Tax Homework Week 5

Chapter 14

1. Please explain how Charitable Contributions come into play in determining "Corporate" taxable income. (5 pts)

Whether a contribution can be deducted is determined by several items: (1) if the donation is made to a qualified organization, (2) the timing of the donation, and (3) the type of property that is donated.

According to IRS Publication 542, “a corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year.” If a corporation is on a cash basis, the contribution is taken in the tax year it is made.

The deduction is limited to 10% of adjusted gross income or the total value of property donated during the year, whichever is less. Any amount exceeding this 10% limitation can be carried forward to following years, used in a first-in first-out basis for up to 5 years.

2. What happens to a loss on the Corporate Tax Return (Form 1120)? Does it pass through to the shareholders? Is it available for future or past periods? Please explain in detail. (5 pts.)

A net operating loss (NOL) occurs when a corporation has tax deductions that are greater than the taxable income. In general, a corporation can carry a NOL back 2 years or forward up to 20 years. Some small businesses may be eligible to carry the loss back for 3 years, and farming businesses can carry the loss back up to 5 years. If the carry back is chosen, the company would receive a refund of taxes previously paid. However, it may be more beneficial to waive the carry back and apply the entire loss to future tax years.

With a C Corporation, which files a Form 1120, the loss does not pass through to the shareholders as it is a separate entity. In contrast, under an S Corporation (which would file a Form 1120S), corporate losses do flow through to the shareholders.

3. Please describe the purpose of Schedules M-1...