Tax return Form 1120 shows the company’s profit, deductions, taxes, credits, and payments. Deductions allow you to reduce the company’s taxes by calculating them from taxable income. Some of them the company can make in the expense column in the income statement. In addition, certain categories of deductions allow you to reduce taxation for the company in the future or postpone it. Therefore, this paper will analyze the types of deductions presented in Form 1120.
Deductions directly related to the company’s activities can be recorded as expenses in the income statement. For example, this includes salaries and wages and employee benefit programs. However, these must be programs that are not a separate category of deductions, like pensions. Therefore, this item includes “insurance or health and welfare programs” for employees (Department of the Treasury. Internal Revenue Service, 2019, p. 14). In addition, advertising, rent, and repair and maintenance expenses may be included in expenses, but only “to the extent, they relate to a trade or business activity” (Department of the Treasury. Internal Revenue Service, 2019, p. 12). That means that if any of the deductions on the Form is directly related to the company’s activities, they can be mentioned in the expense column.
A separate category of deductions is Net operating loss (NOL). It occurs when a company’s tax expense exceeds its income (Department of the Treasury. Internal Revenue Service, 2019). Therefore, the organization will not report this tax deduction every year. The deduction data is necessary in order to reduce the tax burden on the company. Therefore, it should be indicated only if the payment of taxes poses risks to the financial stability of the company.
Reference
Department of the Treasury. Internal Revenue Service. (2022). Instructions for Form 1120: U.S. Corporation Income Tax Return [PDF document]. Web.