| Course | ACC-6060 Federal Taxation |
|---|---|
| Module | Module 5 |
| Paper type | Module 5 written assignment: corporate tax for C corporations and S corporations |
| Length | About 783 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Science in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6060 Module 5
Book Income, Taxable Income and the S Election: Harborview Analytics as a C Corporation and an S Corporation
Student Name
Master of Science in Accounting, Thomas Edison State University
ACC-6060: Federal Taxation
Mentor Name
Month Day, Year
Book Income, Taxable Income and the S Election: Harborview Analytics as a C Corporation and an S Corporation
Introduction
Harborview as a C corporation owes its own 21 percent tax, and the founders owe a second tax on whatever it pays them as dividends. An S corporation generally pays no entity-level income tax; its income, deductions and credits pass through to shareholders, who pay tax whether or not cash is distributed. Taxable income starts from book income but differs from it, because some book income is exempt, some expenses are not deductible and tax depreciation differs from book depreciation (Spilker et al., 2019).
Part A: Reconciling Book Income to Taxable Income
The $20,000 of dividends came from a domestic corporation in which Harborview owns 15 percent, so the deduction is 50 percent; ownership of 20 percent or more would raise it to 65 percent. Because taxable income before the deduction is well above the dividends, the taxable income limit on the deduction does not bind. These same differences would appear on Schedule M-1 or M-3, the return's reconciliation of book and taxable income.
| 2024 | Amount |
|---|---|
| Book income before tax | $412,000 |
| Less municipal bond interest | (8,000) |
| Add nondeductible half of business meals | 6,000 |
| Add fines paid to a city agency | 3,000 |
| Add life insurance premiums on officers, where the company is beneficiary | 4,000 |
| Less excess of tax over book depreciation | (25,000) |
| Add back charitable contributions expensed for books | 30,000 |
| Income before charitable and dividends-received deductions | 422,000 |
| Charitable contributions, within the 10 percent limit of $42,200 | (30,000) |
| Dividends-received deduction, 50 percent of $20,000 | (10,000) |
| Taxable income | $382,000 |
| Tax at 21 percent | $80,220 |
The Cost of Distributing
If Harborview pays $150,000 of dividends, the founders owe 15 percent on qualified dividends plus the 3.8 percent surtax on investment income, 23.8 percent in all at their incomes, or $35,700. Measured on a dollar of pretax profit distributed, the combined rate is 21 percent plus 23.8 percent of the remaining 79 cents, about 39.8 percent.
Four of the adjustments are permanent and one is temporary. Municipal interest, fines, the nondeductible half of meals and officer life insurance premiums will never reverse, and neither will the dividends-received deduction, so they change the company's effective tax rate. The depreciation difference will reverse as book depreciation catches up with tax depreciation, creating a deferred tax liability of $5,250, 21 percent of $25,000, on the balance sheet.
Part B: The Same Year as an S Corporation
Items that may be treated differently on shareholders' returns are separately stated; the dividends-received deduction is not available, because it belongs only to C corporations. Each founder's stock basis, $50,000 at the start, rises by income items, including tax-exempt interest, to $265,000. It is then reduced, in the required order, by the $75,000 distribution, which is tax free because it does not exceed basis, by $6,500 of nondeductible expenses and by the $15,000 charitable deduction, ending at $168,500.
The founders would also owe tax on their full shares of income even though only $75,000 each was distributed. S corporations commonly distribute enough cash for shareholders to pay that tax, and the founders' salaries must be reasonable for the work they do, since paying too little salary to avoid payroll taxes invites IRS challenge.
| Item | Total | Each founder |
|---|---|---|
| Ordinary business income | $402,000 | $201,000 |
| Qualified dividends, separately stated | 20,000 | 10,000 |
| Charitable contributions, separately stated | 30,000 | 15,000 |
| Tax-exempt interest | 8,000 | 4,000 |
| Nondeductible expenses | 13,000 | 6,500 |
Part C: Choosing the Entity
A founder in the top 37 percent bracket who can claim the full qualified business income deduction, which excludes a fifth of eligible income, pays about 29.6 percent on S corporation profit, compared with 39.8 percent on C corporation profit that is paid out. The S corporation wins when profits are distributed, but the C corporation can win when profits are retained for growth, since only the 21 percent tax applies until a dividend or sale. Mackie-Mason and Gordon (1997) found that tax rate differences shift firms between corporate and noncorporate form, and Cooper et al. (2016) report that pass-through income bears a markedly lower average federal rate than corporate income, which fits this comparison. Harborview qualifies to elect S status: it is domestic, has two individual shareholders and one class of stock. If it converts, a five-year built-in gains tax applies to appreciation it held as a C corporation.
There are nontax factors too. Both forms give the founders limited liability, but an S corporation cannot issue preferred stock to a venture investor, and a future investor that is a corporation or partnership would end the S election. If Harborview expects outside equity within a few years, staying a C corporation may be worth some extra tax now.
References
Cooper, M., McClelland, J., Pearce, J., Prisinzano, R., Sullivan, J., Yagan, D., Zidar, O., & Zwick, E. (2016). Business in the United States: Who owns it, and how much tax do they pay? Tax Policy and the Economy, 30(1), 91-128. https://doi.org/10.1086/685594
Mackie-Mason, J. K., & Gordon, R. H. (1997). How much do taxes discourage incorporation? Journal of Finance, 52(2), 477-506. https://doi.org/10.1111/j.1540-6261.1997.tb04810.x
Spilker, B. C., Ayers, B. C., Outslay, E., Weaver, C. D., Barrick, J. A., Robinson, J. R., & Worsham, R. G. (2019). Taxation of individuals and business entities. McGraw-Hill Education.
ACC 6060 Module 5 instructions, in plain terms
Module 5 moves to entities, asking students to tax a corporation and then compare the S corporation alternative. Expect problems that reconcile book income to taxable income, apply the dividends-received deduction, the charitable limit and capital loss rules for corporations, compute the 21 percent tax, determine S corporation eligibility, separate ordinary income from separately stated items and track shareholder basis through income, distributions and losses. Harborview's numbers were built for this sample. Some versions add a corporate capital loss, a net operating loss or the accumulated earnings and profits of a former C corporation, which change the S corporation's distribution rules.
Inside the ACC 6060 Module 5 example
The introduction contrasts the two kinds of corporation and explains why book and taxable income differ. Part A reconciles book income to taxable income line by line in a table, explains the dividends-received deduction percentage and limit, and converts the dividend tax into a combined rate. Part B restates the year for an S corporation, separating items, and tracks a founder's basis in the required order. Part C compares combined rates, explains when retention favors a C corporation, cites research on how taxes affect organizational form and tests eligibility and the built-in gains tax. The conclusion ties the comparison to Harborview's plans for retaining or distributing its profits.
Reading the ACC 6060 Module 5 grading rubric
Harborview's corporate problems carry the same 7-point weight as the other written work in the course. For this module, mentors check every book-tax adjustment, the charitable limit and dividends-received deduction percentage, the tax computation, correct separately stated items for the S corporation and basis adjustments in the required order. Analysis of the entity choice that considers distribution policy, the qualified business income deduction and conversion costs shows depth. Showing each adjustment with its reason supports partial credit. Showing the Schedule M-1 style reconciliation in a table, and both founders' basis schedules, makes the work verifiable. Recognizing the built-in gains tax on conversion shows depth. Answers should also show the deferred tax created by the depreciation difference and explain why permanent items create none.
Common ACC 6060 Module 5 mistakes, and how to avoid them
The errors that cost points here are adding back all meals rather than half, forgetting to add back charitable contributions before applying the 10 percent limit, giving an S corporation a dividends-received deduction and reducing basis in the wrong order. List each book-tax difference with its direction before totaling. Separate S corporation items that shareholders treat differently. Work out ordinary business income and the separately stated items first; basis comes after. Apply the dividends-received deduction percentage that matches the ownership level, and check the taxable income limit. Separate permanent from temporary differences, since only temporary ones create deferred taxes. A free first sample of your own ACC-6060 Module 5 problems is available on request.
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ACC 6060 Module 5 questions, answered
Where can I find a free ACC 6060 Module 5 sample paper?
Harborview Analytics' 2024 problems appear above: a book-to-taxable reconciliation, C corporation tax, the S corporation restatement with basis and the entity comparison.
How is the corporate dividends-received deduction determined?
By ownership: 50 percent below 20 percent ownership, 65 percent from 20 to under 80 percent, and 100 percent for affiliated corporations, subject to a taxable income limit.
What limits a corporation's charitable deduction?
Usually a cap of 10 percent of taxable income, measured before charitable gifts and the dividends-received deduction, with any excess carried forward for five years.
In what order is S corporation stock basis adjusted?
Increases for income first, then decreases for distributions, then nondeductible expenses, then losses and deductions.
What are the requirements for an S election?
A U.S. corporation with one class of stock and 100 or fewer eligible owners, who are mostly individuals.