Quick Notes

One-liners — the rule each study question and final-exam question was really testing, one sentence each, brought current to 2026. The final exam is a 57-question bank; I passed with an 80. Five questions are marked on the printout as missed, and four more I would now answer differently from the way I marked them; those are noted.

Income and deductions

• A corporation never deducts a net capital loss against ordinary income; a net capital gain is simply added to taxable income and taxed at 21%.
• Gross profit, interest, dividends, rents, royalties, service income and net capital gain are gross income; municipal bond interest, life insurance proceeds and contributions to capital — including the sale of the corporation’s own stock — are not.
• Interest on debt used to buy or carry tax-exempt bonds is not deductible; interest on debt used to buy taxable investments is, in full, with no net-investment-income cap for a corporation.
• Dividends paid are never a deduction. Key-man life insurance premiums are never a deduction when the corporation is the beneficiary. Entertainment is never a deduction.
• A corporation deducts casualty losses in full; the individual limitations do not apply.
• A loss on a sale to a controlling shareholder or other related party is disallowed.
• Gross profit $70,000 less expenses $90,000 plus net capital gain $30,000 is taxable income of $10,000 — the gain is ordinary income.
• added 2026 The dividends-received deduction is 50%, 65% or 100% depending on ownership, and goes on Schedule C of Form 1120 after the charitable deduction is figured.

Capital gains and losses

• A corporate net capital loss carries back three years, earliest year first, then forward five, offsetting only capital gains; there is no election to forgo the carryback.
• A $15,000 loss with prior-year gains of $10,000, $11,000 and $5,000 (oldest first) offsets the $10,000 in the third prior year and $5,000 of the second.
• Only three years back count: with gains of $75,000 four years ago and $5,000, $30,000 and $0 in the three prior years, a $50,000 loss absorbs $35,000 and carries $15,000 forward.
• Net §1231 gain is a long-term capital gain and nets with other capital gains and losses; net §1231 loss is ordinary and deductible in full.
• A $12,000 §1231 gain less $7,000 of capital losses adds $5,000 to taxable income; a $5,000 §1231 gain less a $10,000 short-term loss adds nothing and the $5,000 net loss waits. (Both of these were marked wrong on my exam.)
• A carried capital loss is short-term when it lands, whatever it was when it left.
• A capital loss carryback cannot create or increase an NOL in the carryback year.

Accounting methods

• A cash-basis prepayment is deductible when paid only under the 12-month rule; a 24-month premium is prorated by months — $12,000 paid April 1 by a June 30 corporation is $1,500 this year.
• Prepaid interest is always prorated, by cash- and accrual-basis taxpayers alike; the 12-month rule never applies to it.
• Economic performance, not the book accrual, governs accrual-method deductions; deduct the $6,000 of warranty work actually done, not the $10,000 reserve.
• Advance payments for services may be deferred only to the following year: recognize this year’s share now and all of the rest next year, no matter how long the contract runs.
• A cash-basis corporation must be a personal service corporation, a farming corporation, or under the gross receipts threshold — updated 2026 $31 million for 2025, $80 million for manufacturers from 2026.
• Below that threshold inventory can be treated as non-incidental supplies or follow the books; above it, sales and cost of goods sold must be on accrual even if the rest is cash.
• A refundable security deposit is not income until forfeited; advance rent is income when received and can never be deferred.
• Changing a method takes Form 3115; automatic consent requires the change to be on the current list and no overall-method change in the prior five years.

Tax year

• Personal service corporations are generally limited to a calendar year; other C corporations choose any year freely; partnerships and S corporations have required years.
• No Form 1128 is needed to adopt the first tax year; the first return is a short year from the start of business to the chosen year-end — February 1 to June 30 for a corporation that begins February 1 and picks June 30.
• The tax year must match the books; a corporation keeping June 30 books files on a June 30 year.
• A return is due the 15th day of the fourth month after year-end: September 30 year-end, January 15; July 31 year-end, November 15. updated 2026 June 30 year-ends join the rule for tax years beginning after 2025.
• Form 1128 for a change of year is due by the due date of the short-period return — for a calendar-year corporation changing to March 31, by July 15.
• Automatic approval to change is unavailable if the year was changed within the prior 48 months; six years ago is fine.

Organizational, start-up and research costs

• Organizational costs: $5,000 in the first year, the rest over 180 months from the month business begins; $10,000 of costs for a corporation that starts business June 1 with an October 31 year-end is $5,000 + $5,000 × 5/180 = $5,139.
• Stock-issuance costs — broker fees, printing certificates — are never organizational costs; they reduce paid-in capital.
• The first regular directors’ meeting is an operating expense, and charter amendments after the first year ends are neither organizational nor deductible until liquidation.
• Interest, taxes and research costs are never start-up costs; delinquent property taxes paid at purchase go into the building’s basis.
• Pre-opening salaries, franchise training travel, team-building consultants, market surveys and opening advertising are start-up costs.
• R&E excludes management studies, efficiency surveys, quality-control testing, consumer surveys and the purchase of someone else’s patent; equipment cost is not R&E but its depreciation is, and the cost of obtaining your own patent is.
• A machine bought under a guarantee of performance is a purchase at the seller’s risk, not research.
• updated 2026 Domestic research costs for tax years beginning after 2024 are deductible when incurred, or by election amortized over 60 or more months from the month benefits begin, or under §59(e) written off over 120 months from the month incurred; foreign research is amortized over 15 years with no choice.
• Under the 60-month election nothing is deducted until benefits begin: $95,000 of pooled costs with benefits starting August of an October year is 3/60, or $4,750.
• Under the 120-month write-off, $32,500 incurred from March is $2,708 the first year and $3,250 the second.
• A corporation with no income this year and profits expected later amortizes; a profitable one expenses; one that qualifies takes the credit and reduces the deduction (or elects the reduced credit).
• Exam Q24 asked which of four items is not R&E and marked “improving existing software” correct; the better answer is the management study, since software development has been research all along. check

Compensation

• Compensation is the whole package — salary, bonus, fringes, deferred pay, pension — and is reasonable or not on the facts, never because the executive says so; underpayment in the early years is a legitimate reason for a catch-up.
• Excess pay tied to stock ownership is a constructive dividend: no deduction, still taxable to the shareholder.
• A parachute payment of three times or more of the base amount makes the excess over one times the base nondeductible to the payer and subject to a 20% excise tax on the recipient, who still reports it all as income: $3.5 million on a $1 million base is $2.5 million nondeductible and a $500,000 excise tax; $1.2 million on $300,000 is $900,000 and $180,000.
• The base amount is the average of the five prior years’ compensation, and the payment must go to a disqualified individual — an officer, shareholder or highly compensated person.
• Parachute rules exempt S-corporation-eligible small businesses and private corporations with 75% shareholder approval after disclosure; a public issuer with 55% approval has no exemption. (Marked wrong on my exam.)
• Publicly held corporations deduct no more than $1 million per covered employee; since 2018 commissions and performance-based pay no longer escape the cap, but qualified-plan contributions, tax-free fringes and 1993 contracts do.
• Option spreads and stock appreciation rights — cash or stock for the excess of market price over the grant price — are compensation under the cap: $250,000 of option gain on top of $1,300,000 of salary is $550,000 nondeductible.
• An affiliated group aggregates a covered employee’s pay and shares the disallowance pro rata — $400,000 of $2 million is 20% of the $1 million disallowed, or $200,000.
• Pre-2018 outside director: never an officer, not a current employee, not a former employee receiving pay other than qualified-plan benefits, and no remuneration other than as a director; de minimis payments to the director’s employer are the lesser of $60,000 or 5% of that employer’s gross revenue. A former officer never qualifies, whatever the exam answer key says. check

Bad debts

• Business bad debts are ordinary losses and may be deducted as partial worthlessness is established; nonbusiness bad debts are short-term capital losses and only when wholly worthless.
• A loan to a friend for his craft shop is a nonbusiness bad debt — a short-term capital loss — whatever the money was used for.
• A cash-basis taxpayer has no bad-debt deduction for unpaid receivables because the income was never reported.
• Additions to an allowance for doubtful accounts are not deductible; only the accounts actually charged off are.
• Legal action is not required to prove worthlessness; bankruptcy with an expected 30% recovery supports writing off 70% now and the rest at settlement.
• A recovery is income to the extent it exceeds the balance never written off: write off $13,500 of $15,000, collect $3,000, report $1,500.

Charitable contributions

• Gifts to individuals are never deductible; an accrual corporation may deduct a board-authorized gift paid within 3½ months after year-end, so an April 1 payment qualifies and a May 1 payment does not. (The exam key allowed both; the statute allows one.) check
• Ordinary income property — inventory, assets held a year or less, and business property to the extent of depreciation recapture — is deductible at basis: a van with a $15,000 basis and a $20,000 value is $15,000, because the gain would be §1245 ordinary income. (Marked wrong on my exam.)
• A painting bought in June and donated in December is ordinary income property and deductible at cost, even for a related use. (Marked wrong on my exam.)
• Same-year inventory stays in cost of goods sold with no separate contribution; prior-year inventory comes out of opening inventory and is deducted at cost.
• Inventory for the ill, needy or infants, donor-built scientific equipment to colleges, and wholesome food are deductible at basis plus half the appreciation, capped at twice basis: food costing $30,000 worth $62,000 is $46,000; equipment costing $30,000 worth $150,000 is $60,000.
• Long-term capital gain property is deductible at fair market value, but tangible personal property the charity will sell or put to an unrelated use drops to basis; a $325,000 vase sold by the church for pews is $125,000, the same vase displayed by a museum is $325,000.
• Qualified appreciated public stock given to a private nonoperating foundation is deductible at fair market value, and depreciated stock is deductible at fair market value too: $275,000 plus $8,000 is $283,000.
• The ceiling is 10% of taxable income before the DRD and the contribution: $280,000 before a $34,000 DRD supports $28,000.
• Current-year gifts are used before carryovers, and carryovers oldest first: ATI $190,000 with $18,000 of current gifts and a $7,000 carryover deducts $19,000 — $18,000 plus $1,000 of the carryover. (The exam key put the carryover first; §170(d)(2) does not.) check
• updated 2026 For tax years beginning after 2025, gifts below 1% of taxable income are not deductible at all; the examples above assume no floor.
• A contemporaneous written acknowledgment must be in hand by the earlier of the filing date or the due date with extensions — for a November 30 year-end, March 15.
• A C corporation that is not closely held or a personal service corporation files Form 8283 only for noncash gifts over $5,000; closely held, PSC and S corporations file at over $500.

Private reference, not client advice. Notes taken from a 2019 continuing-education course (Thomson Reuters Checkpoint Learning, C Corporations — Overview of Corporate Income Tax); figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2024-40, Rev. Proc. 2025-32). Verify current-year amounts before relying on them.