MODULE 36 TAXES: CORPORATE 571

(b) No deduction is allowed for a NOL carryback or carryover from other years.
(c) A NOL is generally carried back two years and forward twenty years to offset taxable in-
come in those years. However, a three-year carryback is permitted for the portion
of a
NOL that is attributable to a presidentially declared disaster and is incurred by a
small
business corporation (i.e., a corporation whose average annual gross receipts are
$5 mil-
lion or less for the three-tax-year period preceding the loss year). A corporation
may elect
to forego carryback and only carry forward twenty years.
k. Depreciation and depletion computations are same as for individuals.
1. Research and development expenditures of a corporation (or individual) may be treated under
one
of three alternatives
(1) Currently expensed in year paid or incurred
(2) Amortized over a period of sixty months or more if life not determinable
(3) Capitalized and depreciated over determinable life
2. Contributions to a pension or profit
sharing plan
(1) Defined benefit plans
(a) Maximum deductible contribution is actuarially determined.
(b) There also are minimum funding standards.
(2) Defined contribution plans
(a) Maximum deduction for contributions to qualified profit-sharing or stock bonus plans is
generally limited to 25% of the compensation paid or accrued during the year to
covered
employees.
(b) If more than 25% is paid, the excess can be carried forward as part of the contributions of
succeeding years to the extent needed to bring the deduction up to 25%.
3. In working a corporate problem, certain calculations must be made in a specific order [e.g., charitable
contributions (CC) must be computed before the dividends received deduction (DRD)]. The following
memory device is quite helpful:
Gross income
- Deductions (except CC and DRD)
Taxable income before CC and DRD
- CC (limited to 10% of T! before CC, DRD,
capital loss carryback, and
NOL carryback)
Taxable income before DRD
- DRD (may be limited* to 80% (or 70%) ofT! before
DRD, capital loss carryback, and NOL carryover or carryback)
Taxable income .
x Applicable rates
Tax liability before tax credits
- Tax credits
Tax liability
* Limitation not applicable iffull80% (or 70%) of dividends received cr~ates or increases an NOL.
4. A person sitting for the CPA examination should be able to reconcile book and taxable income.
5. If you begin with book income to calculate taxable income, make the following adjustments:
(1) Increase book income by
(a) Federal income tax expense
(b) Excess of capital losses over capital gains because a net capital loss is not deductible
(c) Income items in the tax return not included in book income (e.g., prepaid rents, royalties,
interest)
(d) Charitable contributions in excess of the 10% limitation
(e) Expenses deducted-on the books but not on the tax return (e.g., amount of business gifts in
excess of $25, nondeductible life insurance premiums paid, 50% of business
meals and
entertainment)