How to Calculate Tax Liability for Corporations
The Internal Revenue Service states that corporations are subject to a federal corporate income tax. The one exception to the rule is an IRS registered S corporation, which is not liable to pay corporate taxes. Learn how to file and calculate corporate tax liabilities correctly.
- Collect all financial information for the corporation, including income, expenses and all balance statements. IRS Form 1120 and the accompanying instructions will be needed to file the corporation tax return.
- Calculate the gross profit for the corporation. To get this figure, total all income from any source and deduct any returns, cost of goods sold and allowances.
- Determine the total corporate income by adding the gross profit and any other income received. Income received would include capital gains, interest on gross income, dividends, net gains, gross royalties and any other income to the corporation.
- Calculate and subtract from the total income all allowable IRS deductions. These deductions would include payroll, compensation benefits, pension fund contributions, rent, taxes paid, repairs and maintenance, advertising expenses and other deductions. The IRS allows special deductions for corporations claiming a net operating loss.
- Use the instructions provided on IRS Form 1120 to determine the corporation tax rate and calculate the corporation tax liability. This figure will be derived from the final corporate taxable income.
The IRS corporate rules and guidelines can be very complex and confusing. For that reason, it is good practice to consult an accountant who specializes in corporate tax laws and regulations.