How to Calculate Corporation Taxes

Calculating Corporation Taxes

Traditional C-Corporations pay federal tax on net income. On the other hand, S-Corporations do not pay federal tax on net income. Rather, net income passes through to the shareholders of the S-Corporation and is reported on each shareholder's personal income tax return and taxed according to the shareholder's personal income tax rates. Both C-Corporations and S-Corporations are subject to state tax on net income. Since the determination of taxes paid on S-Corporation profits is highly dependent on the individual shareholder's tax situation, this article is limited to the calculation of federal C-Corporation taxes.

Things You'll Need

• Corporation's profit and loss statement
• Form 1120

Instructions

1. Determine the net income of the corporation. Revenues less cost of goods sold less general and administrative expenses, including interest expense, depreciation and amortization, plus interest income yields the corporation's net income. Prepare the corporate tax return using IRS Form 1120. Taxable income before deductions for net operating losses is reported on line 28, page 1 of Form 1120. Deduct any net operating losses the corporation has and report taxable income on line 30, page 1 of Form 1120.

2. Prepare Schedule J on page 3 of Form 1120 to calculate the corporation's federal tax. If the corporation is a member of a controlled group, check the box next to line 1 and attach Schedule O. A corporation is a member of a controlled group if it is a part of a parent-subsidiary relationship. If the corporation is a qualified personal service corporation, check the box next to line 2 and calculate the tax at 35 percent of taxable income reported on line 30 of Form 1120, page 1.

3. Consult the tax table on page 19 of the Instructions to Form 1120 and calculate the corporation's federal tax. For example, if the corporation's taxable income per line 30 of Form 1120 was $985,000, the federal tax would be $334,900. This is calculated using the following steps: $985,000 - $335,000 = $650,000; $650,000 x 0.34 = $221,000; $221,000 + $113,900 = $334,900.

4. Review alternative minimum tax preference items per IRS Form 4626 and determine if the corporation is subject to alternative minimum tax. Tax preference items consist primarily of depreciation and amortization adjustments. If the corporation is subject to alternative minimum tax, complete Form 4626 and enter the result on line 3 of Schedule J, Form 1120. Add lines 2 and 3 and enter the resulting tax liability on line 4.

5. Review the tax credits listed on lines 5a through 5e and determine if the corporation is able to utilize any of the credits to offset the tax liability. The most common tax credit is foreign tax credit listed on line 5a. Calculate the total tax credits and enter the result on line 6.

6. Subtract line 6, total credits, from line 4, total tax liability. If the corporation is a personal holding corporation, complete Schedule PH and enter the result on line 7 of Schedule J, Form 1120. A corporation is a personal holding corporation if (i) at least 60 percent of its gross income was personal holding income and (ii) at any time during the last half of the year least 50 percent of the corporation's stock was owned by five or fewer individuals.

7. Review the other taxes listed on line 9. These taxes deal with recapture of investment credits and low-income housing credits, look-back provisions for interest on long-term contracts and alternative tax on qualifying shipping activities. Determine if the corporation is subject to any of the taxes listed, complete the appropriate form and enter the tax on line 9.

8. Calculate the corporation's federal tax by adding lines 7 through 9 and entering the result on line 31, page 1 of Form 1120. The total tax liability due will then be reduced for estimated tax payments made and overpayments applied from prior years.

Tips & Warnings

• Note that the examples used in this article were prepared using 2009 federal tax rates. For tax years other than 2009, consult the most recent IRS Form 1120 Instructions.

References

• Internal Revenue Service: Form 1120 Instructions

Resources

• Internal Revenue Service: Form 1120
• Internal Revenue Service: Form 4626
• Internal Revenue Service: Schedule PH