taxmap/pubs/p542-007.htm#TXMP340dfaf8
Income, Deductions, and Special Provisions 

taxmap/pubs/p542-007.htm#TXMP5f13ce33 Cash method corporation.

A corporation using the cash method of accounting deducts contributions in the tax year paid.

taxmap/pubs/p542-007.htm#TXMP45e6c663 Accrual method corporation.

A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Make the choice by reporting the contribution on the corporation's return for the tax year. A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. The declaration must include the date the resolution was adopted.

taxmap/pubs/p542-007.htm#TXMP084a5d62 Limitations on deduction.

A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Figure taxable income for this purpose without the following.

1. The deduction for charitable contributions.
2. The dividends-received deduction (for example line 29b of the 2006 Form 1120).
3. The deduction allowed under section 249 of the Internal Revenue Code.
4. The domestic production activities deduction.
5. Any net operating loss carryback to the tax year.
6. Any capital loss carryback to the tax year.

taxmap/pubs/p542-007.htm#TXMP5dc5076a Carryover of excess contributions.

You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. You lose any excess not used within that period. For example, if a corporation has a carryover of excess contributions paid in 2005 and it does not use all the excess on its return for 2006, it can carry the rest over to 2007, 2008, 2009, and 2010. Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover.

taxmap/pubs/p542-007.htm#TXMP1b09c302 Substantiation requirements.

Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. The acknowledgement should show the amount of cash contributed, a description of the property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. Keep the acknowledgement with other corporate records. Do not attach the acknowledgement to the return.

taxmap/pubs/p542-007.htm#TXMP1bc3098a Contributions of property other than cash.

If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. In addition the corporation should keep a record of:

• The approximate date and manner of acquisition of the donated property and
• The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution.

Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return.

A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work.

See Form 8283 for more information.

taxmap/pubs/p542-007.htm#TXMP0da42036 Qualified conservation contributions.

If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. For more information, see section 170(h) of the Internal Revenue Code.

taxmap/pubs/p542-007.htm#TXMP66990ef3 Contributions of used vehicles.

A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. The deduction is limited to the gross proceeds from the sale of the vehicle, if it is sold without any intervening use or material improvement by the donee organization. An acknowledgement from the donee organization for deductions claimed in excess of $500 must be attached to the corporation's return. The acknowledgement must include the vehicle identification number or similar number, gross proceeds from the sale of the vehicle, and a statement that the deductible amount cannot exceed the gross proceeds from the sale. For more information, see Publication 526.

taxmap/pubs/p542-007.htm#TXMP1977dbfa Reduction for contributions of certain property.

For a charitable contribution of property, the corporation must reduce the contribution by the sum of:

• The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and
• For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.

The reduction for the long-term capital gain applies to:

• Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption;
• Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and
• Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property.

taxmap/pubs/p542-007.htm#TXMP4828d5a9 Larger deduction.

A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. This deduction may be allowed for certain contributions of:

• Inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants.
• Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. The property must be donated to a qualified organization and its original use must be by the donee for research, experimentation, or research training within the United States in the area of physical or biological science.
• Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial completion of construction to an educational organization for educational purposes within the United States.

taxmap/pubs/p542-007.htm#TXMP7b2de01e Contributions to the Hurricane Katrina, Rita, or Wilma relief effort.

Special provisions apply for charitable contributions made for the Hurricane Katrina, Rita, or Wilma relief effort. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, and Publication 526.

taxmap/pubs/p542-007.htm#TXMP27bdb1be Contributions to organizations conducting lobbying activities.

Contributions made to an organization that conducts lobbying activities are not deductible if:

• The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
• The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor.

taxmap/pubs/p542-007.htm#TXMP3f5ce796 More information.

For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 of the Internal Revenue Code, the related regulations, and Publication 526.

taxmap/pubs/p542-007.htm#TXMP585ebb39 Capital Losses

Capital Gains and Losses

A corporation can deduct capital losses only up to the amount of its capital gains. In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years.

A capital loss is carried to other years in the following order.

1. 3 years prior to the loss year.
2. 2 years prior to the loss year.
3. 1 year prior to the loss year.
4. Any loss remaining is carried forward for 5 years.

taxmap/pubs/p542-007.htm#TXMP6433b8fb
Example. 

A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. The corporation treats this $6,000 as a short-term loss when carried back or forward.

The corporation carries the $6,000 short-term loss back 3 years. In year 1, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. It subtracts the $6,000 short-term loss first from the net short-term gain. This results in a net capital gain for year 1 of $7,000. This consists of a net short-term capital gain of $2,000 ($8,000 − $6,000) and a net long-term capital gain of $5,000.

taxmap/pubs/p542-007.htm#TXMP26b9c0f1 S corporation status.

A corporation may not carry a capital loss from, or to, a year for which it is an S corporation.

taxmap/pubs/p542-007.htm#TXMP3631e8eb Rules for carryover and carryback.

When carrying a capital loss from one year to another, the following rules apply.

• When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. In other words, you can carry capital losses only to years that would otherwise have a total net capital gain.
• If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first.
• You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back.

taxmap/pubs/p542-007.htm#TXMP568a9d40 Refunds.

When you carry back a capital loss to an earlier tax year, refigure your tax for that year. If your corrected tax is less than the tax you originally owed, use either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return, to apply for a refund.

taxmap/pubs/p542-007.htm#TXMP0c242183 Form 1139.

A corporation can get a refund faster by using Form 1139. It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss.

taxmap/pubs/p542-007.htm#TXMP4b9e699d Form 1120X.

If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. The corporation must file the Form 1120X within 3 years of the due date, including extensions, for filing the return for the year in which it sustains the capital loss.

taxmap/pubs/p542-007.htm#TXMP6b16bb1d Net Operating Losses

Net Operating Loss

A corporation generally figures and deducts a net operating loss (NOL) the same way an individual, estate, or trust does. The same 2-year carryback and up to 20-year carryforward periods apply, and the same sequence applies when the corporation carries two or more NOLs to the same year. For more information on these general rules, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.

A corporation's NOL generally differs from individual, estate, and trust NOLs in the following ways.

1. A corporation can take different deductions when figuring an NOL.
2. A corporation must make different modifications to its taxable income in the carryback or carryforward year when figuring how much of the NOL is used and how much is carried over to the next year.
3. A corporation uses different forms when claiming an NOL deduction.

The following discussions explain these differences.

taxmap/pubs/p542-007.htm#TXMP2be77e13 Figuring the NOL

A corporation figures an NOL in the same way it figures taxable income. It starts with its gross income and subtracts its deductions. If its deductions are more than its gross income, the corporation has an NOL.

However, the following rules for figuring the NOL apply.

1. A corporation cannot increase its current year NOL by carrybacks or carryovers from other years.
2. A corporation cannot use the domestic production activities deduction to create or increase its current year NOL, including any carryback or carryover.
3. A corporation can take the deduction for dividends received, explained later, without regard to the aggregate limits (based on taxable income) that normally apply.
4. A corporation can figure the deduction for dividends paid on certain preferred stock of public utilities without limiting it to its taxable income for the year.

taxmap/pubs/p542-007.htm#TXMP32230c54 Dividends-received deduction.

The corporation's deduction for dividends received from domestic corporations is generally subject to an aggregate limit of 70% or 80% of taxable income. However, if a corporation has an NOL for a tax year, the limit based on taxable income does not apply. In determining if a corporation has an NOL, the corporation figures the dividends-received deduction without regard to the 70% or 80% of taxable income limit.

See Dividends-Received Deduction under Income, Deductions, and Special Provisions, earlier, for an example.

taxmap/pubs/p542-007.htm#TXMP413d7f9e Claiming the NOL Deduction

NOL Deduction

Generally, a corporation must carry an NOL back 2 years prior to the year the NOL is generated, if the NOL is not used in the prior 2 years the remaining NOL can be carried forward for up to 20 years after the tax year in which the NOL was generated.

A corporation can make an election to waive the 2 year carryback period and use only the 20 year carryforward period. To make the election attach a statement to the original return filed by the due date (including extensions) for the NOL year.

taxmap/pubs/p542-007.htm#TXMP3ca4002c NOL carryback.

The following rules apply.

• If a corporation carries back the NOL, it can use either Form 1120X or Form 1139. A corporation can get a refund faster by using Form 1139. It cannot file Form 1139 before filing the return for the corporation's NOL year, but it must file Form 1139 no later than 1 year after the year it sustains the NOL.
• If the corporation does not file Form 1139, it must file Form 1120X within 3 years of the due date, plus extensions, for filing the return for the year in which it sustains the NOL.
• A personal service corporation may not carryback an NOL to or from any tax year in which a section 444 election to have a tax year other than a required tax year applies.
• Certain electric utility companies may elect a 5 year carryback period for NOLs arising in tax years 2003, 2004, and 2005. The NOL carryback amount is limited to 20% of the total capital expenditures for electric transmission property and pollution control facilities. The election may be made during any tax year ending after December 31, 2005, and before January 1, 2009.
• A corporation can elect to treat a casualty loss arising in tax years ending after August 27, 2005, from the loss of public utility property used predominantly in a rate-regulated trade or business as a specified liability loss treated as a separate NOL subject to a 10 year carryback period. The loss must be the result of Hurricane Katrina. For more information see the Instructions for Form 1139.

taxmap/pubs/p542-007.htm#TXMP10f87788 NOL carryforward.

If a corporation carries forward its NOL, it enters the carryover on Schedule K, Form 1120, line 12. It also enters the deduction for the carryover (but not more than the corporation's taxable income after special deductions) on line 29(a) of Form 1120 or line 25(a) of Form 1120-A.

taxmap/pubs/p542-007.htm#TXMP53b8e542 Carryback expected.

If a corporation expects to have an NOL in its current year, it can automatically extend the time for paying all or part of its income tax for the immediately preceding year. It does this by filing Form 1138. It must explain on the form why it expects the loss.

The payment of tax that may be postponed cannot exceed the expected overpayment from the carryback of the NOL.

taxmap/pubs/p542-007.htm#TXMP1e9710fd Period of extension.

The extension is in effect until the end of the month in which the return for the NOL year is due (including extensions).

If the corporation files Form 1139 before this date, the extension will continue until the date the IRS notifies the corporation that its Form 1139 is allowed or disallowed in whole or in part.

taxmap/pubs/p542-007.htm#TXMP4446fb40 Figuring the NOL Carryover

NOL Carryover

If the NOL available for a carryback or carryforward year is greater than the taxable income for that year, the corporation must modify its taxable income to figure how much of the NOL it will use up in that year and how much it can carry over to the next tax year.

Its carryover is the excess of the available NOL over its modified taxable income for the carryback or carryforward year.

taxmap/pubs/p542-007.htm#TXMP57e1c381 Modified taxable income.

A corporation figures its modified taxable income the same way it figures its taxable income, with the following exceptions.

• It can deduct NOLs only from years before the NOL year whose carryover is being figured.
• The corporation must figure its deduction for charitable contributions without considering any NOL carrybacks.

The modified taxable income for any year cannot be less than zero.

Modified taxable income is used only to figure how much of an NOL the corporation uses up in the carryback or carryforward year and how much it carries to the next year. It is not used to fill out the corporation's tax return or figure its tax.

taxmap/pubs/p542-007.htm#TXMP78208e82 Ownership change.

A loss corporation (one with cumulative losses) that has an ownership change is limited on the taxable income it can offset by NOL carryforwards arising before the date of the ownership change. This limit applies to any year ending after the change of ownership.

See sections 381 through 384, and 269 of the Internal Revenue Code and the related regulations for more information about the limits on corporate NOL carryovers and corporate ownership changes.

taxmap/pubs/p542-007.htm#TXMP6135bb15 At-Risk Limits

At-Risk Limits

The at-risk rules limit your losses from most activities to your amount at risk in the activity. The at-risk limits apply to certain closely held corporations (other than S corporations).

The amount at risk generally equals:

• The money and the adjusted basis of property contributed by the taxpayer to the activity, and
• The money borrowed for the activity.

taxmap/pubs/p542-007.htm#TXMP53c38169 Closely held corporation.

For the at-risk rules, a corporation is a closely held corporation if, at any time during the last half of the tax year, more than 50% in value of its outstanding stock is owned directly or indirectly by, or for, five or fewer individuals.

To figure if more than 50% in value of the stock is owned by five or fewer individuals, apply the following rules.

1. Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered owned proportionately by its shareholders, partners, or beneficiaries.
2. An individual is considered to own the stock owned, directly or indirectly, by or for his or her family. Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants.
3. If a person holds an option to buy stock, he or she is considered to be the owner of that stock.
4. When applying rule (1) or (2), stock considered owned by a person under rule (1) or (3) is treated as actually owned by that person. Stock considered owned by an individual under rule (2) is not treated as owned by the individual for again applying rule (2) to consider another the owner of that stock.
5. Stock that may be considered owned by an individual under either rule (2) or (3) is considered owned by the individual under rule (3).

taxmap/pubs/p542-007.htm#TXMP211fbb7e More information.

For more information on the at-risk limits, see Publication 925, Passive Activity and At-Risk Rules.

taxmap/pubs/p542-007.htm#TXMP38caee76 Passive Activity Limits

Passive Activity Limits

The passive activity rules generally limit your losses from passive activities to your passive activity income. Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate during the tax year, or you have a rental activity.

The passive activity rules apply to personal service corporations and closely held corporations other than S corporations.

Corporations subject to the passive activity limitations must complete Form 8810, Corporate Passive Activity Loss and Credit Limitations. For more information on the passive activity limits, see the Instructions for Form 8810 and Publication 925.

Previous Page:  Publication 542 - Corporations - Recordkeeping Next Page:  Publication 542 - Corporations - Figuring Tax Use   to find additional occurrences of topic items.