IRS Publication 542

What Is IRS Publication 542?

The term IRS Publication 542 refers to a document published by the Internal Revenue Service (IRS) that provides information on the general tax rules that domestic corporations must follow. IRS Publication 542 outlines the type of organizations that are taxed as corporations, the accounting methods typically used, the deductions allowed, and the tax tables to be used.

Understanding IRS Publication 542

The Internal Revenue Service is the government agency responsible for collecting taxes from the public and for enforcing tax laws. The agency's main purpose is to collect income and employment taxes as well as others such as corporate, estate, and gift taxes. Individuals and corporations use IRS forms in order to complete their annual tax returns. The IRS includes a series of instructions and publications to help guide taxpayers on how to complete these filings.

IRS Publication 542 outlines tax laws that govern what the agency calls ordinary domestic corporations—companies that conduct their business in the United States. The publication explains the tax law in plain language to make it easier to understand. However, the information given does not cover every situation and is not intended to replace the law or change its meaning.

Topics covered in the publication include, but aren't limited to the following:

• How to determine whether a business is taxed as a corporation
• Rules applied to the transfer of property exchanged for stock
• The tax treatment of contributed capital from shareholders and nonshareholders
• How to file and pay income taxes
• Accounting and recordkeeping methods
• Corporate deductions
• Distributions

The IRS periodically updates the publication to reflect new tax laws and rules. For instance, the IRS revised Publication 542 in January 2019, following changes to the tax law as a result of the passing of the Tax Cuts and Jobs Act (TCJA). These revisions addressed changes to the corporate tax rate along with the elimination of the corporate alternative minimum tax (AMT) for tax years after 2017.

Special Considerations

As mentioned above, this publication outlines the types of organizations that are taxed as corporations. As per the IRS, the following businesses formed after the year 1996 are taxed as corporations:

• A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic
• A business formed under a state law that refers to it as a joint-stock company or joint-stock association
• An insurance company
• Certain banks
• A business wholly owned by a state or local government
• A business specifically required to be taxed as a corporation by the Internal Revenue Code (IRC), such as certain publicly-traded partnerships
• Certain foreign businesses
• Any other business that elects to be taxed as a corporation such as a limited liability company (LLC) or an S-Corporation

Corporations are treated differently than partnerships. Gains and losses that apply to partnerships are passed through to partners while the gains and losses from S Corporations are passed through to shareholders. Shareholders of corporations can receive income from the business itself in the form of dividends, which can be taxed both on the corporate level prior to distribution and on the individual level when they are sent to shareholders.