The Law Dictionary

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How To Calculate Corporate Tax Liability

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Corporations can be formed in order to attract capital investment towards the production of goods and services. A corporation can be private or public, a corporation can have one officer or numerous officers running it. Here is how to calculate Corporate Tax Liability.

“What is the Incorporation Process?”

The official process for incorporation involves filing the “articles of incorporation” to give your organization a formal legal structure. This process involves writing corporate bylaws, naming a registered agent, headquarters, stockholder meetings, corporate bank accounts, detailed financial records and regular audits. The public corporation will issue stock certificates and record ownership of its shares.

A private corporation might be controlled, owned and managed by a family or partners. The rules governing its operation are not as stringent as the rules for a public entity. Private corporate developments do not need to be publicized in the same way as a public entity does.

“Corporate Status Pools Capital and Risk”

The Internal Revenue Service (IRS) has created the Form 1120 for Corporate Income Tax with the Form 1120S for S Corporate Income Taxes. The Limited Liability Company (LLC) can be used by individuals or partners to reduce their risk. All corporations must file income tax returns.

On the Form 1120, the corporate representative will fill in the name of the corporation, headquarters address, employer identification number, date incorporated and total assets. The gross profit (corporate income) is calculated by adding the gross sales and returns together and then subtracting the cost of goods sold. Other forms of income are then added, such as interest, rents and royalties to arrive at the total income.

Next, the corporation must add together its total deductions. The IRS lists items, such as wages, repairs, rents and advertising as deductions. Companies can fill out separate forms for officer salaries, depreciation and domestic production activities. The total deductions, net operating deduction and special deductions are subtracted from the total income to arrive at the taxable income.

The Schedule L Worksheet allows corporations to list their assets versus liabilities to better calculate their taxes. Cash, accounts receivable and inventory are assets. Accounts payable, mortgages and stock are liabilities. The Corporate Tax Liability is the final amount the organization owes the IRS.


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