Chapter 16 Key Terms

Question	Answer
Affiliated group	Two or more “includible” corporations that are related through common stock ownership and eligible to file a U.S. consolidated tax return. An affiliated group consists of a parent corporation that owns directly 80 percent or more of the voting stock and value of another corporation and one or more subsidiary corporations that meet the 80 percent ownership requirement collectively. Includible corporations are taxable U.S. C corporations, excluding real estate investment trusts; regulated investment companies; and life insurance companies.
Annualized income method	A method for determining a corporation’s required estimated tax payments when the taxpayer earns more income later in the year than earlier in the year. Requires corporations to base their first and second required estimated tax installments on their income from the first three months of the year, their third installment based on their taxable income from the first six months of the year, and the final installment based on their taxable income from the first nine months of the year.
Bargain element (of stock options)	the difference between the fair market value of the employer’s stock and the amount employees pay to acquire the employer’s stock.
Book (financial reporting) income	The income or loss corporations report on their financial statements using applicable financial accounting standards.
Book–tax difference	A difference in the amount of an income item or deduction item taken into account for book purposes compared to the amount taken into account for the same item for tax purposes.
Capital gain property	Any asset that would have generated a long-term capital gain if the taxpayer had sold the property for its fair market value.
Charitable contribution limit modified taxable income	Taxable income for purposes of determining the 10 percent of taxable income deduction limitation for corporate charitable contributions. Computed as taxable income before deducting (1) any charitable contributions, (2) the dividends-received deduction, and (3) capital loss carrybacks.
Consolidated tax return	A combined U.S. income tax return filed by an affiliated group of corporations.
DRD modified taxable income	Taxable income for purposes of applying the taxable income limitation for the dividends-received deduction. Computed as the dividend-receiving corporation’s taxable income before deducting the dividends-received deduction, the net operating loss deduction, and capital loss carrybacks.
Exercise price	The price at which holders of stock options may purchase stock in the corporation issuing the option.
Favorable book–tax difference	A book–tax difference that requires a subtraction from book income in determining taxable income.
Grant date	The date on which employees receive stock options to acquire employer stock at a specified price.
Incentive stock options (ISO)	A type of stock option that allows employees to defer the bargain element for regular tax purposes until the stock acquired from option exercises is sold. The bargain element is taxed at capital gains rates provided the stock is retained long enough to satisfy certain holding period requirements. Employers cannot deduct the bargain element as compensation expense.
M adjustments	Book–tax differences that corporations report on the Schedule M-1 or M-3 of Form 1120 as adjustments to book income to reconcile to taxable income.
Net capital loss carryback	The amount of a corporation’s net capital loss from one year that it uses to offset net capital gains in any of the three preceding tax years.
Net capital loss carryover	The amount of a corporation’s or an individual’s net capital loss from one year that it may use to offset net capital gains in future years.
Net operating loss (NOL)	The excess of allowable deductions over gross income.
Net operating loss carryback	The amount of a pre-2018 net operating loss that a corporation elects to carry back to the two previous years to offset taxable income in those years.
Net operating loss carryover	The amount of a current-year net operating loss that is carried forward for up to 20 years to offset taxable income in those years (20 years for pre-2018 losses; unlimited for post-2017 losses).
Nonqualified stock options (NQO)	A type of stock option requiring employees to treat the bargain element from options exercised as ordinary income in the tax year options are exercised. Correspondingly, employers may deduct the bargain element as compensation expense in the tax year options are exercised.
Ordinary income property	Property that if sold would generate income taxed at ordinary rates.
Permanent book–tax differences	Items of income or deductions for either book purposes or tax purposes during the year but not both. Permanent differences do not reverse over time, so over the long run, the total amount of income or deduction for the item is different for book and tax purposes.
Requisite service period	The period or periods during which an employee is required to provide service in exchange for an award under a share-based payment arrangement (ASC Topic 718, Glossary).
Schedule M adjustments	Book–tax differences that corporations report on the Schedule M-1 or M-3 of Form 1120 as adjustments to book income to reconcile to taxable income.
Temporary book–tax differences	Book–tax differences that reverse over time such that, over the long term, corporations recognize the same amount of income or deductions for the items on their financial statements as they recognize on their tax returns.
Unfavorable book–tax difference	Any book–tax difference that requires an add-back to book income in computing taxable income. This type of adjustment is unfavorable because it increases taxable income relative to book income.
Vesting	The process of becoming legally entitled to receive a particular benefit without risk of forfeiture; gaining ownership.
Vesting period	Period of employment over which employees earn the right to own and exercise stock options.

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Chapter 16 Key Terms

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	Created by Kalie Carney 8 months ago