Tax Corp Chapter 3

1. 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.$20,000

b.$131,000

c.$0

d.$232,000

e.$101,000

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).

Explanation

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).

2. _____ is only available to corporate taxpayers.

a.A Federally declared disaster loss

b.The deduction for charitable contributions

c.The dividends received deduction

d.The Section 179 deduction

e.All of these choices are correct.

Certain deductions are specific to corporate taxpayers, including the dividends received deduction and the organizational expenditures deduction.

Explanation

Certain deductions are specific to corporate taxpayers, including the dividends received deduction and the organizational expenditures deduction.

3. Which of the following is considered a startup expenditure?

a.Printing of stock certificates

b.Depreciation of store equipment

c.Rent and payroll incurred before a corporation actually begins to produce any gross income

d.Accounting services incident to organization

e.Expenses of temporary directors meetings

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.

Explanation

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.

4. 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.$81,900

b.$153,300

c.$44,100

d.$56,700

e.$165,900

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.

Explanation

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.

5. Toby owns 60% of the stock in an S corporation that earned $230,000 during the year. He also owned 10% of the stock in a C corporation that earned $100,000 during the year. Toby received no distributions from the C corporation. With respect to this information, Toby must report $138,000 of income on his individual income tax return for the year.

True

False

An S corporation's income is passed through to the shareholders and must be reported on their personal tax returns. A C corporation's income is taxed to a shareholder only when distributed as dividends. Therefore, Toby will include $138,000 ($230,000 × 60%) of income from the S corporation on his return.

Explanation

An S corporation's income is passed through to the shareholders and must be reported on their personal tax returns. A C corporation's income is taxed to a shareholder only when distributed as dividends. Therefore, Toby will include $138,000 ($230,000 × 60%) of income from the S corporation on his return.

6.

The net income of a proprietorship is subject to the self-employment tax, as are some partnership allocations of income to partners.

True

False

The explanation for the correct answer is that the net income of a proprietorship is indeed subject to the self-employment tax. This is because a proprietorship is a business owned and operated by one individual, and the individual is considered self-employed. Therefore, the net income of the proprietorship is subject to the self-employment tax. Additionally, some partnership allocations of income to partners may also be subject to the self-employment tax, depending on the specific circumstances and agreements within the partnership.

Explanation

The explanation for the correct answer is that the net income of a proprietorship is indeed subject to the self-employment tax. This is because a proprietorship is a business owned and operated by one individual, and the individual is considered self-employed. Therefore, the net income of the proprietorship is subject to the self-employment tax. Additionally, some partnership allocations of income to partners may also be subject to the self-employment tax, depending on the specific circumstances and agreements within the partnership.

7.

No entity-level Federal income tax is typically assessed on S corporations, limited liability companies (LLCs), or partnerships.

True

False

S corporations, limited liability companies (LLCs), and partnerships are all pass-through entities, meaning that the income generated by these entities is passed through to the owners and taxed at their individual tax rates. Therefore, there is no entity-level federal income tax assessed on these types of businesses.

Explanation

S corporations, limited liability companies (LLCs), and partnerships are all pass-through entities, meaning that the income generated by these entities is passed through to the owners and taxed at their individual tax rates. Therefore, there is no entity-level federal income tax assessed on these types of businesses.

8.

The Check-the-Box Regulations allow an entity with more than one owner to elect to be classified as either a partnership or a corporation.

True

False

The Check-the-Box Regulations give entities with multiple owners the flexibility to choose their classification as either a partnership or a corporation. This means that they can select the option that best suits their needs and goals. This regulation allows for greater flexibility in tax planning and structuring for businesses with multiple owners.

Explanation

The Check-the-Box Regulations give entities with multiple owners the flexibility to choose their classification as either a partnership or a corporation. This means that they can select the option that best suits their needs and goals. This regulation allows for greater flexibility in tax planning and structuring for businesses with multiple owners.

9.

The election under the Check-the-Box Regulations is not available to entities that are actually incorporated under state law or to entities that are required to be corporations under Federal law (e.g., certain publicly traded partnerships).

True

False

The explanation for the given correct answer is that the election under the Check-the-Box Regulations is not available to entities that are actually incorporated under state law or to entities that are required to be corporations under Federal law. This means that if an entity is already incorporated under state law or is required to be a corporation under Federal law, it cannot make the election under the Check-the-Box Regulations. Therefore, the statement "The election under the Check-the-Box Regulations is not available to entities that are actually incorporated under state law or to entities that are required to be corporations under Federal law" is true.

Explanation

The explanation for the given correct answer is that the election under the Check-the-Box Regulations is not available to entities that are actually incorporated under state law or to entities that are required to be corporations under Federal law. This means that if an entity is already incorporated under state law or is required to be a corporation under Federal law, it cannot make the election under the Check-the-Box Regulations. Therefore, the statement "The election under the Check-the-Box Regulations is not available to entities that are actually incorporated under state law or to entities that are required to be corporations under Federal law" is true.

10. 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.$250,000 or less

b.$300,000 or less

c.$150,000 or less

d.$200,000 or less

e.$400,000 or less

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.

Explanation

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.

11. The personal holding company tax rate is 20%.

True

False

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.

Explanation

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.

12.

A corporation must make payments of estimated tax unless its tax liability can reasonably be expected to be less than $500.

True

False

A corporation must make payments of estimated tax unless its tax liability can reasonably be expected to be less than $500. This means that if a corporation's tax liability is expected to be $500 or more, it is required to make estimated tax payments. Therefore, the statement is true.

Explanation

A corporation must make payments of estimated tax unless its tax liability can reasonably be expected to be less than $500. This means that if a corporation's tax liability is expected to be $500 or more, it is required to make estimated tax payments. Therefore, the statement is true.

13. 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.

True

False

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.

Explanation

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.

14. 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.

True

False

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.

Explanation

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.

15. 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.

True

False

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).

Explanation

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).

16. 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.$232,000

b.$0

c.$131,000

d.$20,000

e.$101,000

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).

Explanation

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).

17. For a C corporation that has been in existence for three years, losses cannot be passed through to the shareholders.

True

False

Correct. One of the drawbacks to using the corporate form in conducting a trade or business is that losses in the early stage of the business cannot be passed through to the shareholders. The losses can only be used by the corporation when it has taxable income.

Explanation

Correct. One of the drawbacks to using the corporate form in conducting a trade or business is that losses in the early stage of the business cannot be passed through to the shareholders. The losses can only be used by the corporation when it has taxable income.

18. 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.

True

False

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.

Explanation

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.

19. Corporate-source income maintains its identity as it passes through the corporation to the shareholders.

True

False

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.

Explanation

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.

20. Tax planning to reduce corporate income taxes should occur before the end of the tax year.

True

False

Correct. Tax planning to reduce corporate income taxes should occur before the end of the tax year. Effective planning can cause income to be shifted to the next tax year and can produce large deductions by incurring expenses before year-end. Particular attention should be paid to the timing of capital gains and losses, planning for the business interest expense limitation, and charitable contributions.

Explanation

Correct. Tax planning to reduce corporate income taxes should occur before the end of the tax year. Effective planning can cause income to be shifted to the next tax year and can produce large deductions by incurring expenses before year-end. Particular attention should be paid to the timing of capital gains and losses, planning for the business interest expense limitation, and charitable contributions.

21.

The income of a C corporation is subject to double taxation.

True

False

The income of a C corporation is subject to double taxation because the corporation is taxed on its profits at the corporate level, and then the shareholders are taxed again on any dividends or distributions they receive from the corporation. This is in contrast to other types of business entities, such as partnerships or S corporations, where the income is only taxed once at the individual level.

Explanation

The income of a C corporation is subject to double taxation because the corporation is taxed on its profits at the corporate level, and then the shareholders are taxed again on any dividends or distributions they receive from the corporation. This is in contrast to other types of business entities, such as partnerships or S corporations, where the income is only taxed once at the individual level.

22.

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.

True

False

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 means that the statement is true.

Explanation

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 means that the statement is true.

23.

Like individuals, corporations are not allowed a deduction for interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities.

True

False

Corporations are not allowed to deduct the interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities. This is because tax-exempt securities are already exempt from taxation, so allowing a deduction for the interest paid on the borrowed funds would result in a double tax benefit. Therefore, the statement is true.

Explanation

Corporations are not allowed to deduct the interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities. This is because tax-exempt securities are already exempt from taxation, so allowing a deduction for the interest paid on the borrowed funds would result in a double tax benefit. Therefore, the statement is true.

24. For a net operating loss arising in 2019, the NOL can be carried back two years and forward 20 years.

True

False

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.

Explanation

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.

25. 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.

True

False

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).

Explanation

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).

26. 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 p 248 election, what is Tundra's deduction for organizational expenditures for 2019?

a.$533

b.$5,367

c.$5,500

d.$0

e.$5,000

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
Total

Explanation

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
Total

27. What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under p 248?

a.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.

b.The deduction tends to yield better tax results when the corporation uses the cash method of accounting.

c.Using the deduction and the accrual method of accounting is generally counterproductive.

d.The corporation's method of accounting is of no consequence.

e.Using the deduction and the cash method of accounting is generally counterproductive.

An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.

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.

28. The purpose of the dividends received deduction is to mitigate multiple taxation of corporate income.

True

False

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.

Explanation

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.

29. 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.

True

False

The TCJA of 2017 repealed the corporate AMT for tax years beginning after 2017.

Explanation

The TCJA of 2017 repealed the corporate AMT for tax years beginning after 2017.

30. For 2019, the individual marginal tax rates range from 10% to 37%, while the corporate marginal tax rates range from 10% to 39.6%.

True

False

The tax rates for individuals are progressive, with the rates ranging from 10% to 37%. Corporations are taxed at a flat rate of 21%.

Explanation

The tax rates for individuals are progressive, with the rates ranging from 10% to 37%. Corporations are taxed at a flat rate of 21%.

31. 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.

True

False

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.

Explanation

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.

32.

Schedule M–3 is required of corporations with more than $10 million of total assets.

True

False

Schedule M-3 is a tax form that is required to be filed by corporations with more than $10 million of total assets. This form provides a more detailed breakdown of the corporation's financial information, including balance sheet and income statement items. Therefore, the statement "Schedule M-3 is required of corporations with more than $10 million of total assets" is true.

Explanation

Schedule M-3 is a tax form that is required to be filed by corporations with more than $10 million of total assets. This form provides a more detailed breakdown of the corporation's financial information, including balance sheet and income statement items. Therefore, the statement "Schedule M-3 is required of corporations with more than $10 million of total assets" is true.

33. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Federal income tax per books.

True

False

The correct answer is "True." The federal income tax per books would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return.

Explanation

The correct answer is "True." The federal income tax per books would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return.

34. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Excess of capital losses over capital gains.

True

False

The excess of capital losses over capital gains would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return. This is because capital losses can be used to offset capital gains, reducing the taxable income. Therefore, the excess of capital losses would need to be accounted for in order to accurately calculate the income per the tax return.

Explanation

The excess of capital losses over capital gains would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return. This is because capital losses can be used to offset capital gains, reducing the taxable income. Therefore, the excess of capital losses would need to be accounted for in order to accurately calculate the income per the tax return.

35. What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under p 248?

a.The corporation's method of accounting is of no consequence.

b.Using the deduction and the cash method of accounting is generally counterproductive.

c.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.

d.Using the deduction and the accrual method of accounting is generally counterproductive.

e.The deduction tends to yield better tax results when the corporation uses the cash method of accounting.

An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.

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.

36.

Any corporation that files Schedule M–3 must also file Schedule M–1.

True

False

The statement is false because not all corporations that file Schedule M-3 are required to file Schedule M-1. Schedule M-3 is used for reporting book-tax differences for corporations with assets of $10 million or more, while Schedule M-1 is used for reporting adjustments to book income to arrive at taxable income. Therefore, only corporations that meet the asset threshold and have book-tax differences are required to file both schedules.

Explanation

The statement is false because not all corporations that file Schedule M-3 are required to file Schedule M-1. Schedule M-3 is used for reporting book-tax differences for corporations with assets of $10 million or more, while Schedule M-1 is used for reporting adjustments to book income to arrive at taxable income. Therefore, only corporations that meet the asset threshold and have book-tax differences are required to file both schedules.

37.

One objective of Schedule M–3 is to create greater transparency between corporate financial statements and tax returns.

True

False

Schedule M-3 is a form that certain corporations are required to file with their tax returns. It aims to reconcile the differences between the financial statement income and the taxable income reported on the tax return. By doing so, Schedule M-3 increases transparency by providing a clearer picture of how a corporation's financial statements align with its tax returns. Therefore, the statement that one objective of Schedule M-3 is to create greater transparency between corporate financial statements and tax returns is true.

Explanation

Schedule M-3 is a form that certain corporations are required to file with their tax returns. It aims to reconcile the differences between the financial statement income and the taxable income reported on the tax return. By doing so, Schedule M-3 increases transparency by providing a clearer picture of how a corporation's financial statements align with its tax returns. Therefore, the statement that one objective of Schedule M-3 is to create greater transparency between corporate financial statements and tax returns is true.

38. The AMT rules are the same for individuals and corporations.

True

False

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.

Explanation

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.

39. 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.

True

False

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.

Explanation

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.

40. A corporation must make estimated tax payments unless its tax liability can reasonably be expected to be less than $1,000.

True

False

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.

Explanation

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.

41. 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.

True

False

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.

Explanation

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.

42. 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.Oliver must report a $20,000 long-term capital gain on his 2019 tax return.

b.Oliver's corporation pays a tax of $4,200 on the capital gain.

c.Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain.

d.Lonnie receives a preferential tax rate on a long-term capital gain of $20,000.

e.Lonnie must report a $20,000 long-term capital gain on his 2019 tax return.

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").

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").

43. 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.$450,000

b.$250,000

c.$0

d.$500,000

e.$400,000

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).

Explanation

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).

44. Slope Corporation, which sustained a $5,000 net capital loss during the year, will enter $5,000 as an addition item on Schedule M–1.

True

False

Correct. The loss is an expense for book purposes but not deductible for tax purposes. Therefore, the $5,000 net capital loss must be added in reconciling from book income to taxable income.

Explanation

Correct. The loss is an expense for book purposes but not deductible for tax purposes. Therefore, the $5,000 net capital loss must be added in reconciling from book income to taxable income.

45. Which of the following is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at year-end?

a.Schedule M–3

b.Schedule M–8

c.Schedule M–16

d.Schedule M–1

e.Schedule M–2

In general, this financial statement reconciliation is done by adding net income per books to the beginning balance of retained earnings and subtracting distributions made during the year. Other sources of increases or decreases in retained earnings are also listed on Schedule M–2.

Explanation

In general, this financial statement reconciliation is done by adding net income per books to the beginning balance of retained earnings and subtracting distributions made during the year. Other sources of increases or decreases in retained earnings are also listed on Schedule M–2.

46. NOLs arising before 2017 and carried over to years after 2017 are subject to the 80% taxable income limitation.

True

False

The new 80% of taxable income limitation applies to NOLs arising after 2017. NOLs arising in earlier years and carried over to years after 2017 are not subject to the taxable income limitation.

Explanation

The new 80% of taxable income limitation applies to NOLs arising after 2017. NOLs arising in earlier years and carried over to years after 2017 are not subject to the taxable income limitation.

47. 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.

True

False

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.

Explanation

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.

48.

An unincorporated entity with only one owner is, by default, classified as a disregarded entity (or DRE).

True

False

An unincorporated entity with only one owner is classified as a disregarded entity (or DRE) by default. This means that for tax purposes, the entity is not separate from its owner and the owner reports the entity's income and expenses on their personal tax return. This classification is common for sole proprietorships and single-member limited liability companies (LLCs).

Explanation

An unincorporated entity with only one owner is classified as a disregarded entity (or DRE) by default. This means that for tax purposes, the entity is not separate from its owner and the owner reports the entity's income and expenses on their personal tax return. This classification is common for sole proprietorships and single-member limited liability companies (LLCs).

49. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Life insurance proceeds received as a result of the death of a key employee.

True

False

The life insurance proceeds received as a result of the death of a key employee would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return.

Explanation

The life insurance proceeds received as a result of the death of a key employee would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return.

50. Hirsch, Incorporated, is a calendar year corporation that has had revenues of less than $500,000 since inception. In 2017, Hirsch had a net operating loss that was able to be used in full via a carryback to 2016. For 2018, Hirsch expects to have taxable income of $100,000. How will Hirsch avoid a penalty for underpayment of estimated Federal taxes in the current year?

a.Hirsch must pay 100% of the tax shown on its 2018 return via estimated taxes to avoid an underpayment penalty.

b.Hirsch must pay the amount of taxes owed on its 2017 return via estimated taxes to avoid an underpayment penalty.

c.Hirsch must pay 90% of the tax shown on its 2018 return via estimated taxes to avoid an underpayment penalty.

In order to avoid an underpayment penalty, corporations (other than large corporations) must generally pay estimated tax in the amount of the lower of 100 percent of the tax shown on the return for the current year or 100 percent of the tax shown on the return for the preceding year. In this case, however, Hirsch did not have taxable income in the prior year. Therefore, it cannot use the 100 percent of the preceding year method to avoid an underpayment penalty for the current year. It must pay 100 percent of the tax shown on its current return via estimated taxes to avoid an underpayment penalty.

Explanation

In order to avoid an underpayment penalty, corporations (other than large corporations) must generally pay estimated tax in the amount of the lower of 100 percent of the tax shown on the return for the current year or 100 percent of the tax shown on the return for the preceding year. In this case, however, Hirsch did not have taxable income in the prior year. Therefore, it cannot use the 100 percent of the preceding year method to avoid an underpayment penalty for the current year. It must pay 100 percent of the tax shown on its current return via estimated taxes to avoid an underpayment penalty.

51. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

True

False

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.

Explanation

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.

52. 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.$100,000

b.$65,000

c.$0

d.$130,000

e.$84,500

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.

Explanation

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.

53. 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.$10,500

b.$88,200

c.$48,300

d.$6,300

e.$46,200

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.

Explanation

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.

54. When either the accumulated earnings tax or the personal holding company tax applies, they reduce the regular corporate income tax.

True

False

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.

Explanation

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.

55. 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.Schedule M–2.

b.Schedule M–EZ.

c.Schedule M–1.

d.Form 1120S.

e.Schedule M–3.

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.

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.

56.

An organization not qualifying as a corporation under state law can not be treated as such for Federal income tax purposes.

True

False

An organization not qualifying as a corporation under state law cannot be treated as such for Federal income tax purposes. This means that even if an organization is considered a corporation under Federal tax law, if it does not meet the requirements set by the state, it cannot be treated as a corporation for Federal income tax purposes. Therefore, the statement is false.

Explanation

An organization not qualifying as a corporation under state law cannot be treated as such for Federal income tax purposes. This means that even if an organization is considered a corporation under Federal tax law, if it does not meet the requirements set by the state, it cannot be treated as a corporation for Federal income tax purposes. Therefore, the statement is false.

57. The dividends received deduction (DRD) is a tax deduction that may be taken by which of the following?

a.An individual

b.An S corporation

c.A partnership

d.A C corporation

The DRD is a special deduction available to corporations. It is specifically not available to S corporations, personal holding companies (PHC), or personal service corporations.

Explanation

The DRD is a special deduction available to corporations. It is specifically not available to S corporations, personal holding companies (PHC), or personal service corporations.

58. On December 31, 2019, Emerald, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer), who owns 75% of the corporation's outstanding stock. The $50,000 bonus is paid to the president on February 1, 2020. For Emerald's 2019 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M–1.

True

False

The bonus is entered as an addition item on Schedule M–1. Since Emerald is accruing an expenditure with respect to a cash basis related party (i.e., more than 50% shareholder), the $50,000 bonus is not deductible until such time it is included in the president's gross income (2020). An item that is an expense in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M–1.

Explanation

The bonus is entered as an addition item on Schedule M–1. Since Emerald is accruing an expenditure with respect to a cash basis related party (i.e., more than 50% shareholder), the $50,000 bonus is not deductible until such time it is included in the president's gross income (2020). An item that is an expense in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M–1.

59. For 2019, if a corporation owns less than 20% of the stock of another domestic corporation, the dividends received deduction is 65%.

True

False

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%.

Explanation

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%.

60. An employee who pays corporate expenses for which they are not reimbursed by the corporation can deduct the expenses on their personal return as miscellaneous itemized deductions.

True

False

In a closely held corporate setting, shareholder-employees often pay corporate expenses (e.g., office supplies) for which they are not reimbursed by the corporation. The TCJA of 2017 repealed the deduction for miscellaneous itemized deductions (which includes unreimbursed employee expenses) for tax years after 2017. Thus, under current law, neither the corporation nor the employee would be able to deduct such expenses. Therefore, the employee should be reimbursed for these expenses or the employer should pay them directly.

Explanation

In a closely held corporate setting, shareholder-employees often pay corporate expenses (e.g., office supplies) for which they are not reimbursed by the corporation. The TCJA of 2017 repealed the deduction for miscellaneous itemized deductions (which includes unreimbursed employee expenses) for tax years after 2017. Thus, under current law, neither the corporation nor the employee would be able to deduct such expenses. Therefore, the employee should be reimbursed for these expenses or the employer should pay them directly.

61.

The tax attributes of income and expense items of a C corporation pass through the corporate entity to the shareholders.

True

False

The tax attributes of income and expense items of a C corporation do not pass through the corporate entity to the shareholders. Instead, a C corporation is subject to corporate income tax on its profits, and the shareholders are then taxed on any dividends or distributions they receive from the corporation. This is in contrast to pass-through entities, such as partnerships and S corporations, where the income and expenses flow through to the individual shareholders or partners for tax purposes.

Explanation

The tax attributes of income and expense items of a C corporation do not pass through the corporate entity to the shareholders. Instead, a C corporation is subject to corporate income tax on its profits, and the shareholders are then taxed on any dividends or distributions they receive from the corporation. This is in contrast to pass-through entities, such as partnerships and S corporations, where the income and expenses flow through to the individual shareholders or partners for tax purposes.

62.

Gains and losses from property transactions are handled similarly. Whether a gain or loss is capital or ordinary depends upon the nature of the asset in the hands of the taxpayer making the taxable disposition.

True

False

The explanation for the given correct answer is that gains and losses from property transactions are indeed handled similarly. Whether a gain or loss is considered capital or ordinary depends on the nature of the asset for the taxpayer making the taxable disposition. This means that the classification of the gain or loss depends on the specific circumstances and characteristics of the asset being disposed of. Therefore, the statement "Gains and losses from property transactions are handled similarly" is true.

Explanation

The explanation for the given correct answer is that gains and losses from property transactions are indeed handled similarly. Whether a gain or loss is considered capital or ordinary depends on the nature of the asset for the taxpayer making the taxable disposition. This means that the classification of the gain or loss depends on the specific circumstances and characteristics of the asset being disposed of. Therefore, the statement "Gains and losses from property transactions are handled similarly" is true.

63.

The $100 floor and 10 percent-of-AGI limitations on the deductible portion of personal casualty and theft losses applicable to individuals apply to corporations.

True

False

The given statement is false. The $100 floor and 10 percent-of-AGI limitations on the deductible portion of personal casualty and theft losses applicable to individuals do not apply to corporations. These limitations only apply to individuals when they are claiming deductions for personal casualty and theft losses.

Explanation

The given statement is false. The $100 floor and 10 percent-of-AGI limitations on the deductible portion of personal casualty and theft losses applicable to individuals do not apply to corporations. These limitations only apply to individuals when they are claiming deductions for personal casualty and theft losses.

64. Corporate-source income maintains its identity as it passes through the corporation to the shareholders.

True

False

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.

Explanation

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.

65. 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.$1,000,000

b.$0

c.$1,120,000

d.$7,500,000

e.$7,830,000

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.

Explanation

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.

66.

A corporation does not have to file a Federal income tax return unless it has taxable income.

True

False

A corporation is required to file a Federal income tax return regardless of whether it has taxable income or not. This is because the Internal Revenue Service (IRS) requires all corporations to file an income tax return, regardless of their financial situation. Filing a tax return allows the IRS to assess the corporation's financial status and ensure compliance with tax laws. Therefore, the statement that a corporation does not have to file a Federal income tax return unless it has taxable income is false.

Explanation

A corporation is required to file a Federal income tax return regardless of whether it has taxable income or not. This is because the Internal Revenue Service (IRS) requires all corporations to file an income tax return, regardless of their financial situation. Filing a tax return allows the IRS to assess the corporation's financial status and ensure compliance with tax laws. Therefore, the statement that a corporation does not have to file a Federal income tax return unless it has taxable income is false.

67. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Interest income from tax-exempt bonds.

True

False

Interest income from tax-exempt bonds would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return. This is because interest income from tax-exempt bonds is not taxable for federal income tax purposes but it is included in the net income per books. Therefore, it needs to be added back to the net income per books to reconcile with the income per the tax return.

Explanation

Interest income from tax-exempt bonds would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return. This is because interest income from tax-exempt bonds is not taxable for federal income tax purposes but it is included in the net income per books. Therefore, it needs to be added back to the net income per books to reconcile with the income per the tax return.

68. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

True

False

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.

Explanation

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.

69. 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.April 15, 2019, $68,250; June 15, 2019, $246,750; September 15, 2019, $157,500; December 15, 2019, $157,500.

b.April 15, 2019, $68,250; June 15, 2019, $187,250; September 15, 2019, $187,250; December 15, 2019, $187,250.

c.April 15, 2019, $157,500; June 15, 2019, $157,500; September 15, 2019, $157,500; December 15, 2019, $157,500.

d.April 15, 2019, $157,500; June 15, 2019, $157,500; September 15, 2019, $157,500; January 15, 2020, $157,500.

e.April 15, 2019, $68,250; June 15, 2019, $68,250; September 15, 2019, $68,250; December 15, 2019, $68,250.

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.

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.

70.

Like individuals, corporations must be concerned with classifying deductions into deduction for and deduction from categories.

True

False

Corporations do not need to classify deductions into deduction for and deduction from categories. This statement is false because corporations are not individuals and have different tax regulations and requirements. Deductions for corporations are classified based on specific tax laws and regulations applicable to businesses, rather than being categorized as deduction for or deduction from.

Explanation

Corporations do not need to classify deductions into deduction for and deduction from categories. This statement is false because corporations are not individuals and have different tax regulations and requirements. Deductions for corporations are classified based on specific tax laws and regulations applicable to businesses, rather than being categorized as deduction for or deduction from.

71.

For calendar year corporations, the corporate tax return is due March 15 of each year.

True

False

The explanation for the answer "False" is that for calendar year corporations, the corporate tax return is actually due on April 15 of each year, not March 15.

Explanation

The explanation for the answer "False" is that for calendar year corporations, the corporate tax return is actually due on April 15 of each year, not March 15.

72. Sapphire Corporation, a C corporation, has two equal individual shareholders, Kelley and Alex. In the current year, Sapphire earned a net profit of $200,000 and paid a dividend of $40,000 to each shareholder. Regardless of any tax consequences resulting from their interests in Sapphire, Kelley is in the 22% marginal tax bracket (15% capital gains and qualified dividend tax rate) and Alex is in the 35% marginal tax bracket (20% capital gains and qualified dividend tax rate). With respect to the current year, which of the following statements is false?

a.Sapphire can avoid the corporate tax altogether by paying out all $200,000 of net profit as dividends to the shareholders.

b.Kelley incurs income tax of $6,000 on her dividend income.

c.Sapphire pays corporate tax on $200,000.

d.Alex incurs income tax of $8,000 on his dividend income.

e.Sapphire pays corporate tax on $80,000.

Dividend distributions are not deductible by a corporation; thus, Sapphire still incurs corporate tax on $200,000 even if all profits were distributed to shareholders. A preferential tax rate of 15% applies to Kelley and 20% to Alex on the dividends, resulting in tax of $6,000 ($40,000 × 15%) on the dividend for Kelley and $8,000 ($40,000 × 20%) for Alex.

Explanation

Dividend distributions are not deductible by a corporation; thus, Sapphire still incurs corporate tax on $200,000 even if all profits were distributed to shareholders. A preferential tax rate of 15% applies to Kelley and 20% to Alex on the dividends, resulting in tax of $6,000 ($40,000 × 15%) on the dividend for Kelley and $8,000 ($40,000 × 20%) for Alex.

73. 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 m 15%).

True

False

For 2019, all corporations are subject to a flat 21% rate. Therefore, each corporation's tax liability is $10,500.

Explanation

For 2019, all corporations are subject to a flat 21% rate. Therefore, each corporation's tax liability is $10,500.

74. In any single year, a corporation can be subject to both the accumulated earnings tax and the personal holding company tax.

True

False

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.

Explanation

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.

75. 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.$20,000

b.$101,000

c.$232,000

d.$131,000

e.$0

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).

Explanation

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).

76. 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.

True

False

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.

Explanation

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.

77. 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.Capital

b.Limited hybrid

c.Accrual

d.Hybrid

e.Cash

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.

Explanation

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.

78. Which of the following is not considered a reasonable need of the business for purposes of the accumulated earnings tax?

a.Working capital needs

b.Replacement of plant and equipment

c.Debt retirement

d.Product liability losses

e.Loans to shareholders

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.

Explanation

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.

79. Tapper Corp., an accrual basis calendar year corporation, was organized on January 2, year 1. During year 1, revenue was exclusively from sales proceeds and interest income. The following information pertains to Tapper:

Taxable income before charitable contributions for the year ended December 31, year 1	$500,000
Tapper's matching contribution to employee-designated qualified universities made during year 1	10,000
Board of Directors' authorized contribution to a qualified charity (authorized December 1, year 1, made February 1, year 2)	30,000

What is the maximum allowable deduction that Tapper may take as a charitable contribution on its tax return for the year ended December 31, year 1?

a.$0

b.$10,000

c.$30,000

d.$40,000

Tapper's college matching contributions are deductible; Tapper made the contributions; the employees merely directed the proceeds. The Board's authorized contribution is also deductible because it satisfies the two rules under which an accrual-basis corporation can deduct an accrued contribution: 1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 4th month after the end of the taxable year of accrual. Therefore, the total deduction is $40,000 ($10,000 + $30,000).

Explanation

Tapper's college matching contributions are deductible; Tapper made the contributions; the employees merely directed the proceeds. The Board's authorized contribution is also deductible because it satisfies the two rules under which an accrual-basis corporation can deduct an accrued contribution: 1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 4th month after the end of the taxable year of accrual. Therefore, the total deduction is $40,000 ($10,000 + $30,000).

80. 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.$268,000

b.$0

c.$17,500

d.$13,500

e.$14,000

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.

Explanation

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.

81. Parent Corp. owns 40% of Sub Corp. In the current year, Parent has gross income of $43,000 and allowable deductions of $30,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 of dividends from Sub. What is the maximum DRD available to Parent?

a.$4,000

b.$5,200

c.$8,000

d.$8,450

Based on the large ownership percentage, which is over 20%, the applicable DRD rate is 65%. The total dividend is $8,000, and 65% of that is $5,200. This is limited to 65% of the taxable income before the DRD of $13,000 ($43,000 - $30,000). That limitation is $8,450 ($13,000 × 65%). The full DRD of $5,200 is allowed.

Explanation

Based on the large ownership percentage, which is over 20%, the applicable DRD rate is 65%. The total dividend is $8,000, and 65% of that is $5,200. This is limited to 65% of the taxable income before the DRD of $13,000 ($43,000 - $30,000). That limitation is $8,450 ($13,000 × 65%). The full DRD of $5,200 is allowed.

82. Match the following

Accumulated earnings tax

Organizational expenditures

Passive activity loss rules

Dividends received deduction

Personal holding company tax

C corporations

Submit

83. Before the provision for Federal income tax, Karas Corporation had book income of $400,000 for the current year. The book income included $100,000 of dividends received from a 15% owned domestic corporation. What was Karas Corporation's taxable income for the current year?

a.$300,000

b.$335,000

c.$350,000

400,000

Karas Corporation qualifies to report a "dividends-received deduction" of 50 percent of the dividends from the taxable unaffiliated domestic corporation. It is assumed that if the paying corporation is unaffiliated, then the receiving corporation owns less than 20 percent.

Book net income before federal income tax $ 400,000
Less: Dividends received deduction (50,000)
Taxable income $350,000

Explanation

Karas Corporation qualifies to report a "dividends-received deduction" of 50 percent of the dividends from the taxable unaffiliated domestic corporation. It is assumed that if the paying corporation is unaffiliated, then the receiving corporation owns less than 20 percent.

Book net income before federal income tax $ 400,000
Less: Dividends received deduction (50,000)
Taxable income $350,000

84. Which of the following is considered a reasonable need of the business for purposes of the accumulated earnings tax?

a.Unrealistic contingencies

b.Investments in unrelated properties

c.Loans to shareholders

d.Expansion of the business

e.Investments in unrelated businesses

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.

Explanation

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.

85. 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.$1,000,000

b.$1,120,000

c.$7,830,000

d.$7,500,000

e.$0

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.

Explanation

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.

86. Match the following

Regular corporations

Personal service corporations (PSCs)

Schedule M–3

Schedule M–2

Schedule M–1

Reasonable needs of the business

Submit

87. Which of the following statements is not true for tax years beginning after 2017?

a.Affiliated corporations that file consolidated returns can take a 100% dividends received deduction.

b.The dividends received deduction for a small investment in an unrelated corporation is 50%.

c.The dividends received deduction for a large investment in a corporation is 65%.

d.There is no income limitation on the dividends received deduction.

There is an income limitation on the dividends received deduction.

Explanation

There is an income limitation on the dividends received deduction.

88. 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.$47,250

b.$101,850

c.$123,900

d.$107,100

e.$40,950

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.

Explanation

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.

89. 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 p 248 election, what is Tundra's deduction for organizational expenditures for 2019?

a.$533

b.$5,367

c.$5,500

d.$5,000

e.$0

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
Total

Explanation

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
Total

90. 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.

True

False

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.

Explanation

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.

91. 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?

c.If Cliff Company is an S corporation, a preferential tax rate applies to the $25,000 long-term capital gain.

d.If Cliff Company is a C corporation, a preferential tax rate does not apply to the $25,000 long-term capital gain.

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").

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").

92. Campbell Corporation, an accrual basis calendar year corporation, had income of $450,000 for financial statement purposes in year 7. This amount included book depreciation of $50,000. The related tax depreciation was $65,000. Further, the financial statements reported $100,000 of municipal bond interest income, an expense of $2,000 for life insurance premiums on the corporation's president, charitable contributions of $5,000, excess capital losses over capital gains of $3,000, income tax penalties of $10,000, state income tax of $40,000, and Federal income tax expense of $175,000. What is the amount of Campbell's taxable income for year 7?

a.$522,000

b.$525,000

c.$530,000

d.$565,000

Taxable income does not include deductions for federal income tax (although it does allow the state income tax deduction), life insurance premiums on a key-person (such as the president), and penalties. Excess capital losses are not deductible against other income and may only be offset against capital gains (with carryback and carryforward limitations). Municipal bond interest income is not taxable. Depreciation is deducted using the tax rules (any difference, positive or negative, is reported on Schedule M-1). Charitable contributions are limited for tax purposes to 10% of adjusted/recalculated income, but the limit was not reached in this case.

The M-1 schedule is calculated below:
Book Income $450,000
+ Federal income tax $175,000
+ Excess capital losses over capital gains $3,000
+ Life insurance premiums not deducted on tax return $2,000
+ Penalties not deducted on tax return $10,000
- Municipal bond interest income not reported tax return $100,000
- Excess tax depreciation $15,000
= Taxable income $525,000

$522,000 is incorrect. This answer assumes that a corporation is able to deduct $3,000 of excess capital losses over capital gains. While this is allowable for individuals, corporations may deduct capital losses only against capital gains, and they are subject to a 3-year carryback and a 5-year carryforward limitation.

$530,000 is incorrect. This answer assumes that the $5,000 in charitable contributions is not allowable for tax purposes this year, which is not the case. The limitation of the 10% of adjusted/recalculated income has not been reached.

$565,000 is incorrect. This answer assumes that the deduction for state income tax is not allowable for tax purposes.

Explanation

Taxable income does not include deductions for federal income tax (although it does allow the state income tax deduction), life insurance premiums on a key-person (such as the president), and penalties. Excess capital losses are not deductible against other income and may only be offset against capital gains (with carryback and carryforward limitations). Municipal bond interest income is not taxable. Depreciation is deducted using the tax rules (any difference, positive or negative, is reported on Schedule M-1). Charitable contributions are limited for tax purposes to 10% of adjusted/recalculated income, but the limit was not reached in this case.

The M-1 schedule is calculated below:
Book Income $450,000
+ Federal income tax $175,000
+ Excess capital losses over capital gains $3,000
+ Life insurance premiums not deducted on tax return $2,000
+ Penalties not deducted on tax return $10,000
- Municipal bond interest income not reported tax return $100,000
- Excess tax depreciation $15,000
= Taxable income $525,000

$522,000 is incorrect. This answer assumes that a corporation is able to deduct $3,000 of excess capital losses over capital gains. While this is allowable for individuals, corporations may deduct capital losses only against capital gains, and they are subject to a 3-year carryback and a 5-year carryforward limitation.

$530,000 is incorrect. This answer assumes that the $5,000 in charitable contributions is not allowable for tax purposes this year, which is not the case. The limitation of the 10% of adjusted/recalculated income has not been reached.

$565,000 is incorrect. This answer assumes that the deduction for state income tax is not allowable for tax purposes.

93. What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under p 248?

a.Using the deduction and the cash method of accounting is generally counterproductive.

b.The deduction tends to yield better tax results when the corporation uses the cash method of accounting.

c.The corporation's method of accounting is of no consequence.

d.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.

e.Using the deduction and the accrual method of accounting is generally counterproductive.

An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.

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.

94. 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.Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain.

b.Oliver must report a $20,000 long-term capital gain on his 2019 tax return.

c.Oliver's corporation pays a tax of $4,200 on the capital gain.

d.Lonnie receives a preferential tax rate on a long-term capital gain of $20,000.

e.Lonnie must report a $20,000 long-term capital gain on his 2019 tax return.

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").

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").

95. 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.

True

False

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.

Explanation

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.

96. In year 6, Garland Corp. contributed $40,000 to a qualified charitable organization. Garland's year 6 taxable income before the deduction for charitable contributions was $410,000. Included in that amount is a $20,000 dividends received deduction. Garland also had carryover contributions of $5,000 from the prior year. In year 6, what amount can Garland deduct as charitable contributions?

a.$40,000

b.$41,000

c.$43,000

d.$45,000

The charitable contribution deduction is limited to 10% of taxable income before the dividends received deduction and the charitable contribution deduction. 10% ($410,000 + $20,000) = $43,000. There will be a $2,000 carryforward to Year 7.

Explanation

The charitable contribution deduction is limited to 10% of taxable income before the dividends received deduction and the charitable contribution deduction. 10% ($410,000 + $20,000) = $43,000. There will be a $2,000 carryforward to Year 7.

97. The dividends were received from a corporation of which Acorn owns 30%. In Acorn's current-year corporate income tax return, what amount should be reported as income before special deductions?

a.$525,000

b.$505,000

c.$275,000

d.$250,000

Income before special deductions includes sales, dividends received and cost of sales. It excludes the dividends received deduction, which is a "special" deduction.

Sales $ 500,000
Cost of sales (250,000)
Gross profit 250,000
Dividends received 25,000
Income before special deductions $275,000

Explanation

Income before special deductions includes sales, dividends received and cost of sales. It excludes the dividends received deduction, which is a "special" deduction.

Sales $ 500,000
Cost of sales (250,000)
Gross profit 250,000
Dividends received 25,000
Income before special deductions $275,000

98. Parent Corp. owns 15% of Sub Corp. Parent has gross income of $43,000 and allowable deductions of $40,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 in dividends from Sub. What is the maximum DRD available to Parent?

a.$1,500

b.$1,950

c.$4,000

d.$8,000

Based on the small ownership percentage, which is below 20%, the applicable DRD rate is 50%. The total dividend is $8,000, and 50% of that is $4,000. This is normally limited to 50% of taxable income before the DRD. Taxable income before DRD is $3,000 ($43,000 − $40,000), and the full DRD of $4,000 will create a loss. Therefore, the income limitation does not apply, and the full DRD of $4,000 is allowed.

$1,500 is incorrect. $1,500 is 50% of the taxable income before the DRD of $3,000. This would be correct if the income limitation applied. But due to the resulting loss, it does not apply.

$1,950 is incorrect. $1,950 is the income limitation if we use 65% of $3,000. But the correct limitation percentage is 50% because the ownership is less than 20%

$8,000 is incorrect. $8,000 is the total dividend. Only 50% is allowed as a DRD.

Explanation

Based on the small ownership percentage, which is below 20%, the applicable DRD rate is 50%. The total dividend is $8,000, and 50% of that is $4,000. This is normally limited to 50% of taxable income before the DRD. Taxable income before DRD is $3,000 ($43,000 − $40,000), and the full DRD of $4,000 will create a loss. Therefore, the income limitation does not apply, and the full DRD of $4,000 is allowed.

$1,500 is incorrect. $1,500 is 50% of the taxable income before the DRD of $3,000. This would be correct if the income limitation applied. But due to the resulting loss, it does not apply.

$1,950 is incorrect. $1,950 is the income limitation if we use 65% of $3,000. But the correct limitation percentage is 50% because the ownership is less than 20%

$8,000 is incorrect. $8,000 is the total dividend. Only 50% is allowed as a DRD.