How to Calculate Corporate Tax Liability

By David Carnes
Calculating Corporate Tax Liability
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Compute your corporate income tax with IRS Form 1120. Remember that the IRS is likely to calculate your corporate income in a different way than your accountant calculates it. Below is a simplified explanation of how to calculate your federal corporate tax liability. Note that if your company is registered with the IRS as an S corporation, it is exempt from corporate tax liability

Download IRS Form 1120 and Form 1120 Instructions.

Collect all of your company's financial statements and records, including income and expense statements and balance sheets.

Determine your company's gross profits. Start with gross income (all income from whatever source) and subtract your returns and allowances and cost of goods sold to arrive at gross profits.

Determine your company's total income from gross profits by adding income from dividends, gross royalties, gross interest, capital gains, net gains and any other income that your company might have received.

Determine your company's corporate tax deductions. These deductions include payroll and benefits as well as pension funds, repairs, taxes, paid interest, debt write-offs, advertising expenses, lease expenses and certain other expenses. Subtract total deductions from total income. The result is your company's preliminary taxable income.

Subtract from total income any special deductions and any deductions resulting from net operating losses. This is your company's taxable income. There is also a minimum taxable income that is calculated separately. If your taxable income falls below the minimum taxable income, you will have to use the minimum taxable income as your company's taxable income. Note that minimum taxable income is not the same as the alternative minimum tax -- be sure not to confuse the two.

Use the Tax Rate Schedule in the Form 1120 Instructions. Use your company's taxable income to calculate your company's preliminary corporate tax liability.

Subtract from total tax liability any taxes your company has already paid during the tax year in question (including any foreign jurisdictions). You should also subtract carryovers from previous years. Finally, add any tax penalties that are currently due. The remainder is your company's tentative tax liability.

Determine if your company is exempt from the alternative minimum tax. If the tax year for which you are reporting is the corporation's first year of establishment, if your company's gross receipts did not reach a specified amount that is subject to change, or if your company has been exempt from the alternative minimum tax every year since 1997, then it is probably exempt from paying the alternative minimum tax. Otherwise, you must calculate the alternative minimum tax.

Determine the applicable alternative minimum tax from the instructions for IRS Form 4626. If your company's tentative tax liability is smaller than the applicable alternative minimum tax, then it must pay the alternative minimum tax. Otherwise, your company's corporate tax liability is the same as its tentative tax liability.

About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.