Income | |||
Interest income | $10,000.00 | ||
Partially tax-exempt interest with respect to which a credit is allowable under section 35 | 500.00 | ||
Dividends to which sections 34 and 116 are applicable | 750.00 | ||
11,250.00 | |||
Deductions | |||
Real estate taxes | 200.00 | ||
2 personal exemptions at $600 on an annual basis | 1,200.00 | ||
The tax for the 10-month period is computed as follows: | |||
Total income as above | 11,250.00 | ||
Less: | |||
Exclusion for dividends received | $50.00 | ||
2 personal exemptions ($1,200 * 10/12) | 1,000.00 | ||
Real estate taxes | 200.00 | ||
---- | 1,250.00 | ||
Taxable income for 10-month period before annualizing | 10,000.00 | ||
Taxable income annualized (10,000 * 12/10) | 12,000.00 | ||
Tax on $12,000 before credits | 3,400.00 | ||
Deduct credits: | |||
Dividends received for 10-month period | $750.00 | ||
Less: Excluded portion | 50.00 | ||
Included in gross income | 700.00 | ||
Dividend income annualized ($700 * 12/10) | 840.00 | ||
Credit (4 percent of $840) | 33.60 | ||
Partially tax-exempt interest included in gross income for 10-month period | 500.00 | ||
Partially tax-exempt interest (annualized) ($500 * 12/10) | 600.00 | ||
Credit (3 percent of $600) | 18.00 | ||
---- | 51.60 | ||
Tax on $12,000 (after credits) | 3,348.40 | ||
Tax for 10-month period ($3,348.40 * 10/12) | 2,790.33 |
Gross operating income | $126,000 | |
Business expenses | 130,000 | |
Net loss from operations | (4,000) | |
Dividends received from taxable domestic corporations | 30,000 | |
Gross income for short period before annualizing | 26,000 | |
Dividends received deduction (85 percent of $30,000, but not in excess of 85 percent of $26,000) | 22,100 | |
Taxable income for short period before annualizing | 3,900 | |
Taxable income annualized ($8,900 * 12) | 46,800 | |
Tax on annual basis: | ||
$46,800 at 52 percent | $24,336 | |
Less surtax exemption | 5,500 | |
---- | $18,836 | |
Tax for 1-month period ($18,836 * 1/12) | 1,570 |
Taxable income exclusive of net long-term capital gain | $40,000 | |
Net long-term capital gain | 10,000 | |
Taxable income for short period before annualizing | 50,000 | |
Taxable income annualized ($50,000 * 12/6) | 100,000 | |
Regular tax computation | ||
Taxable income annualized | 100,000 | |
Tax on annual basis: | ||
$100,000 at 52 percent | $52,000 | |
Less surtax exemption | 5,500 | |
46,500 | ||
Tax for 6-month period ($46,500 * 6/12) | 23,250 | |
Alternative tax computation | ||
Taxable income annualized | 100,000 | |
Less annualized capital gain ($10,000 * 12/6) | 20,000 | |
Annualized taxable income subject to partial tax | 80,000 | |
Partial tax on annual basis | ||
$60,000 at 52 percent | $41,600 | |
Less surtax exemption | 5,500 | |
---- | 36,100 | |
25 percent of annualized capital gain ($20,000) | 5,000 | |
Alternative tax on annual basis | 41,100 | |
Alternative tax for 6-month period ($41,100 * 6/12) | 20,550 |
Since the alternative tax of $20,550 is less than the tax computed in the regular manner ($23,250), the corporation's tax for the 6-month short period is $20,550.
However, if the tax computed under section 443(b)(2) and this subparagraph is not less than the tax for the short period computed under section 443(b)(1) (or section 441(f)(2)(B)(iii) in the case of certain changes from or to a 52-53-week taxable year), then section 443(b)(2) and this subparagraph do not apply.
Income | ||
Interest income | $11,000 | |
Partially tax-exempt interest with respect to which a credit is allowable under section 35 | 600 | |
Dividends to which sections 34 and 116 are applicable | 850 | |
12,450 | ||
Deductions | ||
Real estate taxes | 200 | |
2 personal exemptions at $600 | 1,200 | |
Tax computation for short period under section 443(b)(2)(A)(i) | ||
Total income as above | $12,450 | |
Less: | ||
Exclusion for dividends received | $50 | |
Personal exemptions | 1,200 | |
Deduction for taxes | 200 | |
1,450 | ||
Taxable income for 12-month period | 11,000 | |
Tax before credits | 3,020 | |
Credit for partially tax-exempt interest (3 percent of $600) | 18 | |
Credit for dividends received (4 percent of ($850-50)) | 32 | |
50 | ||
Tax under section 443(b)(2)(A)(i) for 12-month period | 2,970 | |
Taxable income for 10-month short period from Example 1 of paragraph (b)(1)(vii) of this section before annualizing | 10,000 | |
Tax for short period under section 443(b)(2)(A)(i) ($2,970 * $10,000 (taxable income for short period)/$11,000 (taxable income for 12-month period)) | 2,700 | |
Tax computation for short period under section 443(b)(2)(A)(ii) | ||
Total income for 10-month short period | 11,250 | |
Less: | ||
Exclusion for dividends received | 50 | |
2 personal exemptions | 1,200 | |
Real estate taxes | 200 | |
1,450 | ||
Taxable income for short period without annualizing and without proration of personal exemptions | 9,800 | |
Tax before credits | 2,572 | |
Less credits: | ||
Partially tax-exempt interest (3 percent of $500) | 15 | |
Dividends received (4 percent of ($750-50)) | 28 | |
43 | ||
Tax for short period under section 443(b)(2)(A)(ii) | 2,529 |
The tax of $2,700 computed under section 443(b)(2)(A)(i) is greater than the tax of $2,529, computed under section 443(b)(2)(A)(ii), and is, therefore, the tax under section 443(b)(2). Since the tax of $2,700 (computed under section 443(b)(2)) is less than the tax of $2,790.33 (computed under section 443(b)(1)) on the annualized income of the short period (see Example 1 of paragraph (b)(1)(vii) of this section), the taxpayer's tax for the 10-month short period is $2,700.
Tax computation for short period under section 443(b)(2)(A)(i) | ||
Taxable income for 12-month period from Example 1 | $11,000 | |
Less: Casualty loss | 5,000 | |
Taxable income for 12-month period | 6,000 | |
Tax before credits | $1,360 | |
Credits from Example 1 | 50 | |
Tax under section 443(b)(2)(A)(i) for 12-month period | 1,310 | |
Tax for short period ($1,310 * $10,000/$6,000) under section 443(b)(2)(A)(i) | 2,183 | |
Tax computation for short period under section 443(b)(2)(A)(ii) | ||
Total income for the short period | 11,250 | |
Less: | ||
Exclusion for dividends received | 50 | |
2 personal exemptions | 1,200 | |
Real estate taxes | 200 | |
1,450 | ||
Taxable income for short period without annualizing and without proration of personal exemptions | 9,800 | |
Tax before credits | 2,572 | |
Less credits: | ||
Partially tax-exempt interest (3 percent of $500) | 15 | |
Dividends received (4 percent of $750-50)) | 28 | |
43 | ||
Tax for short period under section 443(b)(2)(A)(ii) | 2,529 |
The tax of $2,529, computed under section 443(b)(2)(A)(ii) is greater than the tax of $2,183 computed under section 443(b)(2)- (A)(i) and is, therefore, the tax under section 443(b)(2). Since this tax is less than the tax of $2,790.33, computed under section 443(b)(1) (see Example 1 of paragraph (b)(1)(vii) of this section), the taxpayer's tax for the 10-month short period is $2,529.
Example. A taxpayer who is an unmarried individual has been granted permission under section 442 to change his annual accounting period files a return for the short period of 4 months ending April 30, 1970. The $30,000 amount specified in section 56 is reduced as follows:
(120/365) * $30,000 = $9,835.89.
26 C.F.R. §1.443-1