How to Calculate Corporate Income Tax Tutorial-Foundations of Finance

Foundations of Finance: The Logic and Practice of Financial Management 6/e

Federal Income Taxation

This corporate income tax tutorial will focus on Federal Income Taxation that exists for the following reasons:To Provide government revenues, Achieve socially desirable goals,Stabilize the economy

With the above objectives in mind, we will now learn how Taxation effects our Corporations.

Income taxes for corporations

 A corporation is required to comply with the following taxation requirements:

1.         A tax return must be filed and the resulting taxes paid by the corporation

2.         Taxable income is basically determined as income less allowable exclusions and tax-deductible expenses

3.         Seventy percent of any dividends received from another corporation are tax exempt

4.         Dividends paid by the corporation to its stockholders are not tax deductible

 

Lec. 3 - Corporate Income Tax

Corporate rate structure:

15% $0 - $50,000

25% $50,001 - $75,000

34% $75,001 - 100,000

There is an added tax of 5% for income between $100,000 and $335,000.

There is also an additional added tax of 3% on income between $15 million and $18 1/3 million.

 

Depreciation

For assets acquired prior to 1981, two depreciation methods, among others, may be used for tax purposes.

(l)         Straight-line

(2)        Double-declining balance

For assets acquired in 1981 or later, the Accelerated Cost Recovery System (ACRS) should be used.

Lec. 5 - Corporate Income Tax - Example 1

Net operating loss:

If a corporation has an operating loss in any year, the loss may be applied against the profits in earlier years.  If the loss has not been completely absorbed by the profits in the earlier years, the loss may be carried forward.

If, after deducting all capital gains and capital losses, the company has a net capital loss, such losses may be carried back for 3 years and forward for 5 years to offset any capital gains occurring during those periods.

Taxes and the firm’s capital structure:

The tax deductibility of interest payments gives debt financing a definite cost advantage over preferred and common stock financing.

Taxes and corporate dividend policies:

The differential tax treatment for the firm’s common stockholders might influence the firm’s preference between stock price appreciation

Taxes and capital investment decisions

When a plant or equipment acquisition is being considered, the returns from the investment should be measured on an after-tax basis using the marginal, not the average tax rate, in the computations.

The depreciation method will have an impact on the timing of taxes.

The estimated salvage value also may have a tax impact; the greater the anticipated salvage value, the less the amount of annual depreciation charges.

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Comments 2 comments

billyaustindillon profile image

billyaustindillon 6 years ago

A great tutorial - addressing the foundations of finance. Particular important the capital investment decision in today;s economy.


cluense profile image

cluense 6 years ago from Cartersville, GA Author

Thank You for your awesome comments and for stopping by! Your the best Billyaustindillion!

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