Está en la página 1de 8


- a company or group of people authorized to act as a single entity (legally a person) and recognized as
such in law.

Characteristics of Corporation

A corporation has the ability to enter into contracts, incur liabilities, and buy, sell, or own assets in its
corporate name. These provisions can be found in the charter or articles of incorporation. Ownership of
a corporation is divided into shares of stock. Stocks can be issued in different classes. All shares of stock
in the same class have identical rights and privileges. The buying and selling of shares does not effect the
business activities of the corporation. Shareholders' liability is limited to the amount they invested.

How Gross Income is Calculated for Business Income Taxes

A calculation of gross income appears on the tax forms for all business types. We'll use Schedule C for
small businesses as an example.
In Part 1 of Schedule C: .
1. Gross receipts or sales of the business is entered first.
2. Then, returns and allowances are deducted.
3. Then, Cost of goods sold i(COGS) s entered. Cost of goods sold is calculated on a separate schedule
and the total is entered here. COGS is only applicable for businesses that sell products.
4. Gross receipts minus returns and allowances and cost of goods sold equals gross profit.
5. Then, income from other sources is entered. This might be income from dividends, tax credits, or
6. So, gross receipts, minus cost of goods sold equals gross profit. Then other income is added to get to
what the IRS calls "total income."
Where does "Other Income" enter the calculation of gross income? It comes after cost of goods sold and
the calculation of gross profit. Other income includes interest income and income from the recovery of
bad debts.

What is Schedule C?
Schedule C - Profit or Loss from Business is part of the individual income tax return IRS Form 1040. It
shows the income of a business for the tax year, as well as deductible expenses. The resulting net profit
or loss of the business, found on line 31, is then reported (beginning with 2018 taxes) on Schedule 1 (line
12) of Form 1040. It is also entered on line 2 of Schedule E (Supplemental Income or Loss) to determine
self-employment taxes.
Classifications of Corporations
Distinguish the “public,” or municipal, corporation from the publicly held corporation.
Explain how the tax structure for professional corporations evolved.
Classification of corporations

Nonprofit Corporations
One of the four major classifications of corporations is the nonprofit corporation (also called not-for-
profit corporation). It is defined in the American Bar Association’s Model Non-Profit Corporation Act as
“a corporation no part of the income of which is distributable to its members, directors or officers.”
Nonprofit corporations may be formed under this law for charitable, educational, civil, religious, social,
and cultural purposes, among others.

Public Corporations
The true public corporation is a governmental entity. It is often called a municipal corporation, to
distinguish it from the publicly held corporation, which is sometimes also referred to as a “public”
corporation, although it is in fact private (i.e., it is not governmental). Major cities and counties, and
many towns, villages, and special governmental units, such as sewer, transportation, and public utility
authorities, are incorporated. These corporations are not organized for profit, do not have shareholders,
and operate under different statutes than do business corporations.

Professional Corporations
Until the 1960s, lawyers, doctors, accountants, and other professionals could not practice their
professions in corporate form. This inability, based on a fear of professionals’ being subject to the
direction of the corporate owners, was financially disadvantageous. Under the federal income tax laws
then in effect, corporations could establish far better pension plans than could the self-employed. During
the 1960s, the states began to let professionals incorporate, but the IRS balked, denying them many tax
benefits. In 1969, the IRS finally conceded that it would tax a professional corporation just as it would
any other corporation, so that professionals could, from that time on, place a much higher proportion of
tax-deductible income into a tax-deferred pension. That decision led to a burgeoning number of
professional corporations.

Business Corporations
The Two Types
It is the business corporation proper that we focus on in this unit. There are two broad types of business
corporations: publicly held (or public) and closely held (or close or private) corporations. Again, both
types are private in the sense that they are not governmental.

The publicly held corporation is one in which stock is widely held or available for wide public distribution
through such means as trading on a national or regional stock exchange. Its managers, if they are also
owners of stock, usually constitute a small percentage of the total number of shareholders and hold a
small amount of stock relative to the total shares outstanding. Few, if any, shareholders of public
corporations know their fellow shareholders.
By contrast, the shareholders of the closely held corporation are fewer in number. Shares in a closely
held corporation could be held by one person, and usually by no more than thirty. Shareholders of the
closely held corporation often share family ties or have some other association that permits each to
know the others.

Though most closely held corporations are small, no economic or legal reason prevents them from being
large. Some are huge, having annual sales of several billion dollars each. Roughly 90 percent of US
corporations are closely held.

The giant publicly held companies with more than $1 billion in assets and sales, with initials such as IBM
and GE, constitute an exclusive group. Publicly held corporations outside this elite class fall into two
broad (nonlegal) categories: those that are quoted on stock exchanges and those whose stock is too
widely dispersed to be called closely held but is not traded on exchanges.

There are four major classifications of corporations: (1) nonprofit, (2) municipal, (3) professional, and (4)
business. Business corporations are divided into two types, publicly held and closely held corporations.

Domestic or Foreign Corporation

A domestic corporation is one formed in the state in which it is doing business. A foreign corporation is
one incorporated in another state or country and does business across state lines. The process of setting
up a company in a foreign state is called foreign qualification.
Many people choose to incorporate in their home state. However, if your corporation will not "do
business" in the home state, it may be wise to incorporate elsewhere. "Doing business" usually means
more than just selling products or making passive investments in that state. It usually requires occupying
an office or otherwise having an active business presence.

Normal Corporate Income Tax

The normal corporate income tax (NCIT) rate for domestic corporations is 30% of the taxable income.
The taxable income is the gross income less allowable deductions such as cost of goods and salaries.

Minimum Corporate Income Tax (MCIT)

If there is no taxable income, the corporation is still required to pay the minimum corporate income tax
of 2% of the gross income.
Concept Of MCIT

The MCIT (2% of gross income) is a new concept introduced by R.A. 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in
capturing the true income of corporations. It was devised as a relatively simple and effective revenue-
raising instrument compared to the normal income tax which is more difficult to control and enforce. It
is a means to ensure that everyone will make some minimum contribution to the support of the public
sector. (Chamber of Real Estate and Builders’ Association, Inc. v. Hon. Executive Secretary Romulo, et al.,
G.R. No. 160756, March 9, 2010)

Note:Favorable business climate theory: Domestic corporations (Resident foreign corporation) owe their
corporate existence and their privilege to do business to the government. They also benefit from the
efforts of the government to improve the financial market and to ensure a favorable business climate. It
is therefore fair for the government to require them to make a easonable contribution to the public
1. MCIT does not apply if the DC or RFC is not subject to NCIT;
2. For DC whose operations are partly covered by the NCIT and partly covered under a special income
tax system, the MCIT shall apply on operations covered by the NCIT;
3. For RFC, only the gross income from sources within the Philippines shall be considered for
determining applicability of MCIT.
When MCIT is applicable
1. If taxable income is zero or negative; or
2. If MCIT is greater than NCIT due.

Section 29 of the National Internal Revenue Code (NIRC) of 1997, as amended, imposes Improperly
Accumulated Earnings Tax (IAET) on corporations for each taxable year on the improperly accumulated
taxable income of such corporations. It is equal to 10 percent of the improperly accumulated taxable

This tax applies to every corporation which is formed or availed of for the purpose of avoiding the
imposition of income tax on the income received by shareholders of the corporation, by permitting its
earnings or profits to accumulate, instead of being divided or distributed. Based on Section 6 of Revenue
Regulations (RR) 2-2001, the dividends must be declared and paid or issued not later than one year
following the close of the taxable year, otherwise, the IAET, if any, should be paid within 15 days

The IAET is imposed to discourage tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends received
by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be
taxed (GR 108067. January 20, 2000).

There are instances when IAET does not apply despite accumulation of earnings and profits of a
corporation. The IAET does not apply to (a) Publicly held corporations, (b) Banks and other nonbank
financial intermediaries, and (c) Insurance companies. RR 2-2001 likewise included taxable partnerships,
general professional partnerships, nontaxable joint ventures and enterprises duly registered under
special economic zones as exempt from the coverage of IAET.

Further, if the failure to pay dividends is due to some other causes, such as the use of undistributed
earnings and profits for the reasonable needs of the business, such purpose would not generally make
the accumulated or undistributed earnings subject to IAET. However, if there is a determination that a
corporation has accumulated income beyond the reasonable needs of the business, the 10-percent
improperly accumulated earnings tax shall be imposed.

While there appears to be no clear-cut definition of the phrase “reasonable needs of the business,”
Section 29(E) of the Tax Code defines it to include the reasonably anticipated needs of the business. RR
2-2001 defines the same as the immediate needs of the business, including reasonably anticipated
needs. In either case, the corporation should be able to prove an immediate need for the accumulation
of the earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits.
The computation of the improperly accumulated earnings under Section 29 of the Tax Code, as
amended, excludes the earnings and profits of a corporation set aside for the reasonable needs of the
business (CTA Case 8295, May 15, 2015).

Under Section 3 of RR 2-2001, the following constitute accumulation of earnings for the reasonable
needs of the business:

a) Allowance for the increase in the accumulation of earnings up to 100 percent of the paid-up capital of
the corporation as of Balance Sheet date, inclusive of accumulations taken from other years;
b) Earnings reserved for definite corporate expansion projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or equivalent body;
c) Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors
or equivalent body;
d) Earnings reserved for compliance with any loan covenant or pre-existing obligation established under
a legitimate business agreement;
e) Earnings required by law or applicable regulations to be retained by the corporation or in respect of
which there is legal prohibition against its distribution;
f) In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings
intended or reserved for investments within the Philippines as can be proven by corporate records
and/or relevant documentary evidence.
Thus, if a company can justify the accumulation of its earnings as within the reasonable needs of
business, it is exempt from the imposition of IAET.
IAET Computation
Normally, when one looks at the financial statements of a corporation and notices that the accumulated
earnings exceed the paid-up capital, one will infer that this is a positive thing. And yes, that is correct;
that means that the corporation is profitable. However, the Bureau of Internal Revenue (BIR) would have
a different view. Such accumulation of earnings could expose a corporation to the improperly
accumulated earnings tax or IAET.

Our tax rules impose a 10% tax on improperly accumulated taxable income of corporations. This is
applicable to corporations formed for the purpose of avoiding the income tax with respect to its
shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the
corporation to accumulate instead of dividing or distributing them to the shareholders. IAET, though,
shall not apply to banks, insurance companies, publicly-held companies, and other corporations covered
by special laws.

The rationale of imposing IAET as a penalty on corporations is to discourage them from improperly
accumulating earnings to spare their shareholders from tax liability should they decide to declare
dividends (other than stock dividends). Thus, unless the accumulation of earnings is “reasonable” as
defined by the tax rules, such accumulation could be subject to a 10% IAET penalty.

Now, consider this scenario: a corporation was charged the 10% IAET penalty. Subsequently, such a
corporation declares cash dividends to its stockholders out of the earnings previously subjected to the
10% IAET. Under the present tax rules, the cash dividends will be subjected to another round of tax,
which is the final withholding tax or FWT, which, this time, differs in amount depending on the type of
shareholder. On the assumption that the shareholders are individuals or non-resident foreign
corporations (not domestic corporate-stockholders), the cash dividends will be subjected to the rates
from 10% to 30% depending on the nationality and residency of the individual or on the applicable tax
treaty or tax sparing provisions for non-resident corporations.
Thus, for the corporation’s earnings which were previously subjected to IAET, such earnings would be
subjected to two types of tax: (1) the 10% IAET (imposed on the corporation); and (2) the FWT on
dividends (imposed on the corporation as the withholding agent).

Special Corporation
1.)Educational Corporation is a corporation formed not for profit but for an educational purpose,
particularly the establishment and maintenance of a school, college, or university. It may be public or
private according to its foundation. When founded by private individuals or supported by private funds
or privately endowed, it is a private corporation. When founded and supported by the state or a
municipal subdivision thereof, it is a public corporation.

2.)A religious corporation is a type of religious non-profit organization, which has been incorporated
under the law. Often these types of corporations are recognized under the law on a subnational level, for
instance by a state or province government. The government agency responsible for regulating such
corporations is usually the official holder of records, for instance the Secretary of State. In the United
States, religious corporations are formed like all other nonprofit corporations by filing articles of
incorporation with the state. Religious corporation articles need to have the standard tax exempt
language the IRS requires.