Taxation for Decision Makers, 2012 Edition

chapter 9

Taxation of Corporations

CHAPTER OUTLINE

Setting the Stage—An Introductory Case

Introduction to Corporations

Taxation of C Corporations

Consolidated Returns

Corporate Distributions

Issues for Closely Held Corporations

Expanded Topics—Earnings and Profits

Revisiting the Introductory Case

Summary

Key Terms

Test Yourself

Problem Assignments

Answers to Test Yourself

Appendix 9A Exempt Organizations

Appendix 9B Multistate Issues

The choice of entity type in which to operate a business is one of the most important decisions owners of businesses can make. Owners generally can form a sole proprietorship, a partnership, or a corporation without tax consequences, but the formation of a business is only a small part of what must be considered in determining the type of entity.

It is extremely important to consider the day-to-day operations of the business and any applicable legal or tax restrictions on a particular business form. What are permissible tax years and methods of accounting? How will its income be taxed? How will the business be able to raise additional capital if it is to grow? Who bears the liability if the business fails? How will owners be compensated? Can an owner easily divest himself or herself of the ownership interest? How easily are new owners able to join the business? What are the tax consequences to the business and its owners if the business ceases operations?

This chapter begins to answer these questions for a regular C corporation. The following chapter ...