Unit Six

COMPUTATION OF CORPORATION TAXES

Corporations are subject to a normal tax only. This tax is levied on the net income which, as explained in the previous Unit, is the difference between the total gross income and the sum of the allowable deductions. Under the 1918 Revenue Act, corporations were subject to both a normal tax and an excess profits tax. The Excess Profits Tax Law was repealed as of January 1, 1922. The present Law provides that

there shall be levied, collected, and paid for each taxable year upon the net income of every corporation a tax of 1242 per centum of the amount of the net income in excess of the credits provided in sections 236 and 263.

(Section 230—1924 Act) It becomes evident from a reading of this section of the Law that corporations, like individuals, are entitled to certain credits which are to be treated as a subtraction from net income before computing the tax. Corporations, are entitled to the following credits:

(a) The amount received as interest upon obligations of the United States which is included in gross income under section 233; and

(b) In the case of a domestic corporation the net income of which is $25,000 or less, a specific credit of $2,000, but if the net income is more than $25,000 the tax imposed by section 230 shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000.

(Section 236—1924) To be entitled to a credit of $2,000.00, a corporation's net income must not exceed $25,000.00, with the exception that corporations whose net income exceeds $25,000.00, but is less than $25,250.00, are granted “relief" by the provision that the tax shall not exceed the tax which would be payable if the $2,000.00 credit were allowed, plus the amount of the net income in excess of $25,000.00. Thus, if a corporation had an income of $25,199.00, the tax, without the benefit of the "relief”, would be $3,149.87 ($25,199.00 at 1272%). Applying the “relief”, the tax will be $3,098.87. This is computed as follows: Net Income.

$25,199.00 Credit...

2,000.00 Income Subject to Tax..

$23,199.00 Rate of Tax...

1212% Income Tax...

$ 2,899.87 Net Income in Excess of $25,000.00

199.00 Total Tax...

$ 3,098.87

Copyright 1925. South Western Publishing Co.

Thus, it will be seen that under the “relief" clause there is a saving of $51.00 in this instance. There will be a corresponding saving whenever the net income is in excess of $25,000.00, but is less than $25,250.00. At that point, and beyond, there is no saving by applying the “relief” provision.

The following propositions will now be used as a basis for illustrating the computation of the tax on the incomes of corportations.

Proposition A
The Cleveland Electrical Corporation has a gross income of
$25,000.00 and is entitled to deductions amounting to $6,000.00.
Compute the tax.

Solution
Gross Income.

$25,000.00
Total Deductions.

6,000.00 Net Income..

$19,000.00 Less Credit..

2,000.00 Income Subject to Tax....

$17,000.00 Rate of Tax..

1212% Income Tax..

$ 2,125.00 In this proposition, the corporation is entitled to the full amount of the credit.

Proposition B
The Corrugated Iron Corporation has a gross income of
$34,000.00 and is entitled to deductions amounting to $8,850.00.
Compute the tax.

Solution
Gross Income.

$34,000.00
Total Deductions..

8,850.00 Net Income..

$25,150.00 Less Credit..

2,000.00 Income Subject to Tax.

$23,150.00 Rate of Tax..

121/2% Income Tax.

$ 2,893.75 Net Income in Excess of $25,000.00.

150.00 Total Tax....

$ 3,043.75

In computing the tax in this proposition, the "relief" clause of the Law is applied. The result is a saving of $100.00 to the corporation. If the tax were computed without the benefit of the "relief" clause, the total tax would amount to $3,143.75 ($25,150.00 at 1212%).

Proposition C The Douglas Granite Corporation has a gross income of $50,000.00 with allowable deductions of $12,000.00. Compute the tax.

Solution
Gross Income...

$50,000.00
Allowable Deductions.

12,000.00 Net Income.

$38,000.00 Rate of Tax.

1272% Income Tax..

$ 4,750.00

In this proposition, the corporation is not entitled to a credit of $2,000.00 because the net income is in excess of $25,000.00. Furthermore, the taxpayer is not entitled to the benefit of the "relief" clause because the net income is in excess of $25,250.00.

In addition to the credits outlined above, domestic corporations are entitled to credit for the amount of any income, war profits and excess profits taxes paid or accrued during the same taxable year to any foreign corporation or to any possession of the United States. For detailed information in regard to this provision of the Law, see Section 238. The application of this provision is so limited that it is not considered desirable to undertake a complete discussion of it here.

In case of foreign corporations which are subject to taxation under the Revenue Act of 1924, but which are not engaged in a trade or business in the United States and do not have any office or place of business therein, there shall be deducted and withheld at the source, a tax equal to 1212% of all annual or periodic gains, profits and income accruing to the benefit thereof. (See Section 237.)

Payment of Taxes. The taxes assessed on corporation returns may be paid in the same manner as the taxes assessed upon individuals, that is, the full amount of the tax may be paid at the time the return is filed or the tax may be paid on an installment basis.

If a corporation desires to pay its income tax on an installment basis, the first installment shall be paid at the time fixed by Law for filing the return, the second installment on the fifteenth day of the third month, the third installment on the fifteenth day of the sixth month, and the fourth installment on the fifteenth day of the ninth month after the time fixed by Law for filing the return.

If any installment is not paid when due, the whole amount of the tax unpaid shall become due and payable upon notice and demand by the Collector.

Cash
Accounts and Notes Receivable
Raw Materials Inventory
Finished Goods Inventory
Deferred Charges to Operations
Investment in Bonds-National Acme Co.
Investment in Common Stock-National Acme Co.
Sinking Fund
Land
Buildings
Machinery and Equipment
Good Will
Discount on Bonds
Discount on Stock
Organization Expenses
Bank Loans
Accounts Payable
Accrued Interest
Accrued Wages
Accrued Property Taxes
Res. for Income Taxes
Reserve for Bad Debts
Reserve for Depreciation
First Mortgage 6% Bonds
Preferred Stock
Common Stock
Sinking Reserve
Surplus
Capital Surplus
Sales
Raw Material Purchases
Direct Labor
Heat, Light and Power
Repairs
Property Taxes
Depreciation on Buildings, 3 %
Depreciation on Machinery, 10%
Miscellaneous Factory Expenses
Inventories
Provision for Bad Debts
Office Salaries
Other Administrative Expenses
Selling Expenses
Dividends Receivable, May I
Interest on Notes Receivable
Profit, Sale of National Acme Stock
Loss, Sale of National Acme Bonds
Loss, Pay Roll Robbery
Income Taxes-Excess Reserve
Interest Paid on Bonds
Discount on Bonds Amortized
Other Interest Paid
Organization Expenses Amortized
Interest on Sinking Fund

9.900 99,585 180,000 180,000 225,000 18,405 36,540

1,534,885

1,224,000
112,860
19,467
2,214
2,790
6,480
22,725
25,560
155,736

2,700
15,750
24,300
44,010

218,241

3,600 2,628 4,500

$2,768,875

Net Adjustments
Net Exclusions
Net Taxable Income