Tax Corp Chapter 3
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Questions and Answers
- 1.
Creek Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive activity loss during the year. If Creek is a closely held C corporation that is not a personal service corporation (PSC), it can deduct $230,000 of the passive activity loss in the year.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
If Creek is a closely held corporation, the passive activity loss is deductible to the extent of the corporation's active income, or $210,000.Rate this question:
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- 2.
For 2019, Mindy is the newly hired chief executive officer of Snow Corporation, a publicly traded corporation. For the current year, her compensation package included cash compensation of $3,500,000, taxable fringe benefits of $210,000, a bonus tied to company performance of $4,000,000, and nontaxable fringe benefits of $120,000. How much of Mindy's total compensation package can Snow Corporation deduct?
- A.
a.$1,000,000
- B.
b.$1,120,000
- C.
c.$7,830,000
- D.
d.$7,500,000
- E.
e.$0
Correct Answer
B. b.$1,120,000Explanation
Correct. For publicly traded corporations, the deduction for compensation for any covered employee is $1 million annually. Covered employees are the principal executive officer, the principal financial officer, and the three other most highly compensated officers. In general, the $1 million maximum applies to compensation, commissions based on individual performance, and performance-based compensation tied to overall company performance. The limitation also does not apply to retirement plan contributions or employer-provided benefits that are excludable from gross income by the employee (e.g., health care benefits). Snow Corporation can deduct $1,000,000 for compensation + $120,000 of nontaxable fringe benefits for a total of $1,120,000.Rate this question:
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- 3.
Oliver is the sole shareholder of a C corporation, and Lonnie owns a sole proprietorship. Both businesses were started in 2019, and each business has a long-term capital gain of $20,000 for the year. Neither business made any distributions during the year. With respect to this information, which of the following statements is false?
- A.
a.Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain.
- B.
b.Oliver must report a $20,000 long-term capital gain on his 2019 tax return.
- C.
c.Oliver's corporation pays a tax of $4,200 on the capital gain.
- D.
d.Lonnie receives a preferential tax rate on a long-term capital gain of $20,000.
- E.
e.Lonnie must report a $20,000 long-term capital gain on his 2019 tax return.
Correct Answer
B. b.Oliver must report a $20,000 long-term capital gain on his 2019 tax return.Explanation
Correct. A C corporation is a separate taxpaying entity, and income of a C corporation is not taxed to shareholders until distributed as dividends. A C corporation does not receive preferential tax rate treatment on LTCG ("Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain" and "Oliver's corporation pays a tax of $4,200 on the capital gain"). Income of a sole proprietorship is taxed currently on the tax return of the proprietor, and the LTCG of the entity is reported as such by the proprietor ("Lonnie must report a $20,000 long-term capital gain on his 2019 tax return"), with the preferential tax rate applicable ("Lonnie receives a preferential tax rate on a long-term capital gain of $20,000").Rate this question:
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- 4.
No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Correct. No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days. This restriction was enacted to close a tax loophole involving dividends on stock that is held only briefly.Rate this question:
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- 5.
Tundra Corporation, a calendar year C corporation, was formed and began operations on July 1, 2019. The following expenses were incurred during the first tax year (July 1 through December 31, 2019) of operations: Expenses of temporary directors and of organizational meetings $9,000 Fee paid to the state of incorporation 1,000 Accounting services incident to organization 2,500 Legal services for drafting the corporate charter and bylaws 3,500 Expenses incident to the printing and sale of stock certificates 4,000 Assuming a § 248 election, what is Tundra's deduction for organizational expenditures for 2019?
- A.
a.$533
- B.
b.$5,367
- C.
c.$5,500
- D.
d.$5,000
- E.
e.$0
Correct Answer
B. b.$5,367Explanation
Qualifying organizational expenditures include these items:
Expenses of temporary directors and of organizational meetings $ 9,000
Fee paid to the state of incorporation 1,000
Accounting services incident to organization 2,500
Legal services for drafting the corporate charter and bylaws 3,500
Expenses incident to the printing and sale of stock certificates 4,000
Tundra Corporation’s deduction under § 248 for 2019 is determined as follows:
Immediate expensing $5,000
Amortization [($16,000 – $5,000) ÷ 180] × 6 (months in tax year) = 367
TotalRate this question:
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- 6.
What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under § 248?
- A.
a.Using the deduction and the cash method of accounting is generally counterproductive.
- B.
b.The deduction tends to yield better tax results when the corporation uses the cash method of accounting.
- C.
c.The corporation's method of accounting is of no consequence.
- D.
d.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.
- E.
e.Using the deduction and the accrual method of accounting is generally counterproductive.
Correct Answer
C. c.The corporation's method of accounting is of no consequence.Explanation
An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.Rate this question:
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- 7.
Johnny, an individual, incorporates two separate businesses that he owns by establishing two new corporations on January 1, 2019. Each corporation generates taxable income of $50,000. Each corporation will have a tax liability of $7,500 ($50,000 × 15%).
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
For 2019, all corporations are subject to a flat 21% rate. Therefore, each corporation's tax liability is $10,500.Rate this question:
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- 8.
During 2019, Savannah Corporation, a calendar year C corporation, had operating income of $510,000, operating expenses of $370,000, a short-term capital loss of $25,000, and a long-term capital gain of $80,000. How much is Savannah's tax liability for 2019?
- A.
a.$47,250
- B.
b.$101,850
- C.
c.$123,900
- D.
d.$107,100
- E.
e.$40,950
Correct Answer
E. e.$40,950Explanation
Savannah's taxable income is $195,000 [$510,000 operating income – $370,000 operating expenses + $55,000 net capital gain ($80,000 long-term capital gain – $25,000 short-term capital loss)]. Corporate income tax on taxable income of $195,000 is $40,950 ($195,000 × 21% flat tax rate). Corporations do not receive a preferential tax rate on long-term capital gains.Rate this question:
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- 9.
The AMT rules are the same for individuals and corporations.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
After the TCJA of 2017, corporations are no longer subject to the AMT. Although fewer individuals will be subject to the AMT under the TCJA of 2017, the TCJA of 2017 did not repeal the AMT for individuals.Rate this question:
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- 10.
As a result of the TCJA of 2017, high-income individuals might consider the corporate entity form as a means to reduce their tax burden.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
With the enactment of the corporate 21% flat tax rate, corporate rates are lower than the tax rates for high-income individual taxpayers. As a result, high-income individuals might consider the corporate entity form as a means to reduce their tax burdens.Rate this question:
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- 11.
In any single year, a corporation can be subject to both the accumulated earnings tax and the personal holding company tax.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Both taxes are designed to prevent corporations and their shareholders from avoiding the double tax on dividend distributions. Therefore, in any single year, the IRS cannot impose both the accumulated earnings tax and the personal holding company tax.Rate this question:
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- 12.
A corporation must make estimated tax payments unless its tax liability can reasonably be expected to be less than $1,000.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A corporation must make estimated tax payments unless its tax liability can reasonably be expected to be less than $500. A corporation that fails to pay its required estimated payments can be assessed a nondeductible penalty.Rate this question:
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- 13.
Dalmatian Corporation acquired intellectual property in 2019 and expensed amortization of $101,000 on its financial statements, which were prepared according to GAAP. For Federal income tax purposes, Dalmatian deducted $131,000. How much tax return amortization would Dalmatian Corporation report on Part III of Schedule M–3?
- A.
a.$20,000
- B.
b.$101,000
- C.
c.$232,000
- D.
d.$131,000
- E.
e.$0
Correct Answer
D. d.$131,000Explanation
The corporation must report the amortization on line 28, Part III as follows: $101,000 book amortization in column (a), $20,000 temporary difference in column (b), and $131,000 tax return amortization in column (d).Rate this question:
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- 14.
Markson, the sole shareholder of Garnet Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Markson would prefer to have the payment treated as salary instead of a dividend.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Markson must include in gross income both salary and dividends, but he would prefer dividend income due to the preferential tax rate accorded such income.Rate this question:
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- 15.
Summer Corporation had operating income of $100,000, a long-term capital loss of $6,000, and a long-term capital gain of $1,000. As a result of these transactions, Summer has no capital loss to carry back or carry forward.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A corporation cannot deduct a net capital loss in the year incurred. For corporations, a net capital loss must be carried back three years or forward five years and be offset against capital gains in the carryback/forward years. Summer can use $1,000 of the long-term capital gain to offset the capital loss, leaving a $5,000 ($6,000 – $1,000) loss carryback.Rate this question:
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- 16.
Corporate-source income maintains its identity as it passes through the corporation to the shareholders.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Corporate-source income loses its identity as it passes through the corporation to its shareholders. Items that normally receive preferential tax treatment (e.g., interest on municipal bonds) are not taxed as such to the shareholders.Rate this question:
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- 17.
For 2019, Mindy is the newly hired chief executive officer of Snow Corporation, a publicly traded corporation. For the current year, her compensation package included cash compensation of $3,500,000, taxable fringe benefits of $210,000, a bonus tied to company performance of $4,000,000, and nontaxable fringe benefits of $120,000. How much of Mindy's total compensation package can Snow Corporation deduct?
- A.
a.$1,000,000
- B.
b.$0
- C.
c.$1,120,000
- D.
d.$7,500,000
- E.
e.$7,830,000
Correct Answer
C. c.$1,120,000Explanation
For publicly traded corporations, the deduction for compensation for any covered employee is $1 million annually. Covered employees are the principal executive officer, the principal financial officer, and the three other most highly compensated officers. In general, the $1 million maximum applies to compensation, commissions based on individual performance, and performance-based compensation tied to overall company performance. The limitation also does not apply to retirement plan contributions or employer-provided benefits that are excludable from gross income by the employee (e.g., health care benefits). Snow Corporation can deduct $1,000,000 for compensation + $120,000 of nontaxable fringe benefits for a total of $1,120,000.Rate this question:
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- 18.
Creek Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive activity loss during the year. If Creek is a closely held C corporation that is not a personal service corporation (PSC), it can deduct $230,000 of the passive activity loss in the year.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
If Creek is a closely held corporation, the passive activity loss is deductible to the extent of the corporation's active income, or $210,000.Rate this question:
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- 19.
Herman is the sole owner of Cliff Company. For 2019, the only income of Cliff was a long-term capital gain of $25,000. The business made no distributions during the year to Herman. Which of the following statements is false?
- A.
a.If Cliff Company is a C corporation, Herman will report none of the $25,000 long-term capital gain on his personal income tax return.
- B.
b.If Cliff Company is a sole proprietorship, Herman must report the $25,000 long-term capital gain on his personal income tax return.
- C.
c.If Cliff Company is an S corporation, a preferential tax rate applies to the $25,000 long-term capital gain.
- D.
d.If Cliff Company is a C corporation, a preferential tax rate does not apply to the $25,000 long-term capital gain.
- E.
e.If Cliff Company is an S corporation, Herman will report none of the $25,000 long-term capital gain on his personal tax return.
Correct Answer
E. e.If Cliff Company is an S corporation, Herman will report none of the $25,000 long-term capital gain on his personal tax return.Explanation
Sole proprietorships and S corporations are not separate taxpaying entities. Instead, the income of such entities passes through to the owners and is reported on their returns. Thus, if Cliff Company is a sole proprietorship or S corporation, Herman must report the $25,000 long-term capital gain on his personal income tax return ("If Cliff Company is a sole proprietorship, Herman must report the $25,000 long-term capital gain on his personal income tax return" is therefore incorrect and "If Cliff Company is an S corporation, Herman will report none of the $25,000 long-term capital gain on his personal tax return" is correct), and the preferential tax rate for such income is applicable ("If Cliff Company is an S corporation, a preferential tax rate applies to the $25,000 long-term capital gain"). C corporations are separate taxpaying entities. Thus, if Cliff Company is a C corporation, Herman will report none of the $25,000 long-term capital gain on his personal income tax return ("If Cliff Company is a C corporation, Herman will report none of the $25,000 long-term capital gain on his personal income tax return"). C corporations do not receive preferential tax rate treatment on LTCG ("If Cliff Company is a C corporation, a preferential tax rate does not apply to the $25,000 long-term capital gain").Rate this question:
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- 20.
On December 31, 2019, Topaz, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 70% shareholder. Topaz pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2020. Topaz deducts the bonus in 2020, the year in which it is included in Barry's gross income.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Correct. Because Barry is a related party (more than 50% shareholder), Topaz's deduction for the bonus occurs in 2020, the year in which the $90,000 is included in Barry's gross income.Rate this question:
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- 21.
Oliver is the sole shareholder of a C corporation, and Lonnie owns a sole proprietorship. Both businesses were started in 2019, and each business has a long-term capital gain of $20,000 for the year. Neither business made any distributions during the year. With respect to this information, which of the following statements is false?
- A.
a.Oliver must report a $20,000 long-term capital gain on his 2019 tax return.
- B.
b.Oliver's corporation pays a tax of $4,200 on the capital gain.
- C.
c.Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain.
- D.
d.Lonnie receives a preferential tax rate on a long-term capital gain of $20,000.
- E.
e.Lonnie must report a $20,000 long-term capital gain on his 2019 tax return.
Correct Answer
A. a.Oliver must report a $20,000 long-term capital gain on his 2019 tax return.Explanation
Correct. A C corporation is a separate taxpaying entity, and income of a C corporation is not taxed to shareholders until distributed as dividends. A C corporation does not receive preferential tax rate treatment on LTCG ("Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain" and "Oliver's corporation pays a tax of $4,200 on the capital gain"). Income of a sole proprietorship is taxed currently on the tax return of the proprietor, and the LTCG of the entity is reported as such by the proprietor ("Lonnie must report a $20,000 long-term capital gain on his 2019 tax return"), with the preferential tax rate applicable ("Lonnie receives a preferential tax rate on a long-term capital gain of $20,000").Rate this question:
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- 22.
Gully, a C corporation, had $115,000 net income from operations, a short-term capital gain of $15,000, and a $10,000 short-term capital loss in 2019. Gully Corporation's taxable income is $115,000.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A corporation can reduce capital gains to the extent of capital losses. Therefore, Gully has a net short-term capital gain of $5,000 ($15,000 – $10,000). Its net income is $120,000 ($115,000 + $5,000).Rate this question:
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- 23.
Ruby Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Cole owns 55% of the stock, and Martin owns the remaining 45%. During 2019, Ruby paid a salary of $200,000 to each shareholder. On December 31, 2019, Ruby accrued a bonus of $50,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2020, what is Ruby Corporation's 2019 deduction for the above amounts?
- A.
a.$450,000
- B.
b.$250,000
- C.
c.$0
- D.
d.$500,000
- E.
e.$400,000
Correct Answer
A. a.$450,000Explanation
A corporation that uses the accrual method cannot claim a deduction for an accrual with respect to a related party until the recipient reports that amount as income. Thus, Ruby cannot deduct the $50,000 bonus attributable to Cole, a related party (i.e., more than 50% shareholder), until 2020. Ruby can deduct in 2019 the salary payments made to each shareholder plus the accrued bonus to Martin, or $450,000 ($200,000 salary + $200,000 salary + $50,000 bonus).Rate this question:
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- 24.
Entities with average annual gross receipts of $25 million or less for the most recent three-year period can use the _____ method to account for inventories.
- A.
a.Capital
- B.
b.Limited hybrid
- C.
c.Accrual
- D.
d.Hybrid
- E.
e.Cash
Correct Answer
E. e.CashExplanation
In general, entities that maintain inventory for sale to customers are required to use the accrual method of accounting for determining sales and cost of goods sold. For tax years beginning after 2017, the TCJA of 2017 allows entities with average annual gross receipts of $25 million or less for the most recent three-year period to use the cash method to account for inventories.Rate this question:
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- 25.
For a net operating loss arising in 2019, the NOL can be carried back two years and forward 20 years.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
For NOLs arising after 2017, the NOL can be carried forward indefinitely to offset taxable income in those future years. NOLs arising after 2017 cannot be carried back.Rate this question:
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- 26.
What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under § 248?
- A.
a.The corporation's method of accounting is of no consequence.
- B.
b.Using the deduction and the cash method of accounting is generally counterproductive.
- C.
c.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.
- D.
d.Using the deduction and the accrual method of accounting is generally counterproductive.
- E.
e.The deduction tends to yield better tax results when the corporation uses the cash method of accounting.
Correct Answer
A. a.The corporation's method of accounting is of no consequence.Explanation
An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.Rate this question:
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- 27.
For 2019, if a corporation owns less than 20% of the stock of another domestic corporation, the dividends received deduction is 65%.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The purpose of the dividends received deduction is to mitigate multiple taxation of corporate income. If a corporation owns less than 20% of another corporation's stock, the dividends received deduction is 50%.Rate this question:
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- 28.
Pyrite Corporation, an accrual basis taxpayer, was formed and began operations on February 1, 2019. During its first year of operations (February 1–December 31, 2019), Pyrite incurred the following expenses: fee paid to state of incorporation of $2,000, accounting and legal services incident to organization of $9,000, and expenses related to the printing and sale of stock certificates of $10,000. Pyrite has $11,000 of qualified organizational expenditures that it may elect to amortize.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Expenditures incurred in connection with issuing and selling shares of stock or other securities do not qualify as organizational expenditures. Thus, Pyrite's organizational expenditures total $11,000 ($2,000 incorporation fee + $9,000 accounting and legal fees).Rate this question:
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- 29.
Tundra Corporation, a calendar year C corporation, was formed and began operations on July 1, 2019. The following expenses were incurred during the first tax year (July 1 through December 31, 2019) of operations: Expenses of temporary directors and of organizational meetings $9,000 Fee paid to the state of incorporation 1,000 Accounting services incident to organization 2,500 Legal services for drafting the corporate charter and bylaws 3,500 Expenses incident to the printing and sale of stock certificates 4,000 Assuming a § 248 election, what is Tundra's deduction for organizational expenditures for 2019?
- A.
a.$533
- B.
b.$5,367
- C.
c.$5,500
- D.
d.$0
- E.
e.$5,000
Correct Answer
B. b.$5,367Explanation
Qualifying organizational expenditures include these items:
Expenses of temporary directors and of organizational meetings $ 9,000
Fee paid to the state of incorporation 1,000
Accounting services incident to organization 2,500
Legal services for drafting the corporate charter and bylaws 3,500
Expenses incident to the printing and sale of stock certificates 4,000
Tundra Corporation’s deduction under § 248 for 2019 is determined as follows:
Immediate expensing $5,000
Amortization [($16,000 – $5,000) ÷ 180] × 6 (months in tax year) = 367
TotalRate this question:
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- 30.
No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days. This restriction was enacted to close a tax loophole involving dividends on stock that is held only briefly.Rate this question:
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- 31.
What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under § 248?
- A.
a.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.
- B.
b.The deduction tends to yield better tax results when the corporation uses the cash method of accounting.
- C.
c.Using the deduction and the accrual method of accounting is generally counterproductive.
- D.
d.The corporation's method of accounting is of no consequence.
- E.
e.Using the deduction and the cash method of accounting is generally counterproductive.
Correct Answer
D. d.The corporation's method of accounting is of no consequence.Explanation
An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.Rate this question:
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- 32.
_____ is only available to corporate taxpayers.
- A.
a.A Federally declared disaster loss
- B.
b.The deduction for charitable contributions
- C.
c.The dividends received deduction
- D.
d.The Section 179 deduction
- E.
e.All of these choices are correct.
Correct Answer
C. c.The dividends received deductionExplanation
Certain deductions are specific to corporate taxpayers, including the dividends received deduction and the organizational expenditures deduction.Rate this question:
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- 33.
Which of the following is considered a startup expenditure?
- A.
a.Printing of stock certificates
- B.
b.Depreciation of store equipment
- C.
c.Rent and payroll incurred before a corporation actually begins to produce any gross income
- D.
d.Accounting services incident to organization
- E.
e.Expenses of temporary directors meetings
Correct Answer
C. c.Rent and payroll incurred before a corporation actually begins to produce any gross incomeExplanation
Startup expenditures include various investigation expenses involved in entering a new business (e.g., travel, market surveys, financial audits, and legal fees) and operating expenses such as rent and payroll that are incurred by a corporation before it actually begins to produce any gross income. "Expenses of temporary directors meetings" and "Accounting services incident to organization" are organizational expenditures, and "Printing of stock certificates" must be capitalized.Rate this question:
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- 34.
Magnet Corporation owns stock in Iron Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In 2019, Iron Corporation pays Magnet a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Magnet claim if it owns 25% of Iron's stock?
- A.
a.$100,000
- B.
b.$65,000
- C.
c.$0
- D.
d.$130,000
- E.
e.$84,500
Correct Answer
B. b.$65,000Explanation
The dividends received deduction depends upon the percentage of ownership by the corporate shareholder. Because Magnet Corporation owns 25% of Iron Corporation, Magnet would qualify for a 65% deduction, calculated as shown below.
1. Multiply the dividends received by the deduction percentage ($130,000 × 65% = $84,500).
2. Multiply the taxable income before the dividends received deduction by the deduction percentage ($100,000 × 65% = $65,000).
3. Limit the deduction to the lesser of Step 1 or Step 2, unless subtracting the amount derived in Step 1 ($84,500) from taxable income before the dividends received deduction ($100,000) generates an NOL ($100,000 – $84,500 = no NOL). If so, use the amount derived in Step 1 ($84,500). In this case, the NOL exception does not apply, and the deduction equals $65,000.Rate this question:
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- 35.
The purpose of the dividends received deduction is to mitigate multiple taxation of corporate income.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Correct. Without the deduction, dividend income paid to a corporation would be taxed to the recipient corporation, with no corresponding deduction to the distributing corporation. Later, when the recipient corporation distributed the income to its shareholders, the income would again be subject to taxation, with no corresponding deduction to the corporation.Rate this question:
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- 36.
For 2019, a corporation is required to apply a minimum tax rate to an expanded base and pay an AMT equal to the difference between the tentative AMT and the regular tax.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The TCJA of 2017 repealed the corporate AMT for tax years beginning after 2017.Rate this question:
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- 37.
For 2019, the individual marginal tax rates range from 10% to 37%, while the corporate marginal tax rates range from 10% to 39.6%.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The tax rates for individuals are progressive, with the rates ranging from 10% to 37%. Corporations are taxed at a flat rate of 21%.Rate this question:
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- 38.
During 2019, Savannah Corporation, a calendar year C corporation, had operating income of $730,000, operating expenses of $400,000, a short-term capital loss of $30,000, and a long-term capital gain of $90,000. What is Savannah's tax liability for 2019?
- A.
a.$81,900
- B.
b.$153,300
- C.
c.$44,100
- D.
d.$56,700
- E.
e.$165,900
Correct Answer
A. a.$81,900Explanation
Savannah's taxable income is $390,000 [$730,000 operating income – $400,000 operating expenses + $60,000 net capital gain ($90,000 long-term capital gain – $30,000 short-term capital loss)]. Corporate income tax on taxable income of $390,000 is $81,900 ($390,000 × 21% flat tax rate). Corporations do not receive a preferential tax rate on long-term capital gains.Rate this question:
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- 39.
Naveen Gupta is the sole shareholder and employee of Opal Corporation, a calendar year C corporation that is engaged exclusively in engineering services. During the year, Opal has gross revenues of $420,000 and operating expenses (excluding salary) of $200,000. Further, Opal Corporation pays Naveen a salary of $190,000, which is considered reasonable in amount. Assuming that Opal Corporation distributes all after-tax income as dividends, how much Federal income tax does Opal pay in the current year?
- A.
a.$10,500
- B.
b.$88,200
- C.
c.$48,300
- D.
d.$6,300
- E.
e.$46,200
Correct Answer
D. d.$6,300Explanation
Correct. Personal service corporations are subject to a 21% flat tax rate. Opal has taxable income of $30,000 [$420,000 (gross receipts) – $190,000 (salary expense) – $200,000 (other operating expenses)]; thus, the corporate income tax is $6,300 ($30,000 × 21%). Opal does not receive a deduction for any dividends paid.Rate this question:
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- 40.
Which of the following is considered a reasonable need of the business for purposes of the accumulated earnings tax?
- A.
a.Unrealistic contingencies
- B.
b.Investments in unrelated properties
- C.
c.Loans to shareholders
- D.
d.Expansion of the business
- E.
e.Investments in unrelated businesses
Correct Answer
D. d.Expansion of the businessExplanation
Earnings can be accumulated for the reasonable needs of the business. Reasonable needs include expansion of the business, replacement of plant and equipment, working capital needs, product liability losses, debt retirement, self-insurance, and loans to suppliers and customers. Reasonable needs do not include loans to shareholders, investments in unrelated properties or businesses, and unrealistic hazards and contingencies.Rate this question:
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- 41.
To be considered a personal holding company (PHC), more than 50% of the stock must be owned by 10 or fewer individuals at any time during the last half of the year.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A PHC has more than 50% of the value of the outstanding stock owned by five or fewer individuals at any time during the last half of the year.Rate this question:
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- 42.
When either the accumulated earnings tax or the personal holding company tax applies, they reduce the regular corporate income tax.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Both taxes are designed to prevent corporations and their shareholders from avoiding the double tax on dividend distributions. Therefore, both of the penalty taxes are in addition to the regular income tax.Rate this question:
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- 43.
What amount of accumulated earnings of a corporation is considered within the reasonable needs of a business without the corporation having to show a bona fide business reason for the accumulation?
- A.
a.$250,000 or less
- B.
b.$300,000 or less
- C.
c.$150,000 or less
- D.
d.$200,000 or less
- E.
e.$400,000 or less
Correct Answer
A. a.$250,000 or lessExplanation
Most businesses are allowed a $250,000 minimum credit. As a result, most corporations can accumulate $250,000 in earnings over a series of years without fear of an accumulated earnings tax.Rate this question:
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- 44.
The personal holding company tax rate is 20%.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Correct. The personal holding company tax is imposed at the rate of 20% and is designed to force a corporation to distribute earnings to shareholders.Rate this question:
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- 45.
Which of the following is not considered a reasonable need of the business for purposes of the accumulated earnings tax?
- A.
a.Working capital needs
- B.
b.Replacement of plant and equipment
- C.
c.Debt retirement
- D.
d.Product liability losses
- E.
e.Loans to shareholders
Correct Answer
E. e.Loans to shareholdersExplanation
Earnings can be accumulated for the reasonable needs of the business. Reasonable needs include expansion of the business, replacement of plant and equipment, working capital needs, product liability losses, debt retirement, self-insurance, and loans to suppliers and customers. Reasonable needs do not include loans to shareholders, investments in unrelated properties or businesses, and unrealistic hazards and contingencies.Rate this question:
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- 46.
The due date (not including extensions) for filing a 2019 Federal income tax return for a calendar year C corporation (Form 1120) is March 15, 2020.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The due date for filing a Form 1120 is the fifteenth day of the fourth month following the end of the corporation's tax year. Thus, a 2019 Form 1120 for a calendar year C corporation would be due April 15, 2020.Rate this question:
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- 47.
Dalmatian Corporation acquired intellectual property in 2019 and expensed amortization of $101,000 on its financial statements, which were prepared according to GAAP. For Federal income tax purposes, Dalmatian deducted $131,000. How much tax return amortization would Dalmatian Corporation report on Part III of Schedule M–3?
- A.
a.$20,000
- B.
b.$131,000
- C.
c.$0
- D.
d.$232,000
- E.
e.$101,000
Correct Answer
B. b.$131,000Explanation
Correct. The corporation must report the amortization on line 28, Part III as follows: $101,000 book amortization in column (a), $20,000 temporary difference in column (b), and $131,000 tax return amortization in column (d).Rate this question:
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- 48.
Corporate taxpayers with total assets of $10 million or more are required to report much greater detail relative to differences between income (loss) reported for financial purposes and income (loss) reported for tax purposes. This expanded reconciliation of book and taxable income (loss) is reported on:
- A.
a.Schedule M–2.
- B.
b.Schedule M–EZ.
- C.
c.Schedule M–1.
- D.
d.Form 1120S.
- E.
e.Schedule M–3.
Correct Answer
E. e.Schedule M–3.Explanation
Schedule M–3 is a response, at least in part, to financial reporting scandals. One objective of Schedule M–3 is to create greater transparency between corporate financial statements and tax returns. Another objective is to identify corporations that engage in aggressive tax practices by requiring transactions that create book/tax differences to be disclosed on corporate tax returns.Rate this question:
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- 49.
During the current year, Tundra Corporation, a calendar year C corporation, had the following transactions: Federal income tax per books $9,000 Premiums paid on key employee life insurance policy 1,000 Life insurance proceeds received as a result of the death of a key employee 250,500 Excess of capital losses over capital gains 3,500 Tax-exempt interest 4,000 What amount will Tundra add to net income on Schedule M–1?
- A.
a.$268,000
- B.
b.$0
- C.
c.$17,500
- D.
d.$13,500
- E.
e.$14,000
Correct Answer
D. d.$13,500Explanation
The following are items that must be added back to net income on Schedule M–1:
Federal income tax per books $9,000
Premiums paid on key employee life insurance policy 1,000
Excess of capital losses over capital gains 3,500
Legal services for drafting the corporate charter and bylaws $13,500
The life insurance proceeds and the tax-exempt interest are subtracted from net income on Schedule M–1.Rate this question:
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- 50.
Tourmaline Corporation, a calendar year C corporation, has taxable income of $1.3 million and $3 million for 2018 and 2019, respectively. The minimum 2019 estimated tax installment payments for Tourmaline are:
- A.
a.April 15, 2019, $68,250; June 15, 2019, $246,750; September 15, 2019, $157,500; December 15, 2019, $157,500.
- B.
b.April 15, 2019, $68,250; June 15, 2019, $187,250; September 15, 2019, $187,250; December 15, 2019, $187,250.
- C.
c.April 15, 2019, $157,500; June 15, 2019, $157,500; September 15, 2019, $157,500; December 15, 2019, $157,500.
- D.
d.April 15, 2019, $157,500; June 15, 2019, $157,500; September 15, 2019, $157,500; January 15, 2020, $157,500.
- E.
e.April 15, 2019, $68,250; June 15, 2019, $68,250; September 15, 2019, $68,250; December 15, 2019, $68,250.
Correct Answer
A. a.April 15, 2019, $68,250; June 15, 2019, $246,750; September 15, 2019, $157,500; December 15, 2019, $157,500.Explanation
Payment Amount
April 15, 2019 $68,250*
June 15, 2019 246,750**
September 15, 2019 157,500
December 15, 2019 157,500
Total $630,000
*Based on preceding year’s tax, for first installment only: $1.3 million taxable income × 21% = $273,000 ÷ 4 = $68,250.
**Based on current year’s tax, for remaining installments: $3 million taxable income × 21% = $630,000 ÷ 4 = $157,500. Second installment must include shortfall from first installment: [$157,500 + ($157,500 – $68,250)] = $246,750.Rate this question:
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