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Free file fillable forms Publication 542 - Main Content Table of Contents Businesses Taxed as CorporationsPersonal services. Free file fillable forms Employee-owners. Free file fillable forms Other rules. Free file fillable forms Other rules. Free file fillable forms Property Exchanged for StockNonqualified preferred stock. Free file fillable forms Liabilities. Free file fillable forms Election to reduce basis. Free file fillable forms Capital Contributions Filing and Paying Income TaxesIncome Tax Return Penalties Estimated Tax U. Free file fillable forms S. Free file fillable forms Real Property Interest Accounting MethodsSection 481(a) adjustment. Free file fillable forms Accounting Periods Recordkeeping Income, Deductions, and Special ProvisionsCosts of Going Into Business Related Persons Income From Qualifying Shipping Activities Election to Expense Qualified Refinery Property Deduction to Comply With EPA Sulfur Regulations Energy-Efficient Commercial Building Property Deduction Corporate Preference Items Dividends-Received Deduction Extraordinary Dividends Below-Market Loans Charitable Contributions Capital Losses Net Operating Losses At-Risk Limits Passive Activity Limits Figuring TaxTax Rate Schedule Alternative Minimum Tax (AMT) Credits Recapture Taxes Accumulated Earnings Tax Distributions to ShareholdersMoney or Property Distributions Distributions of Stock or Stock Rights Constructive Distributions Reporting Dividends and Other Distributions How To Get Tax Help Businesses Taxed as Corporations The rules you must use to determine whether a business is taxed as a corporation changed for businesses formed after 1996. Free file fillable forms Business formed before 1997. Free file fillable forms   A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as a corporation. Free file fillable forms Business formed after 1996. Free file fillable forms   The following businesses formed after 1996 are taxed as corporations. Free file fillable forms A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic. Free file fillable forms A business formed under a state law that refers to it as a joint-stock company or joint-stock association. Free file fillable forms An insurance company. Free file fillable forms Certain banks. Free file fillable forms A business wholly owned by a state or local government. Free file fillable forms A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Free file fillable forms Certain foreign businesses. Free file fillable forms Any other business that elects to be taxed as a corporation. Free file fillable forms For example, a limited liability company (LLC) can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. Free file fillable forms For more information about LLCs, see Publication 3402, Taxation of Limited Liability Companies. Free file fillable forms S corporations. Free file fillable forms   Some corporations may meet the qualifications for electing to be S corporations. Free file fillable forms For information on S corporations, see the instructions for Form 1120S, U. Free file fillable forms S. Free file fillable forms Income Tax Return for an S Corporation. Free file fillable forms Personal service corporations. Free file fillable forms   A corporation is a personal service corporation if it meets all of the following requirements. Free file fillable forms Its principal activity during the “testing period” is performing personal services (defined later). Free file fillable forms Generally, the testing period for any tax year is the prior tax year. Free file fillable forms If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: The last day of its tax year, or The last day of the calendar year in which its tax year begins. Free file fillable forms Its employee-owners substantially perform the services in (1), above. Free file fillable forms This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners. Free file fillable forms Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period. Free file fillable forms Personal services. Free file fillable forms   Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. Free file fillable forms Employee-owners. Free file fillable forms   A person is an employee-owner of a personal service corporation if both of the following apply. Free file fillable forms He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he or she is an independent contractor for other purposes) on any day of the testing period. Free file fillable forms He or she owns any stock in the corporation at any time during the testing period. Free file fillable forms Other rules. Free file fillable forms   For other rules that apply to personal service corporations see Accounting Periods, later. Free file fillable forms Closely held corporations. Free file fillable forms   A corporation is closely held if all of the following apply. Free file fillable forms It is not a personal service corporation. Free file fillable forms At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is, directly or indirectly, owned by or for five or fewer individuals. Free file fillable forms “Individual” includes certain trusts and private foundations. Free file fillable forms Other rules. Free file fillable forms   For the at-risk rules that apply to closely held corporations, seeAt-Risk Limits, later. Free file fillable forms Property Exchanged for Stock If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. Free file fillable forms This rule applies both to individuals and to groups who transfer property to a corporation. Free file fillable forms It also applies whether the corporation is being formed or is already operating. Free file fillable forms It does not apply in the following situations. Free file fillable forms The corporation is an investment company. Free file fillable forms You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors. Free file fillable forms The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt. Free file fillable forms Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange. Free file fillable forms For more information, see section 1. Free file fillable forms 351-3 of the Regulations. Free file fillable forms Control of a corporation. Free file fillable forms   To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock. Free file fillable forms Example 1. Free file fillable forms You and Bill Jones buy property for $100,000. Free file fillable forms You both organize a corporation when the property has a fair market value of $300,000. Free file fillable forms You transfer the property to the corporation for all its authorized capital stock, which has a par value of $300,000. Free file fillable forms No gain is recognized by you, Bill, or the corporation. Free file fillable forms Example 2. Free file fillable forms You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value of $300,000. Free file fillable forms This represents only 75% of each class of stock of the corporation. Free file fillable forms The other 25% was already issued to someone else. Free file fillable forms You and Bill recognize a taxable gain of $200,000 on the transaction. Free file fillable forms Services rendered. Free file fillable forms   The term property does not include services rendered or to be rendered to the issuing corporation. Free file fillable forms The value of stock received for services is income to the recipient. Free file fillable forms Example. Free file fillable forms You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. Free file fillable forms Right after the exchange, you own 85% of the outstanding stock. Free file fillable forms No gain is recognized on the exchange of property. Free file fillable forms However, you recognize ordinary income of $3,000 as payment for services you rendered to the corporation. Free file fillable forms Property of relatively small value. Free file fillable forms   The term property does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors. Free file fillable forms   Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor. Free file fillable forms Stock received in disproportion to property transferred. Free file fillable forms   If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in proportion to his or her interest in the property transferred. Free file fillable forms If a disproportionate transfer takes place, it will be treated for tax purposes in accordance with its true nature. Free file fillable forms It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations. Free file fillable forms Money or other property received. Free file fillable forms   If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other than stock, you may have to recognize gain. Free file fillable forms You must recognize gain only up to the amount of money plus the fair market value of the other property you receive. Free file fillable forms The rules for figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed in Publication 544 under Like-Kind Exchanges. Free file fillable forms If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary income from depreciation. Free file fillable forms See chapter 3 of Publication 544. Free file fillable forms No loss is recognized. Free file fillable forms Nonqualified preferred stock. Free file fillable forms   Nonqualified preferred stock is treated as property other than stock. Free file fillable forms Generally, it is preferred stock with any of the following features. Free file fillable forms The holder has the right to require the issuer or a related person to redeem or buy the stock. Free file fillable forms The issuer or a related person is required to redeem or buy the stock. Free file fillable forms The issuer or a related person has the right to redeem or buy the stock and, on the issue date, it is more likely than not that the right will be exercised. Free file fillable forms The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices. Free file fillable forms For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code. Free file fillable forms Liabilities. Free file fillable forms   If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. Free file fillable forms There are two exceptions to this treatment. Free file fillable forms If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized up to the difference. Free file fillable forms However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized. Free file fillable forms If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange is to avoid federal income tax, the assumption is treated as if you received money in the amount of the liabilities. Free file fillable forms For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. Free file fillable forms Example. Free file fillable forms You transfer property to a corporation for stock. Free file fillable forms Immediately after the transfer, you control the corporation. Free file fillable forms You also receive $10,000 in the exchange. Free file fillable forms Your adjusted basis in the transferred property is $20,000. Free file fillable forms The stock you receive has a fair market value (FMV) of $16,000. Free file fillable forms The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. Free file fillable forms Gain is realized as follows. Free file fillable forms FMV of stock received $16,000 Cash received 10,000 Liability assumed by corporation 5,000 Total received $31,000 Minus: Adjusted basis of property transferred 20,000 Realized gain $11,000   The liability assumed is not treated as money or other property. Free file fillable forms The recognized gain is limited to $10,000, the cash received. Free file fillable forms Loss on exchange. Free file fillable forms   If you have a loss from an exchange and own, directly or indirectly, more than 50% of the corporation's stock, you cannot deduct the loss. Free file fillable forms For more information, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Free file fillable forms Basis of stock or other property received. Free file fillable forms   The basis of the stock you receive is generally the adjusted basis of the property you transfer. Free file fillable forms Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Free file fillable forms Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Free file fillable forms Also decrease this amount by the amount of any liability the corporation or another party to the exchange assumed from you, unless payment of the liability gives rise to a deduction when paid. Free file fillable forms    Further decreases may be required when the corporation or another party to the exchange assumes from you a liability that gives rise to a deduction when paid, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange. Free file fillable forms This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or the trade or business with which the liability is associated. Free file fillable forms The basis of any other property you receive is its fair market value on the date of the trade. Free file fillable forms Basis of property transferred. Free file fillable forms   A corporation that receives property from you in exchange for its stock generally has the same basis you had in the property, increased by any gain you recognized on the exchange. Free file fillable forms However, the increase for the gain recognized may be limited. Free file fillable forms For more information, see section 362 of the Internal Revenue Code. Free file fillable forms Election to reduce basis. Free file fillable forms   In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market value, the transferor and transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal to the fair market value of the property transferred. Free file fillable forms The transferor and transferee make this election by attaching a statement to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. Free file fillable forms However, if the transferor makes the election by including the certification provided in Notice 2005-70, 2005-41, I. Free file fillable forms R. Free file fillable forms B. Free file fillable forms 694, on or with its tax return filed by the due date (including extensions), then no election need be made by the transferee. Free file fillable forms    For more information on making this election, see section 362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70. Free file fillable forms Capital Contributions This section explains the tax treatment of contributions from shareholders and nonshareholders. Free file fillable forms Paid-in capital. Free file fillable forms   Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. Free file fillable forms These contributions are not taxable to the corporation. Free file fillable forms Basis. Free file fillable forms   The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. Free file fillable forms However, the increase for the gain recognized may be limited. Free file fillable forms For more information, see Basis of property transferred, above, and section 362 of the Internal Revenue Code. Free file fillable forms   The basis of property contributed to capital by a person other than a shareholder is zero. Free file fillable forms   If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce the basis of any property acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount of the contribution. Free file fillable forms If the amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other properties held by the corporation on the last day of the 12-month period in the following order. Free file fillable forms Depreciable property. Free file fillable forms Amortizable property. Free file fillable forms Property subject to cost depletion but not to percentage depletion. Free file fillable forms All other remaining properties. Free file fillable forms   Reduce the basis of property in each category to zero before going on to the next category. Free file fillable forms   There may be more than one piece of property in each category. Free file fillable forms Base the reduction of the basis of each property on the following ratio:   Basis of each piece of property   Bases of all properties (within that category) If the corporation wishes to make this adjustment in some other way, it must get IRS approval. Free file fillable forms The corporation files a request for approval with its income tax return for the tax year in which it receives the contribution. Free file fillable forms Filing and Paying Income Taxes The federal income tax is a pay-as-you-go tax. Free file fillable forms A corporation generally must make estimated tax payments as it earns or receives income during its tax year. Free file fillable forms After the end of the year, the corporation must file an income tax return. Free file fillable forms This section will help you determine when and how to pay and file corporate income taxes. Free file fillable forms For certain corporations affected by Presidentially declared disasters such as hurricanes, the due dates for filing returns, paying taxes, and performing other time-sensitive acts may be extended. Free file fillable forms The IRS may also forgive the interest and penalties on any underpaid tax for the length of any extension. Free file fillable forms For more information, visit www. Free file fillable forms irs. Free file fillable forms gov/newsroom/article/0,,id=108362. Free file fillable forms 00. Free file fillable forms Income Tax Return This section will help you determine when and how to report a corporation's income tax. Free file fillable forms Who must file. Free file fillable forms   Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a tax year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. Free file fillable forms Which form to file. Free file fillable forms   A corporation generally must file Form 1120, U. Free file fillable forms S. Free file fillable forms Corporation Income Tax Return, to report its income, gains, losses, deductions, credits, and to figure its income tax liability. Free file fillable forms Certain organizations and entities must file special returns. Free file fillable forms For more information, see Special Returns for Certain Organizations, in the Instructions for Form 1120. Free file fillable forms Electronic filing. Free file fillable forms   Corporations can generally electronically file (e-file) Form 1120 and certain related forms, schedules, and attachments. Free file fillable forms Certain corporations with total assets of $10 million or more, that file at least 250 returns a year must e-file Form 1120. Free file fillable forms However, in certain instances, these corporations can request a waiver. Free file fillable forms For more information regarding electronic filing, visit www. Free file fillable forms irs. Free file fillable forms gov/efile. Free file fillable forms When to file. Free file fillable forms   Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. Free file fillable forms A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. Free file fillable forms A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved. Free file fillable forms Example 1. Free file fillable forms A corporation's tax year ends December 31. Free file fillable forms It must file its income tax return by March 15th. Free file fillable forms Example 2. Free file fillable forms A corporation's tax year ends June 30. Free file fillable forms It must file its income tax return by September 15th. Free file fillable forms   If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. Free file fillable forms Extension of time to file. Free file fillable forms   File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, to request an extension of time to file a corporation income tax return. Free file fillable forms The IRS will grant the extension if you complete the form properly, file it, and pay any tax due by the original due date for the return. Free file fillable forms   Form 7004 does not extend the time for paying the tax due on the return. Free file fillable forms Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. Free file fillable forms The interest is figured from the original due date of the return to the date of payment. Free file fillable forms   For more information, see the instructions for Form 7004. Free file fillable forms How to pay your taxes. Free file fillable forms   A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year. Free file fillable forms Electronic Federal Tax Payment System (EFTPS). Free file fillable forms   Corporations generally must use EFTPS to make deposits of all tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes). Free file fillable forms For more information on EFTPS and enrollment, visit www. Free file fillable forms eftps. Free file fillable forms gov or call 1-800-555-4477. Free file fillable forms Also see Publication 966, The Secure Way to Pay Your Federal Taxes. Free file fillable forms Note. Free file fillable forms Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used to make federal tax deposits. Free file fillable forms Penalties Generally, if the corporation receives a notice about interest and penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. Free file fillable forms Do not attach an explanation when the corporation's return is filed. Free file fillable forms See the instructions for your income tax return. Free file fillable forms Late filing of return. Free file fillable forms    A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. Free file fillable forms If the corporation is charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. Free file fillable forms The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. Free file fillable forms The penalty will not be imposed if the corporation can show the failure to file on time was due to a reasonable cause. Free file fillable forms Late payment of tax. Free file fillable forms    A corporation that does not pay the tax when due may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. Free file fillable forms The penalty will not be imposed if the corporation can show that the failure to pay on time was due to a reasonable cause. Free file fillable forms Trust fund recovery penalty. Free file fillable forms   If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Free file fillable forms The penalty is the full amount of the unpaid trust fund tax. Free file fillable forms This penalty may apply to you if these unpaid taxes cannot be immediately collected from the business. Free file fillable forms   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying these taxes, and who acted willfully in not doing so. Free file fillable forms   A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee. Free file fillable forms A responsible person also may include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds. Free file fillable forms   Willfully means voluntarily, consciously, and intentionally. Free file fillable forms A responsible person acts willfully if the person knows the required actions are not taking place. Free file fillable forms   For more information on withholding and paying these taxes, see Publication 15 (Circular E), Employer's Tax Guide, and Publication 51, (Circular A), Agricultural Employer's Tax Guide. Free file fillable forms Other penalties. Free file fillable forms   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. Free file fillable forms See sections 6662, 6662A, and 6663 of the Internal Revenue Code. Free file fillable forms Estimated Tax Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. Free file fillable forms If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. Free file fillable forms This section will explain how to avoid this penalty. Free file fillable forms When to pay estimated tax. Free file fillable forms   Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. Free file fillable forms Example 1. Free file fillable forms Your corporation's tax year ends December 31. Free file fillable forms Installment payments are due on April 15, June 15, September 15, and December 15. Free file fillable forms Example 2. Free file fillable forms Your corporation's tax year ends June 30. Free file fillable forms Installment payments are due on October 15, December 15, March 15, and June 15. Free file fillable forms   If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day. Free file fillable forms How to figure each required installment. Free file fillable forms   Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure each required installment of estimated tax. Free file fillable forms You will generally use one of the following two methods to figure each required installment. Free file fillable forms You should use the method that yields the smallest installment payments. Free file fillable forms Note. Free file fillable forms In these discussions, “return” generally refers to the corporation's original return. Free file fillable forms However, an amended return is considered the original return if it is filed by the due date (including extensions) of the original return. Free file fillable forms Method 1. Free file fillable forms   Each required installment is 25% of the income tax the corporation will show on its return for the current year. Free file fillable forms Method 2. Free file fillable forms   Each required installment is 25% of the income tax shown on the corporation's return for the previous year. Free file fillable forms   To use Method 2: The corporation must have filed a return for the previous year, The return must have been for a full 12 months, and The return must have shown a positive tax liability (not zero). Free file fillable forms Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only. Free file fillable forms   See the Instructions for Form 1120-W, for the definition of a large corporation and other special rules for large corporations. Free file fillable forms Other methods. Free file fillable forms   If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may be able to lower the amount of one or more required installments by using one or both of the following methods. Free file fillable forms The annualized income installment method. Free file fillable forms The adjusted seasonal installment method. Free file fillable forms Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any required installments. Free file fillable forms Refiguring required installments. Free file fillable forms   If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will be more or less than originally estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. Free file fillable forms An immediate catchup payment should be made to reduce any penalty resulting from the underpayment of any earlier installments. Free file fillable forms Underpayment penalty. Free file fillable forms   If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. Free file fillable forms The penalty is figured separately for each installment due date. Free file fillable forms The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. Free file fillable forms This is true even if the corporation is due a refund when its return is filed. Free file fillable forms Form 2220. Free file fillable forms   Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and to figure the amount of the penalty. Free file fillable forms   If the corporation is charged a penalty, the amount of the penalty depends on the following three factors. Free file fillable forms The amount of the underpayment. Free file fillable forms The period during which the underpayment was due and unpaid. Free file fillable forms The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin. Free file fillable forms   A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any penalty and bill the corporation. Free file fillable forms However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax return if any of the following apply. Free file fillable forms The annualized income installment method was used to figure any required installment. Free file fillable forms The adjusted seasonal installment method was used to figure any required installment. Free file fillable forms The corporation is a large corporation figuring its first required installment based on the prior year's tax. Free file fillable forms How to pay estimated tax. Free file fillable forms   A corporation is generally required to use EFTPS to pay its taxes. Free file fillable forms See Electronic Federal Tax Payment System (EFTPS), earlier. Free file fillable forms Also see the Instructions for Form 1120-W. Free file fillable forms Quick refund of overpayments. Free file fillable forms   A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Free file fillable forms Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to apply for a quick refund of an overpayment of estimated tax. Free file fillable forms A corporation can apply for a quick refund if the overpayment is: At least 10% of its expected tax liability, and At least $500. Free file fillable forms Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax. Free file fillable forms File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income tax return. Free file fillable forms Do not file Form 4466 before the end of the corporation's tax year. Free file fillable forms An extension of time to file the corporation's income tax return will not extend the time for filing Form 4466. Free file fillable forms The IRS will act on the form within 45 days from the date you file it. Free file fillable forms U. Free file fillable forms S. Free file fillable forms Real Property Interest If a domestic corporation acquires a U. Free file fillable forms S. Free file fillable forms real property interest from a foreign person or firm, the corporation may have to withhold tax on the amount it pays for the property. Free file fillable forms The amount paid includes cash, the fair market value of other property, and any assumed liability. Free file fillable forms If a domestic corporation distributes a U. Free file fillable forms S. Free file fillable forms real property interest to a foreign person or firm, it may have to withhold tax on the fair market value of the property. Free file fillable forms A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. Free file fillable forms For more information, see section 1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288, U. Free file fillable forms S. Free file fillable forms Withholding Tax Return for Dispositions by Foreign Persons of U. Free file fillable forms S. Free file fillable forms Real Property Interests; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U. Free file fillable forms S. Free file fillable forms Real Property Interests. Free file fillable forms Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Free file fillable forms Taxable income should be determined using the method of accounting regularly used in keeping the corporation's books and records. Free file fillable forms In all cases, the method used must clearly show taxable income. Free file fillable forms Generally, permissible methods include: Cash, Accrual, or Any other method authorized by the Internal Revenue Code. Free file fillable forms Accrual method. Free file fillable forms   Generally, a corporation (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. Free file fillable forms A corporation engaged in farming operations also must use the accrual method. Free file fillable forms   If inventories are required, the accrual method generally must be used for sales and purchases of merchandise. Free file fillable forms However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method for eligible trades or businesses and may account for inventoriable items as materials and supplies that are not incidental. Free file fillable forms   Under the accrual method, an amount is includable in income when: All the events have occurred that fix the right to receive the income, which is the earliest of the date: The required performance takes place, Payment is due, or Payment is received; and The amount can be determined with reasonable accuracy. Free file fillable forms   Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when: All events that determine the liability have occurred, The amount of the liability can be figured with reasonable accuracy, and Economic performance takes place with respect to the expense. Free file fillable forms   There are exceptions to the economic performance rule for certain items, including recurring expenses. Free file fillable forms See section 461(h) of the Internal Revenue Code and the related regulations for the rules for determining when economic performance takes place. Free file fillable forms Nonaccrual experience method. Free file fillable forms   Accrual method corporations are not required to maintain accruals for certain amounts from the performance of services that, on the basis of their experience, will not be collected, if: The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; or The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million. Free file fillable forms   This provision does not apply if interest is required to be paid on the amount or if there is any penalty for failure to pay the amount timely. Free file fillable forms Percentage of completion method. Free file fillable forms   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460 of the Internal Revenue Code. Free file fillable forms Mark-to-market accounting method. Free file fillable forms   Generally, dealers in securities must use the mark-to-market accounting method described in section 475 of the Internal Revenue Code. Free file fillable forms Under this method any security held by a dealer as inventory must be included in inventory at its FMV. Free file fillable forms Any security not held as inventory at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Free file fillable forms Any gain or loss must be taken into account in determining gross income. Free file fillable forms The gain or loss taken into account is treated as ordinary gain or loss. Free file fillable forms   Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. Free file fillable forms Change in accounting method. Free file fillable forms   A corporation can change its method of accounting used to report taxable income (for income as a whole or for the treatment of any material item). Free file fillable forms The corporation must file Form 3115, Application for Change in Accounting Method. Free file fillable forms For more information, see Form 3115 and Publication 538. Free file fillable forms Section 481(a) adjustment. Free file fillable forms   The corporation may have to make an adjustment under section 481(a) of the Internal Revenue Code to prevent amounts of income or expense from being duplicated or omitted. Free file fillable forms The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. Free file fillable forms However, a corporation can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. Free file fillable forms The corporation must complete the appropriate lines of Form 3115 to make the election. Free file fillable forms See the Instructions for Form 3115. Free file fillable forms Accounting Periods A corporation must figure its taxable income on the basis of a tax year. Free file fillable forms A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Free file fillable forms Generally, corporations can use either a calendar year or a fiscal year as its tax year. Free file fillable forms Unless special rules apply, a corporation generally adopts a tax year by filing its first federal income tax return using that tax year. Free file fillable forms For more information, see Publication 538. Free file fillable forms Personal service corporation. Free file fillable forms   A personal service corporation must use a calendar year as its tax year unless: It elects to use a 52–53 week tax year that ends with reference to the calendar year; It can establish a business purpose for a different tax year and obtains approval of the IRS. Free file fillable forms See Form 1128, Application To Adopt, Change, or Retain a Tax Year, and Publication 538; or It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. Free file fillable forms Use Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, to make the election. Free file fillable forms   If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners may be limited. Free file fillable forms See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction. Free file fillable forms Change of tax year. Free file fillable forms   Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. Free file fillable forms However, under certain conditions, a corporation can change its tax year without getting the consent. Free file fillable forms For more information, see Form 1128 and Publication 538. Free file fillable forms Recordkeeping A corporation should keep its records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Free file fillable forms Usually records that support items of income, deductions, or credits on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Free file fillable forms Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property. Free file fillable forms The corporation should keep copies of all filed returns. Free file fillable forms They help in preparing future and amended returns and in the calculation of earnings and profits. Free file fillable forms Income, Deductions, and Special Provisions Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. Free file fillable forms However, the following special provisions apply only to corporations. Free file fillable forms Costs of Going Into Business When you go into business, treat all costs you incur to get your business started as capital expenses. Free file fillable forms However, a corporation can elect to deduct a limited amount of start-up or organizational costs. Free file fillable forms Any costs not deducted can be amortized. Free file fillable forms Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Free file fillable forms Organizational costs are the direct costs of creating the corporation. Free file fillable forms For more information on deducting or amortizing start-up and organizational costs, see the instructions for your income tax return. Free file fillable forms Also see, Publication 535, chapter 7, Costs You Can Deduct or Capitalize, and chapter 8, Amortization. Free file fillable forms Related Persons A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income. Free file fillable forms Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Free file fillable forms If a deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the expense or interest is includible in the gross income of that person. Free file fillable forms These rules also deny the deduction of losses on the sale or exchange of property between related persons. Free file fillable forms Related persons. Free file fillable forms   For purposes of this rule, the following persons are related to a corporation. Free file fillable forms Another corporation, that is a member of the same controlled group (as defined in section 267(f) of the Internal Revenue Code). Free file fillable forms An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Free file fillable forms A trust fiduciary, when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Free file fillable forms An S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Free file fillable forms A partnership, if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Free file fillable forms Any employee-owner, if the corporation is a personal service corporation (see Personal service corporation, earlier), regardless of the amount of stock owned by the employee-owner. Free file fillable forms Ownership of stock. Free file fillable forms   To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following apply. Free file fillable forms Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries. Free file fillable forms An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. Free file fillable forms Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants. Free file fillable forms Any individual owning (other than by applying (2), above) stock in a corporation, is treated as also owning the stock owned directly or indirectly by that individual's partner. Free file fillable forms To apply (1), (2), or (3), above, stock constructively owned by a person under (1) is treated as actually owned by that person. Free file fillable forms But stock constructively owned by an individual under (2) or (3) is not treated as actually owned by the individual for applying either (2) or (3) to make another person the constructive owner of that stock. Free file fillable forms Reallocation of income and deductions. Free file fillable forms   Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions, credits, or allowances between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests. Free file fillable forms Complete liquidations. Free file fillable forms   The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating distributions. Free file fillable forms More information. Free file fillable forms   For more information about the related person rules, see Publication 544. Free file fillable forms Income From Qualifying Shipping Activities A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. Free file fillable forms If a corporation makes this election it may exclude income from qualifying shipping activities from gross income. Free file fillable forms Also if the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. Free file fillable forms A corporation making this election may also elect to defer gain on the disposition of a qualifying vessel. Free file fillable forms A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative tax. Free file fillable forms For more information regarding the election, see Form 8902. Free file fillable forms Election to Expense Qualified Refinery Property A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50% of the cost of qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed in service before January 1, 2014. Free file fillable forms The deduction is allowed for the year in which the property is placed in service. Free file fillable forms A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate this deduction to its owners based on their ownership interest. Free file fillable forms For more information, see section 179C of the Internal Revenue Code and the related Regulations. Free file fillable forms Deduction to Comply With EPA Sulfur Regulations A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct up to 75% of qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency (EPA). Free file fillable forms A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to allocate the deduction to its owners based on their ownership interest. Free file fillable forms For more information, see sections 45H and 179B of the Internal Revenue Code and the related Regulations. Free file fillable forms Energy-Efficient Commercial Building Property Deduction A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service before January 1, 2014. Free file fillable forms In order to qualify for the deduction: The costs must be associated with depreciable or amortizable property in a Standard 90. Free file fillable forms 1-2001 domestic building; The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system, or the building envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50% or more. Free file fillable forms The deduction is limited to $1. Free file fillable forms 80 per square foot of the building less the total amount of deductions taken for this property in prior tax years. Free file fillable forms Other rules and limitations apply. Free file fillable forms The corporation must reduce the basis of any property by any deduction taken. Free file fillable forms The deduction is subject to recapture if the corporation fails to fully implement an energy savings plan. Free file fillable forms For more information, see section 179D of the Internal Revenue Code. Free file fillable forms Also see Notice 2006-52, 2006-26 I. Free file fillable forms R. Free file fillable forms B. Free file fillable forms 1175, clarified and amplified by Notice 2008-40, 2008-14 I. Free file fillable forms R. Free file fillable forms B. Free file fillable forms 725, and any successor. Free file fillable forms Corporate Preference Items A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. Free file fillable forms These items are known as corporate preference items and they include the following. Free file fillable forms Gain on the disposition of section 1250 property. Free file fillable forms For more information, see section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Free file fillable forms Percentage depletion for iron ore and coal (including lignite). Free file fillable forms For more information, see Mines and Geothermal Deposits under Mineral Property in chapter 9 of Publication 535. Free file fillable forms Amortization of pollution control facilities. Free file fillable forms For more information, see Pollution Control Facilities in chapter 8 of Publication 535 and section 291(a)(5) of the Internal Revenue Code. Free file fillable forms Mineral exploration and development costs. Free file fillable forms For more information, see Exploration Costs and Development Costs in chapter 7 of Publication 535. Free file fillable forms For more information on corporate preference items, see section 291 of the Internal Revenue Code. Free file fillable forms Dividends-Received Deduction A corporation can deduct a percentage of certain dividends received during its tax year. Free file fillable forms This section discusses the general rules that apply. Free file fillable forms The deduction is figured on Form 1120, Schedule C, or the applicable schedule of your income tax return. Free file fillable forms For more information, see the Instructions for Form 1120, or the instructions for your applicable income tax return. Free file fillable forms Dividends from domestic corporations. Free file fillable forms   A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. Free file fillable forms If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 80% of the dividends received. Free file fillable forms Ownership. Free file fillable forms   Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other than certain preferred stock) the receiving corporation owns. Free file fillable forms Small business investment companies. Free file fillable forms   Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations. Free file fillable forms Dividends from regulated investment companies. Free file fillable forms   Regulated investment company dividends received are subject to certain limits. Free file fillable forms Capital gain dividends received from a regulated investment company do not qualify for the deduction. Free file fillable forms For more information, see section 854 of the Internal Revenue Code. Free file fillable forms No deduction allowed for certain dividends. Free file fillable forms   Corporations cannot take a deduction for dividends received from the following entities. Free file fillable forms A real estate investment trust (REIT). Free file fillable forms A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution or the preceding tax year. Free file fillable forms A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend with respect to the dividend. Free file fillable forms Ex-dividend means the holder has no rights to the dividend. Free file fillable forms A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock became ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 366 days. Free file fillable forms Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Free file fillable forms Dividends on deposits. Free file fillable forms   Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative banks, and similar organizations are interest, not dividends. Free file fillable forms They do not qualify for this deduction. Free file fillable forms Limit on deduction for dividends. Free file fillable forms   The total deduction for dividends received or accrued is generally limited (in the following order) to: 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20%-owned corporations, then 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations). Free file fillable forms Figuring the limit. Free file fillable forms   In figuring the limit, determine taxable income without the following items. Free file fillable forms The net operating loss deduction. Free file fillable forms The domestic production activities deduction. Free file fillable forms The deduction for dividends received. Free file fillable forms Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below). Free file fillable forms Any capital loss carryback to the tax year. Free file fillable forms Effect of net operating loss. Free file fillable forms   If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not apply. Free file fillable forms To determine whether a corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit. Free file fillable forms Example 1. Free file fillable forms A corporation loses $25,000 from operations. Free file fillable forms It receives $100,000 in dividends from a 20%-owned corporation. Free file fillable forms Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. Free file fillable forms If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Free file fillable forms Therefore, the 80% of taxable income limit does not apply. Free file fillable forms The corporation can deduct the full $80,000. Free file fillable forms Example 2. Free file fillable forms Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. Free file fillable forms Its taxable income is $85,000 before the deduction for dividends received. Free file fillable forms After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable income is $5,000. Free file fillable forms Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received deduction is limited to 80% of its taxable income, or $68,000 ($85,000 × 80%). Free file fillable forms Extraordinary Dividends If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it generally must reduce its basis in the stock by the nontaxed part of the dividend. Free file fillable forms The nontaxed part is any dividends-received deduction allowable for the dividends. Free file fillable forms Extraordinary dividend. Free file fillable forms   An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's adjusted basis in the stock. Free file fillable forms The percentages are: 5% for stock preferred as to dividends, or 10% for other stock. Free file fillable forms Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. Free file fillable forms Treat all dividends received that have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds 20% of the corporation's adjusted basis in the stock. Free file fillable forms Disqualified preferred stock. Free file fillable forms   Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time the corporation held the stock. Free file fillable forms   Disqualified preferred stock is any stock preferred as to dividends if any of the following apply. Free file fillable forms The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future. Free file fillable forms The issue price of the stock exceeds its liquidation rights or stated redemption price. Free file fillable forms The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce tax through a combination of dividends-received deductions and loss on the disposition of the stock. Free file fillable forms   These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect on that date, and thereafter, before the issuance of the stock. Free file fillable forms More information. Free file fillable forms   For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code. Free file fillable forms Below-Market Loans If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest. Free file fillable forms A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Free file fillable forms A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following: A loan in exchange for a note that requires payment of interest at the applicable federal rate, and An additional payment in an amount equal to the forgone interest. Free file fillable forms Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Free file fillable forms Foregone interest. Free file fillable forms   For any period, forgone interest is equal to: The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Free file fillable forms See Below-market loans, in chapter 4 of Publication 535 for more information. Free file fillable forms Charitable Contributions A corporation can claim a limited deduction for charitable contributions made in cash or other property. Free file fillable forms The contribution is deductible if made to, or for the use of, a qualified organization. Free file fillable forms For more information on qualified organizations, see Publication 526, Charitable Contributions. Free file fillable forms Also see, Exempt Organizations Select Check (EO Select Check) at www. Free file fillable forms irs. Free file fillable forms gov/charities, the on-line search tool for finding information on organizations eligible to receive tax-deductible contributions. Free file fillable forms Note. Free file fillable forms You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual. Free file fillable forms Cash method corporation. Free file fillable forms   A corporation using the cash method of accounting deducts contributions in the tax year paid. Free file fillable forms Accrual method corporation. Free file fillable forms   A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Free file fillable forms Make the choice by reporting the contribution on the corporation's return for the tax year. Free file fillable forms A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. Free file fillable forms The declaration must include the date the resolution was adopted. Free file fillable forms Limitations on deduction. Free file fillable forms   A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Free file fillable forms Figure taxable income for this purpose without the following. Free file fillable forms The deduction for charitable contributions. Free file fillable forms The dividends-received deduction. Free file fillable forms The deduction allowed under section 249 of the Internal Revenue Code. Free file fillable forms The domestic production activities deduction. Free file fillable forms Any net operating loss carryback to the tax year. Free file fillable forms Any capital loss carryback to the tax year. Free file fillable forms Farmers and ranchers. Free file fillable forms    Corporations that are farmers and ranchers should see section 170(b)(2) of the Internal Revenue Code for special rules that may affect the deduction limit. Free file fillable forms Carryover of excess contributions. Free file fillable forms   You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. Free file fillable forms You lose any excess not used within that period. Free file fillable forms For example, if a corporation has a carryover of excess contributions paid in 2010 and it does not use all the excess on its return for 2011, it can carry any excess over to 2012, 2013, 2014, and 2015, if applicable. Free file fillable forms Any excess not used in 2015 is lost. Free file fillable forms Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). Free file fillable forms You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover. Free file fillable forms Cash contributions. Free file fillable forms   A corporation must maintain a record of any contribution of cash, check, or other monetary contribution, regardless of the amount. Free file fillable forms The record can be a bank record, receipt, letter, or other written communication from the donee indicating the name of the organization, the date of the contribution, and the amount of the contribution. Free file fillable forms Keep the record of the contribution with the other corporate records. Free file fillable forms Do not attach the records to the corporation's return. Free file fillable forms For more information on cash contributions, see Publication 526. Free file fillable forms Gifts of $250 or more. Free file fillable forms   Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. Free file fillable forms The acknowledgement should show the amount of cash contributed, a description of the property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. Free file fillable forms The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. Free file fillable forms Keep the acknowledgement with other corporate records. Free file fillable forms Do not attach the acknowledgement to the return. Free file fillable forms Contributions of property other than cash. Free file fillable forms   If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. Free file fillable forms In addition the corporation should keep a record of: The approximate date and manner of acquisition of the donated property and The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution. Free file fillable forms   Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. Free file fillable forms For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return. Free file fillable forms   A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. Free file fillable forms A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. Free file fillable forms The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work. Free file fillable forms   See Form 8283 for more information. Free file fillable forms Qualified conservation contributions. Free file fillable forms   If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. Free file fillable forms For more information, see section 170(h) of the Internal Revenue Code. Free file fillable forms Contributions of used vehicles. Free file fillable forms   A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. Free file fillable forms The deduction is limited, and other special rules apply. Free file fillable forms For more information, see Publication 526. Free file fillable forms Reduction for contributions of certain property. Free file fillable forms   For a charitable contribution of property, the corporation must reduce the contribution by the sum of: The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV. Free file fillable forms   The reduction for the long-term capital gain applies to: Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption; Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property. Free file fillable forms Larger deduction. Free file fillable forms   A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. Free file fillable forms This deduction may be allowed for certain contributions of: Certain inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants. Free file fillable forms Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. 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Tax Relief for Victims of Hurricane Irene in North Carolina

E-file to Remain Available for Irene Victims through Oct. 31

Updated 10/11/11 to include Bladen, Columbus and Sampson counties.

Updated 9/12/11 to include Pender and Wayne counties.

Updated 9/7/11 to include Bertie, Brunswick, Camden, Chowan, Duplin, Edgecombe, Gates, Greene, Hertford, Johnston, Jones, Martin, Nash, New Hanover, Northampton, Pasquotank, Perquimans, Vance, Warren and Wilson counties.

Updated 9/2/11 to include Halifax and Lenoir counties. Also added Currituck, Onslow, Pitt and Washington counties.

NC-2011-58, Sept. 1, 2011

GREENSBORO — Victims of Hurricane Irene that began on Aug. 25, 2011 in parts of North Carolina may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Beaufort, Bertie, Bladen, Brunswick, Camden, Carteret, Chowan, Columbus, Craven, Currituck, Dare, Duplin, Edgecombe, Gates, Greene, Halifax, Hertford, Hyde, Johnston, Jones, Lenoir, Martin, Nash, New Hanover, Northampton, Onslow, Pamlico, Pasquotank, Pender, Perquimans, Pitt, Sampson, Tyrrell, Vance, Warren, Washington, Wayne and Wilson. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Aug. 25, and on or before Oct. 31, have been postponed to Oct. 31, 2011. This includes corporations and other businesses that previously obtained an extension until Sept. 15 to file their 2010 returns, and individuals and businesses that received a similar extension until Oct. 17. It also includes the estimated tax payment for the third quarter, normally due Sept. 15.  

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Aug. 25, and on or before Sept. 9, as long as the deposits are made by Sept. 9, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Oct. 31 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Aug. 25 and on or before Oct. 31.

The IRS also gives affected taxpayers until Oct. 31 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Aug. 25 and on or before Oct. 31.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after Aug. 25 and on or before Sept. 9 provided the taxpayer makes these deposits by Sept. 9.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “North Carolina/Hurricane Irene” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

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