Entity Taxation

# REG — Entity Taxation Exam: CPA — REG (Taxation & Regulation) — Core section (all candidates required) Last Updated: June 2026 --- ## C Corporations ### Tax Formula `` Gross income − Deductions (business expenses, depreciation, etc.) = Taxable income × Flat 21% rate = Tax liability − Credits = Net tax `` Flat rate: 21% for all C corps regardless of income level (post-TCJA permanent under OBBBA). ### Dividends Received Deduction (DRD) C corps receiving dividends from other domestic C corps can deduct a portion to avoid triple taxation. | Ownership % | DRD Percentage | |---|---| | < 20% | 50% | | 20%–80% | 65% | | > 80% (affiliated group) | 100% | DRD limitation: DRD cannot exceed the applicable % × taxable income (before DRD), unless the DRD creates or increases a net operating loss. ### Organizational Costs and Start-Up Costs - §248: Corporations can elect to deduct up to $5,000 of organizational costs in year 1; remainder amortized over 180 months. Deduction phases out dollar-for-dollar if total costs exceed $50,000. - §195: Same $5,000/$50,000 rule for start-up costs. ### Net Operating Loss (NOL) - Post-TCJA: NOLs carried forward indefinitely; deduction limited to 80% of taxable income in any year. - No carryback (generally) for tax years after 2017. ### Accumulated Earnings Tax (AET) and Personal Holding Company (PHC) Tax - AET: 20% penalty tax on accumulated earnings beyond reasonable business needs (> $250,000 accumulated for C corps generally; $150,000 for personal service corps) - PHC: 20%…