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Assignment Help, Cloud Based ERP System, Microsoft NAV Certification » Sikkim Manipal University Assignments & Solutions » MBA Sem 1,2,3 and 4 » MBA 3rd Sem Assignment » Finance Management » MF0003-Taxation Management-Fall-10 » SET2/3) How is tax liability of a company is computed ?

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3) How is tax liability of a company is computed ?

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  • Gather together all corporate financial statements, including corporate balance sheets and income and expense statements.


  • Calculate gross profit for tax purposes. This calculation begins with gross income, which the IRS defines as all income from any source. From this figure, you will need to subtract returns and allowances and cost of goods sold.


  • Calculate total income by adding gross profit, dividends, gross interest, gross royalties, capital gains, net gains and any other income to gross profit.


  • Calculate allowable deductions. These deductions include payroll, benefits and other compensation expenses (including pension funds), repairs, bad debt write-offs, interest paid, taxes, advertising, rent and certain other deductions. Subtract this amount from total income to arrive at preliminary taxable income.


  • Subtract special deductions and any deductions allowable for net operating losses to arrive at taxable income. Note that the IRS specifies a minimum taxable income that must be separately calculated. If your taxable income falls below this level, you will need to substitute the minimum taxable income. This is not the same as the alternative minimum tax (AMT).


  • Consult the Form 1120 Instructions for Schedule J, Line 2, for the Tax Rate Schedule, and use it together with taxable income to calculate total tax liability.


  • Subtract taxes already paid in 2008, taxes paid in foreign jurisdictions and any carryovers from previous tax years. Add any penalties due. This is your tentative tax liability.


  • Determine if the corporation is exempt from the alternative minimum tax (AMT) under IRS rules. If the tax year in question is the corporation's first year in existence, if gross receipts failed to total $7.5 million over the last three years or if the corporation has been continuously exempt from AMT since 1997, it should be exempt from AMT. Otherwise, the AMT must be calculated.


  • Calculate the AMT using IRS Form 4626, and compare it with your tentative tax liability from Step 8 above. The larger of the two figures is the amount you owe the IRS.

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Assignment Help, Cloud Based ERP System, Microsoft NAV Certification » Sikkim Manipal University Assignments & Solutions » MBA Sem 1,2,3 and 4 » MBA 3rd Sem Assignment » Finance Management » MF0003-Taxation Management-Fall-10 » SET2/3) How is tax liability of a company is computed ?

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