Khóa luận tốt nghiệp Kế toán kiểm toán: The procedures and calculation method for filing federal corporate tax returns in the united states by xoa tax

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FACULTY OF ACCOUNTING AND AUDITING

GRADUATION THESIS

THE PROCEDURES AND CALCULATION

METHOD FOR FILING FEDERAL CORPORATE TAX RETURNS IN THE UNITED

STATES BY XOA TAX

Lecturer: Ms Nguyen Hoang Dieu HienStudent: Dinh Ho Tuyet Anh

Student ID: K194050735Class: K19405CA

Ho Chi Minh City, 17" April 2023

University of Economics and Law, for their dedicated teaching and guidance that has

contributed significantly to my personal and professional growth It is thanks to their

passionate teaching and guidance that I have gained the motivation to pursue my career

path with confidence and determination

Especially, | would like to express my sincere appreciation to my instructor Ms.

Nguyen Hoang Dieu Hien, lecturer of the Faculty of Accounting and Auditing, for her

support and guidance throughout my graduation thesis.

Furthermore, I would like to extend my deepest gratitude to XOA Tax for providing

me with an optimal environment to learn and apply the knowledge I acquired during my

studies in a practical setting | am grateful to all the dedicated members of the company

who generously shared their knowledge and experience to help me overcome the challenges

that I faced during my internship

In conclusion, I really thank to all people helping me to finish this graduation thesis.

Ho Chi Minh City, 17 April, 2023

Student

Dinh Ho Tuyet Anh

ACKNOWLEDGEMENTT 0 G5 5 S3 ch TH cọ TH 0000.0009 00900 i

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CHAPTER 4: COMMENTS AND RECOMMENDATIONS 36

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Diagram 4 The process of providing business tax services by XOA Tax 18

United States Certified Public Accountant Entity identification number

S corporation

C corporation

OVERVIEW

1 Research rationales

In most countries of the world, all businesses which generates income is required

to file a tax return When it comes to taxes, people often think of it as a public fund payable

to the state or as a burden that deprives us of a portion of our income Taxation, on the otherhand, is an integral part of a country's development and plays an important role for the

society Every citizen and corporation has the obligation to declare taxes in order to

contribute to social and economic advancement Each year, many governments will impose

or eliminate a few additional taxes to help the market economy thrive.

Business income tax is of particular interest to most Americans, especially who

operate their own businesses, and every business with income is obliged to submit business

tax forms with the Internal Revenue Service (IRS) The business tax system in the United States is complicated and it affects companies of all sizes and types All of the levels of government, from federal to state to municipality, have the authority to tax, legislate, and regulate.

Businesses are taxed by the federal and state government on their net income, withvaried tax rates and deductions depending on the kind of company entity Paying taxes can

be difficult and time-consuming, so it is critical to understand the laws and regulations that

need to be followed when submitting business tax returns Businesses that violate tax

returns or evade taxes will face fines from the IRS, the severity of which is determined by

the degree of the violation As a result, business owners should understand the regulations

and taxes imposed in order to reduce their tax burden as much as possible

Being aware of the role and importance of tax work, as well as conducting research

on business tax returns, is essential and will help practitioners gain a deeper understanding

of the tax preparation process Therefore, the writer determines to work on the topic “KOA Tax's Procedures And Calculation Method For Filing Federal Business Tax Returns In The

United States” to have a better understanding of the process of filing a business tax return

2 Research objectives

In this report, the writer focuses on understanding and analyzing in detail the US tax return process for a US-based corporation The research objective is to gain an

understanding ofthe steps and calculation approach needed to complete a successful federal

tax return as well as any regulations that must be followed Additionally, introducing tax forms and relevant software for filing taxes will also be discussed.

3 Research scope and limitations

The scope of this research will encompass the procedures for filing federal business income tax returns as well as any calculating method used to process the return taken by

XOA Tax This includes examining and calculating the steps needed to complete asuccessful return, any regulations that must be followed in order to do so and introducing

relevant forms and software which are used by the company.

This research is limited to procedures and method for filing federal income tax

returns of the company only and does not take into account other state tax as well as global

or regional taxation systems The research will also not explore potential issues experienced

while filing taxes and how to avoid them

4 Research structure

The remainder of this report is structured as followed:

Chapter 1: Introduction to XOA Tax

Chapter 2: Introduction to customer business ABC

Chapter 3: The procedures of filing federal tax returns for customer business ABC

Chapter 4: Comments and recommendations

CHAPTER 1: INTRODUCTION TO XOA TAX

1.1 General information

- Name: XOA Tax Limited Liability Partnership

- Subsidiary: XOA Consulting Company Limited

- Employer ID Numbers: **-***1677

- Founded: 2020

- Address: 10015 Garden Grove Boulevard, Garden Grove, CA 92844

- Industry: accounting and tax

- Services offered: bookkeeping, tax filing, financial planning, individual taxpayer

identification number (ITIN) application, virtual consultation

- Customers: businesses and individuals in the United States

1.2 History of formation and development

1.2.1 About XOA Tax

XOA Tax Limited Liability Partnership is a CPA firm which was founded in 2020

and has been in operation for about three years Despite its relative youth, the company boasts a team of seasoned and experienced tax accountants and Certified Public Accountants (CPA).

XOA Tax is headquartered in California, USA Its customers are individuals andbusinesses in the United States In 2022, XOA Tax formed a subsidiary firm, XOAConsulting which is located in Ho Chi Minh city, Vietnam With the motto "fast and

concise", XOA Tax prioritizes providing professional and reliable services to its customers The company places the needs of its clients at the forefront, with the goal of helping them achieve their objectives.

XOA Tax is an ambitious company specializing in financial and accounting

services Despite its youthfulness, it is dynamic and on the cusp of speedy growth to provide

outsourced bookkeeping and tax services for US customers The firm offers extensive

services to business owners, individuals, and independent contractors alike It is devoted toproviding professional services of superior quality efficiently and reliably The policyencourages maintaining a professional relationship with clients through active engagement

and regular correspondence, while also preserving the technical proficiency and innovative

insight that are essential components of its approach and style.

1.2.2 About a subsidiary company — XOA Consulting

XOA Consulting Company Limited is a newly incorporated company established

in July 2022 The company operates as a partner entity of XOA Tax—collaborating with XOA Tax in order to deliver accounting and tax-related services to US customers XOA Consulting is registered with the tax code of 0317389762 and is based in Ho Chi Minh City.

Since its establishment, the company has maintained a comprehensiveorganizational structure comprising various departments including accounting, tax,

marketing and information technology The staffs in Vietnam are entrusted with the responsibility of managing the operations of the whole company They receive customers'

documents from XOA Tax, and conduct bookkeeping, financial statements preparation and

tax returns filing.

1.3 Firm goals

The graph below shows the four core values of XOA Tax in identifying objectives

and meeting their customers' needs.

Table I Firm goals at XÓA Tax

Upholding Building Success Passion for Diversity and

Integrity Together Excellence Inclusion

Maintain the utmost | Work as a team, Dedicate ourselves | Commit to an

standards of foster collaboration | to excellence, inclusive work

honesty and and sharing in order | continuously learn | environment that

integrity to win the | to provide clients and upgrade embraces and

trust of the clients, | with the exceptional | knowledge in order | respects individuals

public and service that is to become smarter | regardless of their

colleagues aligned with their and collectively race, gender,

needs is the key to | thrive religions, age,

success sexual orientation,

or disability

1.4 Organizational structure

The organizational structure of XOA Tax includes:

Directors

Management Teams

Accounting Tax Marketing Sales IT

Department Department Department Department Department

Diagram 1 Organizational structure at XÓA Tax

Partners are the heads of the company, have full authority to decide on the

company's operational strategies, and bear all the responsibilities related to the company's

operations They are also responsible for maintaining professional standards and ensuring

that the business complies with all the relevant laws and regulations

The director is in charge of setting general directions such as business strategy inVietnamese office, XOA Consulting They supervise and manage the various departments,

ensuring that each department operates efficiently and effectively They also cooperate with

partners to make strategic decisions that benefit the company as a whole

Under the director are the management teams which is responsible for the

day-to-day operations of the business There are five departments:

- Accounting department: Responsible for preparing financial statements, payrolland sales reports for business customers by experienced accountants who have the

knowledge and expertise to handle all aspects of accounting including bookkeeping,

budgeting, forecasting, and financial analysis

- Tax department: This department has the most employees inside the companydue to the high volume of individuals and businesses who come to file tax returns eachyear In addition to creating tax planning strategies to make sure customers are in

compliance with all federal and state tax regulations, this department is in charge of filingtaxes on behalf of both individuals and businesses.

- Marketing department: This department is operated in the Vietnamese office

Responsible for designing marketing strategies that match with the firm's overall business

objectives This department is in charge of developing the company's website, marketingcontent, and generating leads for the sales team

- Sales department: This department is based in the US office and collaborateswith the marketing team to convert leads into customers, reach out to potential consumers,and create connections with clients while recognizing their needs and desires They are also

in charge of gathering information from customers

- IT department: Involved in looking after a company's technologicalinfrastructure, including its networks and software programs This department isresponsible for ensuring that workers carry out their responsibilities without interruption

from machine-related problems.

1.5.1 Tax services

Tax is a key area of XOA Tax’s services Two main tax services offered to

customers are corporate income tax and personal income tax, both of which involve taxplanning, consulting, and preparation services to ensure that clients comply with all federal

and state tax laws The team of experts in this division including knowledgeable staffs and CPAs are well-versed in the latest tax laws and regulations and can provide valuable

guidance to clients in order to avoid being audited by the Internal Revenue Service (IRS)

Additionally, the tax team assists customers in forming businesses and consulting

which business entities are appropriate for them because the choice of business entity can affect business tax and individual tax for the business owners Therefore, tax is an important factor for all firms, and the type of business entity selected can have a considerable impact

on the tax implications for the employers.

1.5.2 Accounting services

The accounting department provides clients with bookkeeping and payroll services Thisentails keeping up-to-date financial records, computing and filing sales taxes, conductingbank reconciliations, keeping track of inventories, processing payroll and ensuring

compliance with all accounting regulations From daily transactions to more complicated financial reporting, the personnel in this division has experience handling all aspects of

accounting They can assist with forecasting, financial analysis, and budgeting, helping

clients make informed decisions about their business.

1.6 Tax department organization

Tax preparer Senior tax accountant Manager

Diagram 3 Tax department organization at XOA Tax

The tax department is led by a highly qualified manager, who holds the title of aCertified Public Accountant The manager is responsible for overseeing the overall

operations of the department, including signing of engagement letters and assisting clients with the e-filing or paper-filing of their tax returns Additionally, the manager helps clients

contact to the IRS to deal with complex documents or audited tax returns, and ensures that

all necessary paperwork is collected and submitted in a timely manner.

The manager is supported by a number of senior tax accountants who are in charge

of advising and helping the tax preparers These senior accountants are experienced

professionals with a deep understanding of tax laws and regulations, and they are

responsible for ensuring that the clients receive accurate and timely tax services They also

assist clients in forming businesses and advise clients on the best types of company entitiesfor their needs They prepare sales tax for businesses and assist with tax planning as well

On the other hand, they also work with customers to find ways to minimize their tax

obligations or maximize their tax refunds

The tax preparers are in charge of preparing and filing taxes for the clients Seniors

will provide them with client documentation, and they will assist them in filing clients' tax returns using the tax software, making sure that all tax returns are accurate and compliant

with all applicable laws and regulations They are trained and experienced in preparing

individual and business tax returns, and work closely with the seniors to ensure that all relevant information is included in the returns by listing open items when filing Anytime

the preparers find problems with the clients’ documents, such as incorrect numbers orinformation, they should immediately report them to the managers or seniors and notify the

clients before continuing to process the returns.

The tax department is set up to offer clients efficient and effective tax services A highly qualified manager oversees the department, which is backed up by senior tax

accountants with years of expertise and proficient tax preparers Together, they make surethat clients receive accurate and timely tax services that match their demands

CHAPTER 2: INTRODUCTION TO CUSTOMER BUSINESS ABC

2.1 Introduction to ABC Incorporation

The full name of business ABC is ABC Incorporation which is established in 2008

with the entity identification number (EIN) XXXXX6979, specializing in the production

and distribution of sexy wear and adult costumes at affordable prices Initially, the companywas created as an online platform to provide easy access to customers seeking fun and sexy

wear The company has grown quickly over the years and is now known as a top global provider in its specialist industry.

ABC was formed as an S corporation and located in California, with one

shareholder who owns 100% shares of the company with 100,000 shares at the beginning

The company first filed statement of information with the California Secretary of State was

in July 2008 under the entity number XXX066 With a strong online presence and an growing customer base, ABC Incorporation remains dedicated to providing exceptional

ever-products and services to its clients

Business ABC has been a valued client of XOA Tax for three years During this

time, XOA Tax has provided ABC with comprehensive accounting and tax services

including financial statement preparation, sales reporting, and tax filing.

2.2 Accounting policy

a) Accounting method

Business ABC uses accrual method to accurately record and report financial

transactions While the business manages inventory and cost of goods sold, this method

ensures that expenses and revenues are recognized when earned, making it easy to keeptrack By utilizing the accrual method, business ABC is able to provide a more accuraterepresentation of its financial position and performance over time

b) Fixed assets and depreciation

Fixed assets include the building and automobile which is reported as cost less

accumulated depreciation Using the straight-line method, fixed assets are depreciated over

their anticipated useful lifetimes

CHAPTER 3: THE PROCEDURES OF FILING FEDERAL TAX RETURNS FOR

CUSTOMER BUSINESS ABC

3.1 Theoretical basis

3.1.1 Tax documents

- IRS Instructions for Form 1120-S provide guidance on how to calculate the S

corporation's taxable income, how to allocate income and deductions among shareholders, how to prepare and file Schedule K-1.

- IRS Instructions for Form 2553 "Election by a Small Business Corporation" provide

guidance to file Form 2553 to elect S corporation status.

- IRS Publication 542 "Corporations" provides general guidance on tax issues relevant

to all types of corporations, including S corporations.

- IRS Instructions for Form 7203 “S Corporation Shareholder Stock and Debt Basis

Limitations” provide guidance about shareholder basis including stock basis and debtbasis and how to file basis statement

- IRS Publication 550 "Investment Income and Expenses" provides guidance on tax

issues related to investments, including how to report income and losses from S

corporations on Schedule K-1.

- IRS Revenue Ruling 59-221 provides guidance on the qualification of corporations as

S corporations, and discusses the requirements for electing S corporation status

- IRS Publication 334 "Tax Guide for Small Business" provides general guidance on tax

issues relevant to small businesses, including those that are organized as S corporations

3.1.2 Business entities

A business entity is an organization formed by a single person or group of

individuals for the purpose of carrying out business operations There are three main types

of business entities, that are sole proprietorships, partnerships, corporations The form ofentity impacts how taxes are paid as well as the level of financial liability that a companyconfronts Furthermore, each type of business entity has benefits as well as drawbacks, and

the choice of entity will be determined by the business owners' objectives and needs.

a) Sole proprietorship

A sole proprietorship is a form of business entity in which the business is ownedand managed by a single person Because there is no legal distinction between the business

and the owner in this type of business structure, the owner is personally responsible for its

debts, liabilities, and legal obligations.

The income and expenses of the business are reported on Schedule C of the

individual tax return (Form 1040) filed by the business owner The proprietors must pay

both self-employment tax and income tax to the federal government if the business is

profitable.

b) Partnership

Partnerships are owned by two or more individuals Each individual contributesmoney, property, and they each participate equally in the business's gains and losses In

addition, the legal responsibilities and liabilities owed to the company are without limit.

In contrast to sole proprietorships, partnerships are required to file separateannual tax return using Form 1065 This kind of business is subject to individual tax ratherthan company tax, the partner will therefore be required to disclose any income or loss on

their individual tax return The income or loss of the business will be reported on Schedule K-1 of each partner.

Form 1120S must be used for the yearly tax return that an S-Corp is required to submit

Each shareholder gets a Schedule K-1 This tax form details the shareholder's portion of the

company's revenue or loss, nondeductible expenses, and payouts, all of which must bereported on the shareholder's individual tax return

On the other hand, C corporations are liable to the corporate income tax on their

earnings, and their shareholders are also subject to tax on any dividends that they get from

the business Hence, C-Corps are subject to double taxation; first at the level of the

company itself, and then at the level of the shareholders Additionally, there is no limit on

the number of shareholders in a C-Corp, and shareholders can be individuals, othercorporations, or foreign entities C-Corps must file an annual tax return on Form 1120 Thisform is used to calculate the company's tax obligation, and the corporation is responsible

for paying any taxes that are determined to be owing.

Table 2 Comparison of business entities

Number of One owner Must have at Maximum one | No restrictions

owners least two hundred

partners shareholders

Subject to

personal and

corporate taxes

3.1.3 Introduction about S corporation

An S Corporation or S-Corp, also known as small business corporation, is abusiness entity that is structured as a pass-through entity This means that the corporation

itself is not taxed on its income, but rather the profits and losses of the corporation are passed through to the shareholders and taxed on their personal income tax returns Hence, this type of entity that elects to have income tax not at the corporate level but at the

shareholder level, specifically, this business structure can avoid double taxation in

shareholder and corporate taxes This benefit allows shareholders to use business losses to

offset income on their own tax return which can help to reduce the overall tax burden for the shareholders, as they are only taxed on the income that they actually receive.

Even though S corporations have appealing features, they are subject to restrictions,

such as caps on the number and types of shareholders, the permitted stock classes, and the prohibition on corporate or foreign ownership First, S-Corps are limited to a maximum of

100 shareholders, all of whom must be US citizens Second, shareholders of an S-Corp

cannot typically be corporations or non-resident aliens Finally, an S-Corp can only haveone class of stock, which means that all shares must have the same rights and privileges It

might be challenging to raise capital or use stock options to incentivize important employees due to this restriction.

According to IRS Instructions for Form 2553, the business must submit form 2553,titled "Election by a Small Business Corporation’, to the IRS in order to elect the S-Corpstatus (see Appendix 1) The filing deadline is no later than two months and fifteen days

after the beginning of the tax year for which the election is to be effective When the IRS accepts the election, the S-Corp is required to file Form 1120S (see Appendix 2), which is

a United States income tax return for an S Corporation, annually in order to report income

and deductions as well as other tax-related matters

3.1.4 Tax base of S corporation

The tax base for S-Corps is determined by their taxable income, which is calculated

by subtracting allowable deductions from their gross income S-Corps use a pass-through

tax method, which implies that the company itself is exempt from paying federal income tax on any profits that it generates Instead, the corporation's revenues and losses are passed through to its shareholders, who then record them on their own individual tax returns.

On Form 1120S, the corporation reports their income, deductions, and credits on

Schedule K-1, which is then distributed to each shareholder Since the profit or loss of thecorporation is passed-through to its shareholders, each shareholder then reports their share

of the S-Corp's income, deductions, and credits on their individual income tax returns

To identify taxable income for each shareholder, first of all, the S-Corp needs to

calculate business income or loss first on Form 1120S Ordinary business income or loss is

determined by the following formula:

e Ordinary business income or loss (net income)

= Gross income - Allowable deductions Where:

- Gross income refers to total income including revenue from sales, interest and othersources such as grants from government, then net of returns and allowances, and cost ofgoods sold

- Allowable deductions are costs such as salaries, depreciation, meals and supplies that can

be deducted from its gross income to arrive at its taxable income

After determining business income or loss, it will then be reported on Schedule K-1 of each

shareholder After that, the S-Corp will issue Schedule K-1 to each shareholder to report on

their individual tax returns.

s* Example for business ABC

At the end of the 2021 tax year on 31 December, business ABC reported sales of

$2,058,985, accompanied by a cost of goods sold of $1,155,858, and a sum total of

deductions amounting to $568,830 Consequently, the net income or loss for the period is

determined as follows:

e Gross income = $2,058,985 - $1,155,858 = $903,127

e Net income = $903,127 - $568,830 = $334,297

Since ABC is a pass-through business entity, its profits are passed through to its

shareholder and reported on Schedule K-1 Therefore, the income of ABC's shareholder asrecorded on Schedule K-1 is $337,695, which is disclosed under line 1 denoting ordinary

business income (loss).

LC] Final K-1 L_Ì amended K-1 OMB No 1545-0123

>Fyaaiig Shareholder”s Share of Current Year Income,

Deductions, Credits, and Other Items

mm no business income (loss) Credits

eee eee eee oon 34,297.

LỆ) Net rental real estate income(loss)

lS Other net rental income (loss)

Figure I Business income reported on Schedule K-1

3.1.5 Shareholder basis of S corporation

The shareholder basis of an S-Corp refers to the amount of investment that a shareholder has in the company Basis is deposits and earnings less withdrawals Like a bank account, more cannot come out than goes in - basis can never goes negative Since basis begins when the company stock is acquired, basis should be tracked from day one.

The shareholder starts with either the initial cost of the shares they bought or their capitalcontribution to the S-Corp This basis may be changed over time depending on variablessuch as the company's revenues or losses, the shareholder's further investments, and anydividends received from the S-Corp

A shareholder basis in an S corporation is important because it determines the

amount of tax-free distributions that the shareholder can receive from the company It is animportant concept to understand as it affects the tax treatment of any distributions the

shareholder may receive from the firm.

The formula of shareholder basis is:

e Beginning basis + Additional contributions - Distributions +/- Profits/Loss

= Ending basis

The shareholder's basis decides what portion of payments are taxed as dividends

and what portion is taxed as a return of capital If the basis exceeds the distribution amount,

the excess is recognized as a return of capital and is not taxed Nevertheless, if the basis is

less than the distribution amount, the excess is considered as a dividend and taxedaccordingly.

For example, the shareholder of ABC invested in the company totally $100,000 in

2008 and a business had a net profit of $337,695 at the end of that year In 2009, the business

had a net loss of $50,000 and the shareholder made a distribution of $30,000 to their

personal bank account The shareholder is calculated as follow:

In 2008

Beginning basis was $100,000

Net profit was $337,695

Ending basis was: $100,000 + $337,695 = $437,695

In 2009

Beginning basis was $437,695

Net loss was $50,000

Distribution was $30,000

Ending basis was $437,695 - $50,000 - $30,000 = $357,695

Therefore, the shareholder still had enough basis for the distributions for the year

2009, and the amount was tax-free However, had the shareholder made another $380,000

distribution in 2009, the basis would be reduced to zero and the $22,305 excess would be

treated as taxable capital gain distributions.

3.2 Introduction to the tax software

Intuit ProSeries is a comprehensive tax preparation software that serves the needs

of tax professionals and accounting firms Developed by Intuit, a well-known provider of

financial software, and is intended to simplify and streamline the process of doing taxes It

provides a virtual office for filing taxes by managing the entire process, from gathering and

automatically importing data to filing returns This software makes it simpler for tax

professionals to precisely calculate tax returns and eliminate errors due to its user-friendly

design and sophisticated features ProSeries is updated annually with the most recent tax

return requirements as they can change from year to year to ensure compliance with the

most recent tax laws and regulations Hence, ProSeries releases a new edition every year.

It offers a variety of tools and resources to help tax professionals stay organized and efficiently manage their clients' tax information.

PROFESSIONAL | TAX YEAR 2022

INTUIT ProSeries Tax

Figure 2 Intuit ProSeries tax software background

3.3 The process of providing business tax services by XOA Tax

The process of XOA Tax’s business tax services is divided into three stages: