572 MODULE 36 TAXES: CORPORATE

(2) Deduct from book income

(a) Income reported on the books but not on the tax return (e.g., tax-exempt interest, life in-
surance proceeds)
(b) Expenses deducted on the tax return but not on the books (e.g., MACRS depreciation
above straight-line, charitable contribution carryover)
(c) The dividends received deduction
2. When going from taxable income to book income, the above adjustments would be reversed.
3. Schedule M-I of Form 1120 provides a reconciliation of income per books with taxable income
before the NOL and DRD. There are two types of Schedule M-I items:
(1) Permanent differences (e.g., tax-exempt interest)
(2) Temporary differences-items reflected in different periods (e.g., accelerated depreciation on
tax return and straight-line' on books)
EXAMPLE: A corporation discloses that it had net income after taxes of $36,000 per books. Included in the
computation were deductions for charitable contributions of $10,000, a net capital loss of $5,000, and federal
income taxes paid of $9,000. What is the corporation's Tl?
Net income per books after tax $36,000
Nondeductible net capital loss -t-" 5,000
Federal income tax expense + 9,000
Charitable contributions + I O. 000
Taxable income before CC $60;000
CC (limited to 10% x 60,000) - 6.000
Taxable income $54000
4. Schedule M-2 of Form 1120 analyzes changes in a corporation's Unappropriated Retained Earn-
ings per books between the beginning and end of the year.
Balance at beginning of year
Add: Net income per books
Other
increases
Less: Dividends to shareholders
Other decreases (e.g., addition to reserve for contingencies)
Balance at end of year
5. Affiliated and Controlled Corporations
6. An affiliated group is a parent-subsidiary chain of corporations in which at least 80% of the
com-
bined voting power and total value of all stock (except nonvoting preferred) are owned by includible
corporations. .
7. They may elect to file a consolidated return. Election is binding on all future returns.
8. If affiliated corporations file a consolidated return, intercompany dividends are eliminated in the
consolidation process. If separate tax returns are filed, dividends from affiliated corporations are
eligible for a 100% dividends received deduction.
9. Possible advantages of a consolidated return include the deferral of gain on intercompany transac-
tions and offsetting operating/capital losses of one corporation against the profits/capital gains of
another.
EXAMPLE:, P Corp. owns 80% of the stock of A Corp., 40% of the stock of B Corp., and 45% of the stock ofC
Corp. A Corp. owns 40% of the stock of B Corp. A consolidated tax return could be filed by P, A, and B.
EXAMPLE: Parent and Subsidiary file consolidated tax returns using a calendar year. During 2008, Subsidiary
paid a $10,000 dividend to Parent. Also during 2008, Subsidiary sold land with a basis of$20,000 to Parentfor its
FMV of $50,000. During 2009, Parent sold the land to an unrelated taxpayer for $55,000.
The intercompany dividend is eliminated in the consolidation process and is excluded from consolidated tax-
able income. Additionally, Subsidiary's $30,000 of gain from the sale of land to Parent is deferred for 2008. The
$30,000 will be included in consolidated taxable incomefor 2009 when Parent reports $5,000 of income from the
sale of that land to the unrelated taxpayer.

10. A controlled group of corporations is limited to an aggregate of $75,000 of ta~able income

taxed at
less than 35%, one $250,000 accumulated earnings credit, one Sec. 179 expense election, and one
$40,000 AMT exemption. There are three basic types of controlled groups.