 Hello and welcome to the session in which you would look at C corporate taxation or introduction to C corporate taxation. Now it's very important to put things into perspective. How? Well, to understand C corporate taxation, it's very important to compare this to individual. Most likely, whether you are an accounting student, a CPA candidate or an enrolled agent, you already learned about individual taxation. So it's very important to compare the two, look at the similarities, look at the differences to understand how C corporation differ or similar to individual taxation. Starting with similarities. Gross income of a corporation and individuals are very similar. What does that mean? Well, when it comes to gross income, the job of the IRS, the job of Uncle Sam, the job of the US government is to collect as much money as possible. Therefore, practically everything is included, not practically, everything is included unless it is specifically executed. So if it's not executed, it's included. So it's a broad definition. It includes compensation, income from trade, gains from property, interest, dividend, everything. Everything is included. Now for individual, we saw a few execution. Also for corporations, we're gonna see few execution. But unless it's clearly executed, you have to include that income in the corporation. Non-taxable exchange treatments are the same, which is good. When it comes to deduction, business deduction and end, which is a corporate deduction and individuals are very similar. You can deduct interest, taxes, losses, including casualty and theft losses, no, no limitation, no AGI here, bad debt, cost recovery, which is depreciation. You can deduct charitable contribution. We're gonna learn about those net operating loss, research and experimental expenditure and other less common deduction. Now corporation, no distinction between business debt and personal debt and non-business debt because for individual, we do differentiate between those two. But like an individual, you are allowed to take an interest deduction if the tax, you are not allowed to take an interest deduction if the tax exempt securities are purchased. So if you went to the bank or to a lender and borrowed money, so you have interest. Well, generally speaking, this interest is deductible as an interest expense, unless you took this money, you took this money that you borrowed and you purchased, what did you purchase? Government bond, tax exempt securities, municipal bond. Well, if that's the case, guess what? The income, you're gonna see the income is executed. This is one of the income that's executed. Then you cannot take the deduction on your taxes. So if the income is executed and your related expense to that income should be executed as well to be fair. Also you cannot take expenses for entertainment that's contrary to public policy. You cannot take expenses for related parties transaction. You cannot take expenses for lobbying expenses. You cannot take those expenses. Now bear in mind, some of the credit that are personal in nature, they cannot be taken as well. However, foreign tax credit can be claimed by an individual, can also be claimed by a corporation. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's gonna help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. So this are some of the similarities. Let's take a look at some of the dissimilarities or the differences. The first thing is you have a different tax rate. For an individual, it's progressive. For corporate, it's a flat. Now, used to be progressive. They both used to have a progressive tax rate, a different progressive tax rate, nevertheless progressive. The Tax Cuts and Jobs Act of 2017, it removed this. Now the corporate had a flat tax rate of 21% as I am doing this recording. In the future, could that change? Everything's possible. We all, we have election every four years. So everything's possible. In general, all expenses of corporation are business expenses, generally speaking. Now, corporation don't have what we call adjusted gross income, AGI. You don't, we don't have standard deduction or itemized deduction. Because the government don't allow the corporation to deduct, you know, a standard deduction or they have something called itemized deduction. Now it has to be a business deduction. The deduction for qualified business income don't apply to corporation. Da, it exists because corporation exists. So it exists to serve other form of corporation. Therefore, the qualified business income deduction does not apply. You're gonna see shortly that it is on the form and we're gonna see only four specific industries, two industries, they allow it. But generally speaking, it does not apply because the reason it exists is to compensate other form of businesses. In addition, the Tax Cuts and Jobs Act adds a limitation on the access business losses which does not apply to corporation and applies to individual. Now also what's not available to C corporation are credit of personal nature like child independent tax credit, for disabled taxpayer, credit for elderly, earned income credit. Any credit that are personal in nature because personal is different individual is different than a C corporation. Let's take a look at an individual and corporation from a grand perspective. How do they compute their taxes? Starting with income. Income is broadly defined for individual as well as for corporation. It means everything is included unless it's executed. Then we'll deduct any execution that's execution by law. Like what? Just to give you an example, the municipal interest is executed. For example, there are many others. We'll talk about those in a separate session. Actually, we already covered them to get to gross income. From gross income we'll have deductions for AGI. We had a whole lesson about this, several lessons about this, deductions what's deducted for AGI, equal to AGI, adjusted gross income. Then from adjusted gross income, we'll deduct either the greater of itemized or standard deduction. Again, we talked about those to get to, then we deduct QBI, which we also covered QBI, qualified business income deduction. Then we get to taxable income. From taxable income, if we have any credit, we'll deduct the credit and we had many credits. We learn about the credits and we arrive to either tax due or tax refund. Either we have to pay more money or we have a refund due from the government. So this is basically a skeleton or a formula for the 1040, summarizing the 1040. Let's look at corporations. Very similar to start with income broadly defined. Unless we have execution, we execute them. Income minus any exclusion will give us gross income. From gross income, we are going to deduct business expenses. We don't deduct at this point net operating loss, NOL or DRD dividend to receive deduction. What is dividend to receive deduction? Well, we're going to see later on, it's a phantom deduction given by the government to reduce your income. Then we get to taxable income before net operating loss and before dividend to receive deduction. Then we deduct NOL, then we'll deduct DRD. Hold on a second. Why don't we just deduct those with the deductions? Well, because certain computation we're going to have, we're going to need this line for certain limitation. We're going to see later on when we looked at charitable contribution, when we look at dividend to receive deduction, you have to compute your taxable income, not related to NOL and DRD because as I told you, DRD is not a business deduction. DRD is a phantom, is a ghost deduction given to you by the government. NOL, net operating losses are losses from prior year. You should exclude them from this year. You can deduct them, but don't deduct them to get to taxable income for the purpose of certain computation. Once we deduct NOL and DRD, we'll get the taxable income. Again, businesses will have credits. If they have any credits, they will deduct those credits. Then they will either have a tax due or a refund. So this is basically 11. This form is a skeleton of 1120 C to be more specific. Let's take a look at a grant 1120 C. You may not be able to see it clearly. I admit the years because I don't want people to think, you know, because it's a different year. It's 1120 would always look the same, whether it's 25, 22, or 23, or 2017. So I'm gonna break it into two component. We'll look at the income part of it first. This is the income part. Notice income will have gross receipt, less returns and allowances, minus cost of goods sold equal to gross profit. Then we have any dividend is included, interest, gross rent and royalties, capital gains, net gains, other income. If we have other income, just attach them and we'll get to total income. So the first part of the corporation income, notice it basically if there is nothing, if you received income of any other sort, you just attached it. So basically all income is included, interest, dividend, net gains, capital gains, so on and so forth. Then from the income we'll get to line 11, we'll get the what we called deductions or from an accounting perspective, what we call expenses. Again, list of the expenses, compensation of officers, salaries and wages, bed debt, rent, taxes and license, interest, charitable contribution, cost recovery, which is depreciation, advertisement, pension, employee benefit program, section 199, deduction, qualified, only this deduction available, either for agricultural or horticultural industries or cooperative to be more specific, cooperative. Okay, so just keep that in mind. And any other deduction, any other business deduction, you add them up and you come up with your other deduction, then you have net operating loss and any other special deductions. Then you get to your net income basically. What did you, income minus expenses, you get to net income, to net profit. Now what are some of the key differences, between individual and corporation? Okay, one thing we have to look for as accounting period and accounting method, capital gains and capital losses, recapture of depreciation, business interest expense limitation, passive activity losses, charitable contribution, executive compensation, net operating loss, special deduction only available for corporation, for example, the dividend received deduction, I just told you about it, but we're gonna have those deductions. So what's gonna happen is we're gonna look, we're gonna compare this, going step by step, looking at the differences between corporation and individuals. In this session, I'm gonna focus only on the accounting period and accounting method. Rest assured, we're gonna cover all of those, you know, when I have a list, I'll go over the list. Accounting periods, accounting periods, C corporation can use either the calendar year, which is January 1st till December 31st or a physical year, that's fine, they can use either or. Now bear in mind, S corporation, which is a different type of corporation, it's not C and personal service companies are limited to calendar year and why, because they're passed through, they have to be almost the same as individual. And we'll see that later when we talked about C corporation, we already talked about S corporation. That's why they are not allowed a physical year. Now what's a personal service company? Personal service company is a type of a corporation that's established to provide personal services in the area of health, law, engineers, architect, accounting, actuarial services, consulting. What are we talking about here? Doctors, lawyers, accountant, you know, it's a personal service. Has the majority of the service performed by the shareholder employees? If you're a doctor, you're the owner of the company and you're the manager and you're the person that runs the place, right? It's a personal service. If you're an accountant, so on and so forth. Those are called personal service companies, attorneys. And features that over 10% of the stock is held by the shareholder employee. Most of the time, all the stocks is held by the shareholder employee. So this is what you need to know about the accounting period. Simply put, C corporation, all we have to know, they can use calendar, they're more flexible, they can use physical. What's a physical year? Is any year, any 52 to 53 week year other than January 1st till December 31st. Let's talk about accounting method. When we say accounting method, what are we looking at? We're looking at, are you using cash method or accrual method? Generally speaking, corporation, they cannot use the cash method. What's the cash method? Account for your revenues and your expenses based on cash basis. It means only revenue if you receive that in cash. It's only an expense when you pay it. Well, corporations, they have to use accrual unless they have this exception. The average gross receipt over the past three years is less than 29 million, less than a certain amount. Now this number is for 2023, this number will change. So simply put, maybe in 2025, 2026, maybe they will always raise this number. So as long as you make in gross receipt less than this amount, less than a certain amount, which is unusually in tens of millions, you could use the cash basis. Otherwise, once you go above that amount, you have to use accrual, which is it means large corporations, especially publicly traded in large corporations that have 30 million or more, 29 or more, let's say 30 million, round it to 30 million, it's gonna be 30 million soon. They have to use the accrual accounting if their gross receipt averaging 30 million in the past three years. Also, when you have inventory, when you have inventory generally speaking, you have to use the accrual method because of the matching principle, what we know in accounting. For example, when you buy inventory, inventory is an asset and it's only expense to the income statement, when what? It's expense to the income statement when you sell it in terms of cost of goods sold. This is part of the matching principle. Now, for tax purposes, if your business has less than 29 million in gross sales, you are allowed to use the cash method. Now you have to be careful. If you buy the inventory in a particular year and you expense it, in future years, you're not gonna have expenses. So you have to be careful about tax planning in the situation. What do they want you to do that? They want you to get the deduction, save money, buy more inventory to stimulate the economy. That's the whole purpose of allowing you to take this deduction. Also, when it comes to accrual taxpayer, the Tax, Cats and Jobs Act of 2017 modified the rules regarding the timing of gross income by actual taxpayer, by accrual taxpayer basis. Here's the general rule now. Generally, you must recognize gross income no later than the tax year in which the income is included in the financial statement. So if you're in accrual, how much can you defer that income? Well, the maximum you can defer it, no more than one year after you record it for GAP. So GAP, once you record the income for GAP purposes, let's assume we're looking at the year 2025. Well, if you record the income in 2025 for GAP, the maximum you could defer for tax is one year. The maximum you could defer it because they don't want you to defer. They don't want you to keep pushing your income forward because as you defer your income, as you push your income forward, you are not paying taxes and that's not what the government want. The government want you to recognize your revenue so you can pay your taxes. So you cannot manipulate accrual to defer taxes. What they're saying, if you recognize it for GAP, will give you one year, but you have to hit your taxes with that income. What should you do now? We're gonna look at additional features of the differences between corporation and individual, but you should go to Farhat Lectures, look at additional MCQs through false additional notes that's gonna help you understand this concept better. Again, we're gonna keep working with this, capital gains, capital losses, recapture of depreciation and other key features that differentiate a C corporation from individual taxation. Good luck, study hard and of course, stay safe.