic production activities income
X Deduction rate
Domestic production activities deduction (To Form 1120, line 25)
9,000
(5,000)
(800)
3,200
x 9%
288 h
FORM 1120 - U.S. CORPORATE INCOME TAX RETURN (Form 1120 page 1)
GROSS INCOME:
Sales
- Cost of goods sold (Form 1125-A)..

..
+ Dividend income (received, 80% deductible)
.
Total gross income
DEDUCTION:
- Wage expense
.
- Dividend-received deduction (Schedule C, 80% x 500 f)
=...
Income before domestic production activities
deduction
- Domestic production activities deduction (Form 8903)
= 3% x (9,000 m 5,000 d 800 k) = 9% x 3,200
=
$9,000 m
(5,000) d
500 f
4,500
(800) k
(400)
3,300
(288) h
TAXABLE INCOME ..
TAX LIABILITY (3,012 x 15%) (Schedule J) .
...
- Federal income tax expense (paid)
..
Tax refund
3,012 a
452
(500)
48
16-21
FORM 1125-A COST OF GOODS SOLD (Form 1125-A)
Inventory (beginning) ..
+ Purchase ...
- Inventory (ending)
Cost of goods sold (To line 2 of Form 1120)
$1,000
6,000
(2,000)
5,000 d
SCHEDULE C DIVIDEND-RECEIVED DEDUCTION (Form 1120 page 2)

Dividend income received from a 30% owned corporation
x 80%
Dividend-received deduction (To line 29b of Form 1120)
$500 f
x 80%
400
SCHEDULE J TAX COMPUTATION (Form 1120 pages 3 & 4)

Total tax liability = Taxable income 3,300 a x 15%
=
$495
SCHEDULE L BALANCE SHEET (Form 1120 page 5)

ASSETS:
Cash .
Inventory (ending
Total
LIABILITY & EQUITY:
Common stock
Retained earnings (ending) (Line 8 of Schedule M-2)
Total
12-31-Year 1
12-31-Year 2
$8,000
1,000
9,000
10,050
2,000
12,050
7,000
2,000
9,000
7,000
5,050 b
12,050
SCHEDULE M-1 - RECONCILIATION OF INCOME PER BOOK AND INCOME PER RETURN (p.3 & 4)
Net income per book .................................
.
+ Federal tax expense (income tax paid) ...............
.
+ Fines expense for parking violation ...............
.....
- Interest income (from New Jersey state bonds) .........
- Dividends-received deduction (Schedule C, 80% x 500
f)..
Taxable income (line 28 of Form 1120) .................
$3,250 e
500
50
(100)
(400)
(288) h
3,012 a
SCHEDULE M-2 - ANALYSIS OF UNAPPROPRIATED RETAINED EARNINGS PER BOOK (p.3 & 4)
Retained earnings (beginning) .....................
+ Net income per book (line 1 of Schedule M-1) ..
- Dividends (Cash paid to Harrison stockholders)
Retained earnings (ending) (To line 25 of Schedule L)
$2,000 c
3,250 e
(200)
5,050 b
SCHEDULE M- 3 - Net Income (Loss) Reconciliation for Corporation
With Total Assets of $40 Million or More (Form 1120 pages 3 & 4)
NET INCOME PER BOOK ...................................
.
PERMANENT DIFFERENCE:
+ Federal tax expense (income tax paid) ...............
.+ Fines expense for parking violation ...............
.....
- Interest income (from New Jersey state bonds) ....
.....
$3,250 e
500
50
(100)
(400)
(288) h
- Dividends-received deduction (Schedule C, 80% x 500

f)..
TEMPORARY DIFFERENCE:
None
TAXABLE INCOME (line 28 of Form 1120)
(0)
3,012 a
INCOME STATEMENT Year 2

Sales ...........................
- Cost of goods sold (Form 1125-A)..

+ Dividends received income .....
...
+ Interest income (New Jersey bonds)
- Wage expense ...................
..
- Fine & penalties expense .......
.
- Federal income tax expense ......
NET INCOME
$9,000
(5,000) d
500
100
(800)
(50)
(500)
3,250 e
CONSOLIDATED TAX RETURN
16-22
ELIGIBILITY OF A CONSOLIDATED TAX RETURN

To be qualified to file a consolidated tax return, there must be a parent corporation and at least a subsidiary to form an
affiliated group, and this parent must own directly or indirectly at least 80% of the subsidiary. A corporation has an option
to file or not to file a consolidated tax return. A corporation may belong to a controlled group, but it may not be eligible to
file a consolidated return. Only two corporations can file a consolidated tax return. One individual and one corporation
cannot file a consolidated tax return. For example, John (an individual, not a corporation) owns 80% or Corporation A and
80% of Corporation B. Corporation A and Corporation B belong to a controlled group through John. However, Corporation
A and Corporation B cannot file a consolidated tax return because they do not own each other legally. They are related to
each only through John, and John and Corporation A cannot file a consolidated tax return because John is an individual
who files Form 1120, while Corporation A files Form 1120. Further, to be includable as a member of this affiliated group,
this subsidiary must not be an S corporation, an insurance corporation, a foreign corporation, a tax-exempt corporation, a
real estate company, or a regulated investment company.
EXAMPLE 33 - ELIGIBILITY FOR CONSOLIDATED TAX RETURN (Form 1120)

1: P Corporation owns 80% of A Corporation, and A owns 80% of B Corporation. Can P, A an B file
a consolidated tax return? ANSWER: Yes, because P and A together directly and indirectly owns at least 80% of B.
2: P Corporation owns 80% of A Corporation and 70% of B Corporation. Can P, A and B file a consolidated tax return?
ANSWER: No, P, A and B cannot file a consolidated tax return because P did not own at least 80% of B. However, P
and A can.
3: P Corporation owns 80% of A and 70% of B. A owns 10% of B. Can P, A and B file a consolidated tax return?
ANSWER: Yes, P, A and B can file a consolidated tax return because P and A together directly and indirectly own 80%
(70% + 10%) of B.
4: John owns 80% of A Corporation and 80% of B Corporation. Can A and B file a consolidated tax return?
ANSWR: No, John is not a corporation. He cannot file Form 1120 (he only can file Form 1040), and A did not own B.
A is not Bs parent corporation. A and B only have a brother-sister relationship. Therefore, A does not legally own B at all.
5: P Corporation owns 80% of A Corporation and 80% of B Corporation. Can P, A and B file a consolidated tax return?
ANSWER: Yes, P, A and B can file a consolidated tax return because P is treated as a parent of A and B. There is a
parent-subsidiary relationship.
6: Harvey owns 80% of P Corporation and 10% of B Corporation. P owns 80% of A Corporation. A owns 70% of B.
Can P, A and B file a consolidated tax return?
ANSWER: No P, A and B cannot file a consolidated tax return because P did not own Harvey, and Harvey is not a
corporation after all. He cannot file Form 1120 (He can only file Form 1040). As a result, P only indirectly owns 70% of B.
Therefore, B is not to be affiliated with P. Nevertheless, P and A
can file a consolidated tax return because they are affiliated.
COMPONENTS OF A CONSOLIDATED TAX RETURN
The following deductions are to be re-determined from the viewpoint of one consolidated corporation, not as
several affiliated member corporations. There are advantages and disadvantages for filing a consolidated tax return.
(a). Dividends received from affiliated member corporations are fully deductible, and dividends received from
unaffiliated corporations have 70%, 80%, or 100% dividend-received deduction.
(b). Intercompany transactions in inventory, machinery, & land that create an intercompany profit are fully eliminated.
(c). Capital gains and losses from capital assets can offset each other.
(d). Capital gain or loss from the sale of business properties (Sections 1231, 1245, and 1250) afe fully deferred.
(e). Charitable contributions are combined in considering the 10% limit.
(f). Net operating loss carryback and carryover are permitted.
(g). Tax rate brackets have only one tax saving for 15% and 25% tax bracket.
(e). If the interest payor uses the accrual basis to recognize interest expense, and the interest payee uses the cash
basis to recognize interest income, the payor must defer the interest deduction until the following year when the payee
recognizes interest income. In this case both parties must use the same cash basis.
(f). When payor capitalizes and amortizes service expense, the payee must also capitalize and amortize the service
income. In this case both parties must use the same accrual basis.
EXAMPLE 34 - COMPONENTS OF A CONSOLIDATED TAX RETURN (Form 1120)
16-23
Parent Corporation (P) owns 80% of Subsidiary Corporation (S). Given the components of taxable
income for Parent and Subsidiary in columns 2 and 3, respectively.
REQUIRED: (1) What is the consolidated taxable income? ANSWER: $3,830 g
(2) What is the consolidated tax liability? ANSWER: $575 f.
(3) What is the advantage in terms of tax liability for filing a consolidated tax return? ANSWER: $214 h .
Parent
Subsid- Conso
(P)
iary (S)
lidated
1. Sales (all to unaffiliated)
9,000
6,000
15,000
2. Cost of goods sold
(3,000)
(6,500)
(9,500)
3. Dividend received by P from S
100
0
100 b
4. Capital gain on sale of land from S to P, 1,200 price - 1,000 cost = 200 gain
0
200
0g
5. Capital gain on sale of IBM stock by P
400
0
400
6. Capital loss on sale of GM stock by S, 300 to be carried forward to 5 years.
(0)
(0)
(300) c
GROSS
6,500
(300)
5,700
INCOME
7. Wage expense
(1,000)
(500)
(1,500)
8. Charitable contribution by P, 140
(140)
(0)
(140)
9. Charitable contribution by S, 130 > 10% limit, to be carried forward 5 years.
(0)
(0)
(130) d
10. Dividend-received deduction = 100% x $100 in (3) =
(100) a
(0)
(100) b
TAXABLE INCOME
5,260
(800)
3,830 g
x Tax rate
x 15%
x 0%
x 15%
TAX LIABILITY
789 e
0k
575 f
Advantage of consolidation = Tax savings = 789 e (575 f + 0 k) = $214 h.
a = Since P owns at least 80% of S, it is entitled to an 100% dividends-received deduction.
b = Intercompany dividend of 100 from an affiliated corporation can be 100% eliminated.
c = P(5) and S(6) must be counted together for a consolidated tax return that results in an $100 capital gain which is fully
taxable.
d = S has negative taxable income. Its 130 charitable contribution is not deductible. It must be carried forward to the next
5 years. However, P(8) and S(9) charitable contribution must be considered together. As a result, 10% of the
consolidated taxable income is enough for a total of $270 ($140 from P(8) + $130 from S(9)) of charitable contribution.
g = Intercompany gain of 200 from an affiliated corporation on the sale of land can be 100% deferred until an restoration
event occurs (e.g., later P sells the land to an unaffiliated corporation).
CORPORATE ALTERNATIVE MINIMUM TAX

Form 1120 - U.S, Corporate Income Tax.
Form 4626 - Alternative Minimum Tax - Corporate.

orm 990-T (Exempt Organization Business Income Tax Return).
CORPORATE ALTERNATIVE MINIMUM TAX (AMT, Form 4626) (gross receipt > $7,500,000)
TAXABLE INCOME before net operating loss deduction
Plus tax preference items:
+ 1. Interest of tax-exempt municipal bonds for private activity (housing), not for public activity
190,000
+ 1,000
(highway)
+ 0 Life insurance proceeds are still tax free for regular taxable income and AMT).
+ 2. Charitable contribution of appreciated capital gain asset
(8,000 market value - 7,000 adjusted basis)
=
+ 3. Excess accelerated depreciation (150% declining balance method) over the straight-line
depreciation for personal property after 1986, and real property before 1987.
(8,000 accelerated depreciation - 7,000 straight-line depreciation)
=
+ 4. Excess straight-line depreciation on 27.5 years over the straight-line depreciation on
40 years for real property after 1986
(8,000 straight-line depreciation on 27.5 years - 7,000 straight-line depreciation on 40
years)=
+ 5. Excess deductible depletion over depletion on adjusted basis for natural resources (oil)
(deductible depletion can go over the cost).
(8,000 deductible - 7,000 on cost)
=
+ 6. Excess of estimated reserve for bad debt over the actual bad debt (bank)
(8,000 deductible estimate - 7,000 actual)
=
+ 0 Dividend-received deduction: Both taxable income and AMT allow for
100% deduction (for at least 80% ownership), 80% deduction (for 20% to < 80% ownership),
and 70% deduction (for less than 20% ownership). However, the adjusted current earnings
allow for only 100% and 80% deduction, but not 70% deduction).
Plus or minus adjustment:
+ 7. For installment sale on ordinary inventory, realize percentage profit for taxable income,
but total profit for AMT (non-dealer)
(8,000 total profit - 7,000 percentage profit)
=
For unusual transaction, e.g., land, use installment method to realize percentage gain
for both taxable income and AMT). For long-term construction after 1986, percentage-ofcompletion method must be used for both taxable and AMT, resulting in no difference).
- 8. Basis adjustment for property sold. Since depreciation for AMT is usually less than
depreciation for taxable income, so when the property is sold, gain for taxable income is
usually greater than the gain for AMT. (8,000 gain for taxable income - 7,000 gain for AMT)
=
PRE-ADJUSTMENT ALTERNATIVE MINIMUM TAXABLE INCOME (Pre-adjustment AMTI)
+ 9.= 75% x (Adjusted current earnings - pre-adjustment AMTI)
= 75% x (204,000 assumed - 196,000 pre-adjustment AMTI) =
+ 10. For net operating loss (NOL) deduction (carried back 2 years and forward 20 years),
it denies the above tax preference items for AMT.
(1,000 NOL for taxable income - 0 NOL for AMT)
=
+ 11. Adjustment for domestic production activities deduction (9% of lesser of production activity
income or AMTI, not taxable income) (if taxable income < production income < ATMI) (9%)
ALTERNATIVE MINIMUM TAXABLE INCOME (AMTI)
- 12. Exemption = (Maximum 40,000 - 25% x (AMTI - 150,000))
= 40,000 - 25% x (202,000 - 150,000)
= 40,000 13,000 =
Tax base
X 20% alternative minimum tax rate
+ 1,000
+ 1,000
+ 1,000
+ 1,000
+ 1,000
16-24
+ 1,000
(1,000)
196,000
+ 6,000
+ 1,000
(1,000)
202,000
(27,000)
175,000
x
20%
Tentative alternative minimum tax

- AMT foreign tax credit
- Regular tax on 190,000 taxable income = 22,250 + 39% x (190,000 - 100,000)
= 22,250 + 35,100 =
35,000
(0)
(57,350)

ALTERNATIVE MINIMUM TAX (To line 4 of Schedule J of Form 1120)
IS THE INTEREST INCOME FROM STAT AND MUNICIPAL BONDS TAXABLE?

Bonds for public activity (highway)
Bonds for private activity (housing)
Inventory valuation method
Taxable
income
NO
NO
LIFO
Alternative minimum
taxable income (AMTI)
NO
YES
LIFO
Adjusted current
earnings (ACE)
YES
YES
FIFO
CAN THE INSTALLMENT METHOD TO RECOGNIZE PROFIT IN PERCENTAGE BE USED (DEFERRED GAIN)?
Taxable Alternative minimum
Adjusted current
income taxable income (AMTI)
earnings (ACE)
NonUsual transaction (inventory)
YES
NO
NO
dealer
Unusual transaction (land)
YES
YES
NO
Usual transaction (inventory)
YES
YES
NO
Dealer
Unusual transaction (land)
YES
YES
NO
IS THE DIVIDENDS-RECEIVED DEDUCTION AVAILABLE?
% of dividend-received
Taxable
deduction
income
100% deduction (for 100% >= ownership >=
YES
80%)
80% deduction (for 80% > ownership >=
YES
20%)
70% deduction (for 0% < ownership <
YES
20%)
Alternative minimum
taxable income (AMTI)
YES
Adjusted current
earnings (ACE)
YES
YES
YES
YES
NO
16-25
WHAT DEPRECIATION METHOD TO USE?
Taxable
Alternative minimum
Adjusted current
income
taxable income(AMTI)
earnings (ACE)
Personal property Before 1987 Accelerated (ACRS)
Straight-line
Straight-line
(machine) After 1986 Accelerated (MACRS)
Straight-line
Straight-line
Real property
Before 1987 Accelerated (ACRS)
Straight-line
Straight-line
(factory)
After 1986 Straight-line on 27.5 years Straight-line on
Straight-line on 27.5 years
for residence, on 31.5
40 years for
for residential and 31.5
years for commercial
residential and
years for commercial
(39 years after 5-12-1993). commercial
(39 years after 5-12-1993
HOW MUCH IS THE DOMESTIC PROCUTION ACTIVITIES DEDUCTION?= 9% .
For taxable income (regular tax), Domestic production activities deduction
= 9% of lesser of domestic production activities income or taxable income,
both without regard to the domestic production deduction itself.
For alternative minimum taxable income, and
adjusted current earnings,
Domestic Production activities
= 9% of lesser of domestic production activities income or alternative minimum
taxable income, both without regard to the domestic production deduction
itself.
EXAMPLE 35 - CORPORATE ALTERNATIVE MINIMUM TAX with domestic production activities deduction
Ford Corporation is engaged in car manufacturing and car rental activities. The results are shown below.
1
2
3
Sales from car manufacturing (production activities)..

Cost of goods sold for car manufacturing
Wage expense for car manufacturing
$200,000
(30,000)
(20,000)
4
5
6
Loss from car rental business (non-production activities).

Interest income from New Jersey bonds used for housing (private use).
Interest income from New Jersey bonds used for highway (public use).
(10,000)
4,000
3,000
REQUIRED: What are production activities income (150,000), taxable income (127,400), AMTI (133,290), AMT (0),
tax liability (32,936), ACE (134,400), production activities deduction for taxable income (12,600) and for
AMT(12,600+360)?
Taxable Income
Alternative
Adjusted current
(Form 1120)
minimum tax (AMTI) earnings (ACE)
Sales from car manufacturing.
200,000
200,000
200,000
(30,000)
(30,000)
(30,000)
- Wage expense for car manufacturing.
(20,000)
(20,000)
(20,000)
PRODUCTION INCOME
150,000 a
150,000 c
150,000
- Loss on car rental business.
(10,000)
(10,000)
(10,000)
+ Interest income from NJ bonds for housing.
+0
+ 4,000 m
+ 4,000
+ Interest income from NJ bonds for highway.
+0
+0
+ 3,000
- Domestic production activities deduction
=9%x(lesser of 150,000 a or 140,000
(12,600) k
(12,600)
b)=12,600
(12,600)
TAXABLE INCOME before production deduction 140,000 b
PRE-ADJSTMT-AMTI before production deduction
144,000 q
PRE-ADJUSTMT-AMTI after production
131,400 d
deduction.
.. 134,400 f
ACE after production deduction.
..
+ Adjusted current earning adjustment

=75%x(134,400 f 131,400 d)=
+ 2,250 g
2,250
- Adjustment for domestic production deduction
=9%x(140,000 b 144,000 q)= 360
(360)
e
TAXABLE INCOME after production deduction
127,400 n
ALTERNATIVE MINIMUM TAXABLE INCOME .
.................133,290 r
- AMT exemption = 40,000 0(133,290<

(40,000)
150,000)=
TAX BASE
127,400 s
93,290
X Tax rate [22,250 + 39%x(127,400 100,000)] =
X table
X 20%
REGULAR TAX / TENTATIVE MINIMUM TAX
32,936 h
18,658
- Regular tax
(32,936 h)
ALTERNATIVE MINIMUM TAX (line 4,Sch J,1120)
+0j
0j
TAX LIABILITY
32,936
16-26 end
FORM 4626 - ALTERNATIVE MINIMUM TAX - CORPORATE
TAXABLE INCOME.
+ Interest income from NJ bonds for housing .
Pre-adjustment alternative minimum taxable income..
+ Adjusted current earnings adjustment = 75% x (134,400 f 131.400 d) =.
- Adjustment for domestic production activities deduction = 9%x(140,000 b 144,000 q)=
ALTERNATIVE MINIMUM TAXABLE INCOME.................................................................
- AMT exemption = 40,000 0 (133,290 r < 150,000) = 40,000 - 0 = 40,000
Tax base .............................................. ...
x 20% Alternative minimum tax rate .....................
Tentative minimum tax ..................................... .
- Regular tax (on 127,400 s, tax rate table) = ...........
ALTERNATIVE MINIMUM TAX (32,936-18,658<0=>0)(To line 4 of Schedule J of Form
1120)
SIX TAXING ENTITIES:
127,400 n
+ 4,000 m
131,400 d
+ 2,250
(360)
133,290 r
(40,000)
93,290
x 20%
18,658
(32,936)
0j
1
2
3
4
5
6
Taxing Entities
Individual
Sole proprietorship
C corporation
Partnership
S corporation
Trust
Tax Form
Form 1040
Schedule C
Form 1120
Form 1065
Form 1120S
Form 1041
Chapter
Individual tax
Individual tax
Chapters 16, 18, 19
Chapters 20, 21
Chapter 22
Chapter 25

Tax 310 16

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Tax 310 16

Caricato da

Copyright:

Formati disponibili

16-1

CHAPTER 16 C CORPORATION INCOME TAX TAXABLE INCOME, TAX LIABILITY

TAX CONSEQUENCES OF DIFFERENT BUSINESS ORGANIZATIONS:

EXAMPLE 1 DOUBLE TAXATION ON A C CORPORATIONS INCOME

2015 CORPORATE TAX RATE:

EXAMPLE 2 CORPORATE TAX LIABILITY

CORPORATE TAX FORMULA (Form 1120)

3. Dividends (80% deduction below if own domestic company>=20%)

8. Salaries paid to owner-employees, officers (Schedule E) .

10. Employee fringe benefits ...............................

12. Charitable contribution ( < 10% x adjusted taxable income)

13. Amortization of organization cost, start-up cost (15 years)

Regular tax ..................................................

- 19. Foreign tax credit (Form 1118) ........................

+ 25. Accumulated earnings tax (38.6%, no form) .............

ACCOUNTING INCOME VERSUS TAXABLE INCOME, TEMPORARY DIFFERENCE VERSUS

EXAMPLE 3 ACCOUNTING INCOME VERSUS TAXABLE INCOME

Interest expense to purchase New Jersey state bonds = 150

Federal income tax paid = 1,500

Premium for life insurance policy = 1,600

Death benefits of life insurance policy = 5,000

Parking violation fines = 1,800

Business meal = 2,000, but only 50% is deductible

Income tax expense (+E)(37,050 a accounting income x 15% tax rate =

Deferred income tax liability (+L)(100 F, c, temporary x 15% = 15)

ORGANIZATIONAL EXPENSE AND START-UP COST:

EXAMPLE 4 ORGANIZATIONAL COST

12-1-Year 0- $45,000 Lawyer's fees to draft the corporate charter.

EXAMPLE 5 DOMESTIC PRODUCTION ACTIVITIES DEDUCTION

EXAMPLE 6 DOMESTIC PRODUCTION ACTIVITIES DEDUCTION

EXAMPLE 7 DOMESTIC PRODUCTION ACTIVITIES DEDUCTION

FORM 1120 (Total)

? (See total =>)

EMPLOYEE STOCK OPTION:

EXAMPLE 8 STOCK SUBSTANTIALLY VESTED

EXAMPLE 9 RESTRICTED STOCK PLAN

EXAMPLE 10 EMPLOYEE STOCK PURCHASE PLAN

GAIN OR LOSS FROM SALE OF BUSINESS-USE PROPERTY:

GAINS OR LOSS FROM SALE OF CAPITAL ASSET (for investment):

EXAMPLE 11 CAPITAL GAIN FROM BUSINESS-USE PROPERTY

EXAMPLE 12 CAPITAL GAIN AND LOSS DEDUCTION CARRYOVER (from investment)

EXAMPLE 13 CAPITAL GAIN AND LOSS DEDUCTION CARRYBACK (from investment)

1,200-300=900; 900-400=500; 500-500=0)

EXAMPLE 15 CAPITAL GAIN AND LOSS DEDUCTION CARRYBACK (from investment)

NET OPERATING LOSS DEDUCTION:

EXAMPLE 16 NET OPERATING LOSS CARRYOVER DEDUCTION

EXAMPLE 17 NET OPERATING LOSS CARRYBACK DEDUCTION

EXAMPLE 18 NET OPERATING LOSS CARRYBACK

AND CARRYOVER DEDUCTION

SHOULD THE NET OPERATING LOSS BE CARRIED BACK OR CARRIED OVER?

NET LOSS CARRYBACK AND CARRYFORWARD

EXAMPLE 20 CHARITABLE CONTRIBUTION

DIVIDENDS-RECEIVED DEDUCTION (Schedule C of Form 1120):

GAIN AND LOSS IN A RELATED PARTY TRANSACTION

A. Carryback years (B. Deduct for charity)

A. Carryover years (B. Deduct for charity)

EXAMPLE 23 SEQUENCE OF DEDUCTION

TAX TREATMENT FOR A GROUP OF CONTROLLED CORPORATIONS

- INCOME TAX ON A GROUP OF CONTROLLED CORPORATIONS (Income is equal)

WHAT IS A GROUP OF CONTROLLED CORPORATIONS?

EXAMPLE 25 PARENT-SUBSIDIARY CONTROLLED CORPORATIONS

Are A, B and C a controlled group? Who can file a consolidated tax

EXAMPLE 26 BROTHER-SISTER CONTROLLED CORPORATIONS