Calculation of Federal Income Tax

Corporations pay tax on net taxable income. Shareholders pay an additional tax on the distributions (dividends).  

The corporate tax is calculated based on two fundamental accounting methods or a hybrid thereof.  The cash method recognizes items of income and expense when the cash payments are received or made, and the accrual method when the right to receive income or obligation to pay an expense has been fixed.

Only the items of income and expense belonging to the business of that entity are considered.  If there are some unrelated items, they are recorded as dividends or loan transactions directly with the shareholders or other persons on whose behalf such transactions are executed.

While gross income means all income from whatever sources are derived (IRC Sec. 61), deductions are legislative grace.  An entity may Read More

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