Deck 3: The Corporate Income Tax

Question 1

Identify which of the following statements is true.

A) A corporation that is a member of an affiliated group filing a consolidated tax return may be allowed a tax year which is different from the group's parent.
B) An S corporation must generally use a calendar year.
C) A corporation's first year must cover a twelve-month period.
D) All of the above are false.

Answer 1

B

Question 2

Identify which of the following statements is true.

A) A corporate capital loss can be carried back three years, and then can be carried forward five years.
B) Corporate capital loss carrybacks can offset corporate ordinary income earned in previous years.
C) At the election of a corporation, a net capital loss carryback can be forgone and carried forward only.
D) All of the above are false.

Answer 2

A

Question 3

A new corporation may generally select one of the following accounting methods with the exception of

A) cash method.
B) accrual method.
C) retail method.
D) hybrid method.

Answer 3

C

Question 4

Organizational expenses incurred after 2019 are amortized over five years.

Question 5

Corporations may deduct the adjusted basis of inventory plus one-half of the excess of the property's FMV over its adjusted basis if the inventory is used for the care of the ill, needy, or infants.

Question 6

Corporations may carry charitable contributions in excess of the income limitation forward for five years.

Question 7

Identify which of the following statements is false.

A) A corporation's fiscal year generally must end on the last day of the month.
B) A fiscal year may not end on December 31.
C) A new corporation can elect a fiscal year that runs from February 16 to February 15 of the following year.
D) A corporation's first tax year may not cover a full 12-month period.

Question 8

Identify which of the following is false.

A) Corporations that sell real property at a gain must report an additional 20% of the entire gain as ordinary income.
B) Corporations selling real property that previously had been depreciated using an accelerated method are subject to Sec. 291.
C) Section 291 reduces the amount of net Sec. 1231 gains that can be offset by corporate capital losses.
D) Section 291 recapture applies to Sec. 1250 property.

Question 9

Identify which of the following statements is true.

A) A corporation is a separate taxpaying entity that must file a tax return annually.
B) A newly formed corporation must select its basic accounting method.
C) The terms "regular corporation" and "C corporation" are synonymous.
D) All of the above are true.

Question 10

If a controlling shareholder sells depreciable property to a controlled corporation and the property is depreciable by the purchaser, any gain on the sale is a 1231 gain.

Question 11

All of the taxable income of a personal service corporation is taxed at a flat 21% rate.

Question 12

Corporations are permitted to deduct $3,000 in net capital losses annually.

Question 13

The dividends-received deduction is designed to reduce double taxation of corporate dividends payable to individual shareholders.

Question 14

Once a corporation has elected a taxable year, it can change the taxable year without IRS permission if

A) the resulting short period has a net operating loss of $100,000 that the corporation wants to carry forward.
B) the corporation changed its taxable year seven years ago.
C) the corporation is not an S corporation.
D) a corporation can change its taxable year without IRS permission in all of the above situations.

Question 15

A C corporation must use a calendar year as its tax year unless it has a substantial business purpose to use a fiscal year.

Question 16

Trail Corporation has gross profits on sales of $140,000 and deductible expenses of $180,000. In addition, Trail has a net capital gain of $60,000. Trail's taxable income is

A) a $20,000 loss.
B) a $40,000 loss.
C) $60,000.
D) $20,000.

Question 17

Newco Corporation has asked you to help determine whether it should use the accrual method or the cash method of accounting. What are the tax issues involved in making this determination?

Question 18

Identify which of the following statements is false.

A) A corporation with annual gross receipts of $25,000,000 or less can use the accrual method to account for sales, cost of goods sold, inventories, accounts receivable and payable, and the cash method for other income and expenses.
B) Casualty losses incurred by a corporation are deductible subject to a nondeductible floor similar to those applicable to individuals.
C) The passive loss rules do not apply to widely held C corporations.
D) Corporations may receive a deduction for dividends received from other corporations.

Question 19

NOLs arising in tax years ending after 2017 carry over to subsequent tax years indefinitely.

Question 20

Sparks Corporation receives a dividend of $100,000 from Jill Corporation, a C corporation. Sparks owns 70% of Jill Corporation stock. Sparks' dividends-received deduction is $65,000.

Question 21

Identify which of the following statements is true.

A) "Ordinary income property" with regard to the charitable contribution deduction does not include property whose sale would have produced a short-term capital gain.
B) The Twilight Corporation purchases inventory for $5,000. Its FMV on the date it is donated to the Blue-Gray Hospital for the care of the needy is $13,000. The maximum charitable contribution deduction available for the donation is $9,000.
C) Corporations' charitable deductions are limited to 20% of their adjusted taxable income.
D) All of the above are false.

Question 22

Island Corporation has the following income and expense items for the year: The taxable income of Island Corporation is

A) $100,000.
B) $70,000.
C) $47,000.
D) $50,000.

Question 23

Identify which of the following statements is true.

A) When a corporation donates appreciated capital gain property to a charity, the amount of the contribution deduction generally equals the property's FMV.
B) When a corporation donates appreciated capital gain property to a private nonoperating foundation, the corporation's contribution is limited to the property's FMV minus the ordinary gain that would have resulted from the property's sale.
C) When a corporation contributes appreciated property to a charity, the charitable contribution deduction is the property's FMV or adjusted basis, depending on the election made by the taxpayer.
D) All of the above are false.

Question 24

In February of the current year, Brent Corporation donates computer equipment that it purchased six months ago to Eastside High School for use in its educational program. The donated property had a $20,000 adjusted basis to Brent and a $40,000 FMV. What is the amount of the gift?

A) $20,000
B) $30,000
C) $35,000
D) $50,000

Question 25

Booth Corporation sells a building classified as a residential rental property for $200,000. The MACRS straight-line depreciation taken is $20,000 and the adjusted basis of the building is $170,000. Booth Corporation must recognize ordinary income of

A) $30,000.
B) $20,000.
C) $4,000.
D) $0.

Question 26

Identify which of the following statements is true.

A) Organizational expenditures incurred by a corporation do not include the cost of accounting services necessary to create the corporation.
B) Organizational expenditures incurred by a corporation do not include the cost of printing stock.
C) Unamortized organizational expenses cannot be deducted when the corporation is liquidated.
D) All of the above are false.

Question 27

Identify which of the following statements is true.

A) A corporation that accrues compensation payable to an employee must pay the amount within two and one-half months after the close of the taxable year to deduct the amount in the year of the accrual.
B) Accrued compensation that is deductible in the year of accrual is considered to be part of an IRS deferred compensation plan.
C) Accrued compensation not paid within three and one-half months after the close of the corporation tax year is deducted in the year following the accrual.
D) All of the above are false.

Question 28

Identify which of the following statements is true.

A) The dividends-received deduction is designed to reduce double taxation of corporate dividends.
B) The full 65% dividends-received deduction is available without restriction.
C) If a corporation receives dividends eligible for the 65% dividends-received deduction and the 50% dividends-received deduction, the 50% dividends-received deduction reduces taxable income prior to the 65% deduction.
D) All of the above are false.

Question 29

Edison Corporation is organized on July 31. The corporation starts business on August 10. The corporation adopts a November 30 fiscal year end. The following expenses are incurred during the year: What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending November 30?

A) $16,000
B) $12,000
C) $5,156
D) $800

Question 30

Identify which of the following statements is false.

A) The 50% dividends-received deduction is limited to 50% of the taxable income of the corporation without regard to any NOL deduction, any capital loss carryback, and the dividends-received deduction itself unless the dividends-received deduction produces an NOL.
B) Members of an affiliated group can claim a 90% dividends-received deduction for dividends received from other group members that is not subject to a taxable income limitation.
C) A corporate dividends-received deduction is not allowed for dividends received on stock held for 40 days.
D) All of the above are false.

Question 31

Organizational expenditures include all of the following except for

A) costs incurred when issuing stock.
B) legal costs incident to the creation of the corporation.
C) expenses of organizational meetings.
D) fees paid to the state of incorporation.

Question 32

Evans Corporation has a $15,000 net capital loss in 2017. The corporation reported the following capital gain netting in income during the past three years. Identify which of the following statements is true.

A) The loss is used to offset the gains from 2016 and then carried back to offset $10,000 of the gains in 2014.
B) The loss is used to offset the $11,000 of the 2015 gains and then carried back to offset $4,000 of the year 2014 net gain.
C) The loss is used to offset $3,000 of 2014, 2015 and 2016 capital gains, remaining amount carried forward at $3,000 a year until expired.
D) The loss is used to offset the year 2014 net gains, then $5,000 of the year 2015 net gains.

Question 33

Super Corporation gives a painting to a museum for public display on August 6. The painting was purchased on April 3 of the same year for $20,000 and is worth $30,000 at the date of gift. Also, Super accrues a charitable contribution on December 30 and pays the $12,000 contribution on February 1 of the next year. Super Corporation is a calendar-year corporation that uses the accrual method of accounting. Before considering the 10% limitation rule, the maximum deduction for the current year is

A) $12,000.
B) $20,000.
C) $30,000.
D) $32,000.

Question 34

Dallas Corporation, not a dealer in securities, realizes taxable income of $60,000 from the operation of its business. Additionally, in the same year, Dallas realizes a long-term capital loss of $10,000 from the sale of marketable securities. If the corporation realizes no other capital gains or losses, what is the proper treatment for the $10,000 long-term capital loss on the tax return?

A) Use $3,000 of the loss to reduce taxable income and carry $7,000 of the long-term capital loss forward for five years.
B) Use $6,000 of the loss to reduce taxable income and carry $4,000 of the long-term capital loss forward for five years.
C) Use $10,000 of the long-term capital loss to reduce taxable income.
D) Carry the $10,000 long-term capital loss back three years as a short-term capital loss, then forward five years.

Question 35

Maxwell Corporation reports the following results: Maxwell's dividends-received deduction is

A) $30,000.
B) $35,000.
C) $56,000.
D) $70,000.

Question 36

Garth Corporation donates inventory having an adjusted basis of $40,000 and an FMV of $150,000 to a qualified public charity. The inventory will be used by the charity to care for the ill. The maximum charitable contribution deduction before consideration of the 10% limitation is

A) $40,000.
B) $55,000.
C) $80,000.
D) $95,000.

Question 37

Blueboy Inc. contributes inventory to a qualified charity for use in feeding the needy. The inventory has a $70,000 FMV and a $30,000 adjusted basis. Blueboy Inc. can take a charitable contribution deduction of

A) $20,000.
B) $30,000.
C) $50,000.
D) $60,000.

Question 38

If a corporation's charitable contributions exceed the deduction limitation in a particular year, the excess

A) is not deductible in any future year.
B) becomes a carryover to a maximum of five succeeding years.
C) may be carried back to the third preceding year.
D) is carried over indefinitely.

Question 39

Richards Corporation has taxable income of $280,000 calculated before the charitable contribution deduction and before its dividends-received deduction of $34,000. Richards makes cash contributions of $35,000 to charitable organizations. What is Richards Corporation's charitable contribution deduction for the current year?

A) $24,600
B) $28,000
C) $31,400
D) $35,000

Question 40

Green Corporation is incorporated on March 1 and begins business on June 1. Green's first tax year ends on October 31, i.e., a short year. Green incurs the following expenses during the year: What is the deduction for organizational expenses if Green chooses to deduct its costs as soon as possible?

A) $36,000
B) $5,028
C) $667
D) $500

Question 41

The following expenses are incurred by Salter Corporation when it is organized on July 1:
Attorney fees to draft charter $20,000
Underwriter fees for stock sale 10,000
Transfer cost for property contributed to the corporation for stock 4,000
Costs of organizational meetings before beginning business 5,000
Costs of directors' meetings after beginning business 8,000
Salter commenced business on September 8. What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending December 31?

Question 42

Two days before the ex-dividend date, Drexel Corporation buys 100 shares of Zebra Corporation stock (less than 1%) for $200,000. Drexel Corporation receives $10,000 of dividends from Zebra Corporation. Two weeks after the ex-dividend date, Drexel Corporation sells the Zebra Corporation stock for $190,000. Which of the following statements is correct?

A) Drexel Corporation cannot recognize a capital loss.
B) Drexel Corporation cannot take a dividends-received deduction on the Zebra Corporation dividend.
C) Drexel Corporation will be allowed a 50% dividends-received deduction when reporting the Zebra Corporation dividend.
D) Drexel Corporation will receive no dividends-received deduction because the stock was purchased ex-dividend.

Question 43

Money Corporation has the following income and expenses for the tax year: What is Money's net operating loss?

A) $490,000
B) $494,000
C) $520,000
D) $220,000

Question 44

Delux Corporation, a retail sales corporation, has a taxable income of $500,000. Delux Corporation's regular tax liability is

A) $158,250.
B) $162,200.
C) $105,000.
D) $175,000.

Question 45

Access Corporation, a large manufacturer, has a taxable income of $16,000,000. Access Corporation's tax is

A) $5,440,000.
B) $3,360,000.
C) $5,600,000.
D) $3,680,000.

Question 46

Identify which of the following statements is true.

A) A corporate NOL can be carried back two years and forward 15 years.
B) An NOL incurred before 2018 carries forward 20 years and is not subject to the 80% of taxable income limitation.
C) In computing an NOL for the current year, a deduction is allowed for NOLs from previous years.
D) All of the above are false.

Question 47

West Corporation purchases 50 shares (less than 1%) of Perch Corporation common stock on April 3. The ex-dividend date is April 4. West Corporation pays $50,000 for the stock and receives a dividend of $5,000 on the Perch stock. On May 1, West Corporation sells the Perch stock for $45,000. West's taxable income before the dividends-received deduction is $4,000. West's dividends-received deduction is

A) $3,500.
B) $3,200.
C) $2,800.
D) $0.

Question 48

Identify which of the following statements is true.

A) Any amount of net business interest disallowed due to limitation may be carried over indefinitely.
B) If a corporation accrues an obligation to pay compensation, the corporation must make the payment by year-end to be able to deduct during the current year.
C) Corporations can deduct up to $10,000 in capital losses per year.
D) Net business interest is limited to 50% of adjusted taxable income.

Question 49

Baxter Corporation is a personal service corporation. Baxter Corporation has taxable income of $10,000. Baxter Corporation's tax is

A) $1,500.
B) $2,400.
C) $2,100.
D) $2,900.

Question 50

Lass Corporation reports a $25,000 net capital loss this year. The corporation reports the following net capital gains during the past three years.
Determine the amount of net capital loss carried back to each preceding tax year and the amount of capital loss, if any, available as a carryforward.

Question 51

Miller Corporation has gross income of $100,000, which includes $60,000 of dividends from a 10%-owned corporation. In addition, Miller has $80,000 of expenses. Miller's taxable income or loss is

A) $20,000.
B) $6,000.
C) $0.
D) ($10,000).

Question 52

Identify which of the following statements is true.

A) For expenses incurred after December 31, 2017, no deduction is allowed for any activities involving entertainment, amusement, or recreation, including expenses related to a facility used in connection with these activities.
B) The Dividends Received Deduction for individuals is limited to 50%.
C) Domestic Production Activities Deduction carry overs that originated from pre 2018 tax years are limited to 50% of taxable income until 2025.
D) Deductibility of business interest in a given year is limited to 80% of adjusted taxable income.

Question 53

On December 10 of the past year Dell Corporation (a calendar-year taxpayer) accrued an obligation for a $100,000 bonus to Muriel, a sales representative who had had an outstanding year. Muriel owns no Dell Corporation stock. The bonus is paid on May 5 of the current year. What is Dell's deduction for last year? What is Dell's deduction for this year?

Question 54

Identify which of the following statements is true.

A) The charitable contribution deduction is computed after the deduction for an NOL.
B) The charitable contribution deduction is computed after the dividends-received deduction.
C) The NOL deduction claimed by a corporation must be taken after the dividends-received deduction.
D) All of the above are false.

Question 55

Ryan Corporation sells a commercial building and land. The sales proceeds attributable to the building is $145,000. When purchased, the building is allocated $75,000 of the purchase price. The firm has depreciated the building using the MACRS rules. The MACRS deductions taken total $60,000. What is the amount and character of Ryan's recognized gain?

Question 56

Jackson Corporation, not a dealer in securities, realizes taxable income of $80,000 from the operation of its business. Additionally, Jackson Corporation realizes a $10,000 long-term capital loss from the sale of marketable securities. Explain the treatment of the loss on the corporate return for this and any other years.

Question 57

Bright Corporation purchased residential real estate five years ago for $450,000, of which $50,000 was allocated to the land and $400,000 was allocated to the building. Bright booked straight-line MACRS deductions of $55,000 during the past five years. This year, Bright sells the property for $550,000, of which $100,000 is allocated to the land and $450,000 is allocated to the building. What is the amount and character of Bright's recognized gain or loss on the sale?

Question 58

Webster, who owns all the Bear Corporation stock, purchases a dump truck from Bear Corporation in January. The truck cost $12,000 and has a $10,000 adjusted basis at the time of the sale. Webster pays Bear the truck's $8,000 FMV. Later in the same year, Webster sells the dump truck to an unrelated party for $6,000. Webster can recognize a loss of

A) $4,000.
B) $2,000.
C) $3,000.
D) $5,000.

Question 59

Chambers Corporation is a calendar year taxpayer using the accrual method of accounting. Last year its board of directors authorizes a $20,000 contribution to the Boy Scouts. Chambers pays the contribution on March 12 of the current year. What is the maximum contribution allowed for last year? What is the maximum contribution allowed in the current year?

Question 60

Walter, who owns all of the Ajax Corporation stock, purchases a truck from Ajax Corporation in January. The truck cost $12,000 and has a $10,000 adjusted basis. Walter pays the truck's $8,000 FMV. Later in the same year, Walter sells the truck to an unrelated party for $13,000. With respect to these transactions

A) Ajax Corporation reports a loss of $2,000 and Walter reports a gain of $5,000.
B) Ajax Corporation reports no loss and Walter reports a gain of $3,000.
C) Ajax Corporation reports a loss of $4,000 and Walter reports a gain of $5,000.
D) Ajax Corporation reports no loss and Walter reports a gain of $5,000.

Question 61

Dexter Corporation reports the following results for the current year:
Gross income from operations $90,000
Dividends from less than 20%-owned corporations 50,000
Operating expenses 75,000
Charitable contributions 10,000
In addition, Dexter has a $25,000 NOL carryover from the preceding tax year. What is Dexter's taxable income for the current year?

Question 62

How does the use of a net capital loss differ for individual and corporate taxpayers?

Question 63

Zerotech Corporation donates the following property to an elementary school:
• Computer printer purchased three years ago for $1,000. The printer has a $500 FMV and $0 adjusted basis on contribution date.
• Computer equipment acquired one year ago at a cost of $5,000. The equipment has an $8,000 FMV and $0 adjusted basis on contribution date.
• Computer software acquired two months ago at a cost of $10,000. The software will be used in a prekindergarten program. Its FMV on the contribution date is $10,000 and it has an adjusted basis of $0.
a) Identify any donation qualifying for special treatment.
b) What is Zerotech's charitable contribution deduction?

Question 64

How does the use of an NOL differ for individual and corporate taxpayers?

Question 65

Little Corporation uses the accrual method of accounting. Little's sole shareholder, Renee, uses the cash method of accounting. Both taxpayers use the calendar year as their tax year. The corporation accrues a $25,000 interest payment to Renee on December 25 and makes the payment on March 10. What are the tax consequences of the transactions to both taxpayers in preceding year and current year?

Question 66

Courtney Corporation had the following income and expenses for the tax year:
Gross profit on sales $300,000
Expenses $600,000
Dividends received from less-than-20%-
owned domestic corporations $ 20,000
Courtney had taxable income for the past three years of:
2016 $100,000
2017 $120,000
2018 $ 80,000
Determine the corporation's NOL for the current year.

Question 67

During the year, Soup Corporation contributes some of its inventory to a qualified charity for use in feeding the needy. The inventory has an FMV of $85,000 and an adjusted basis of $25,000. What is the amount of Soup Corporation's charitable contribution deduction for the donation of the inventory as determined without regard to the overall charitable contribution limitation?

Question 68

Bebop Corporation reports the following results in the current year:
Gross income from operations $150,000
Dividends from 15% owned domestic corporation 50,000
Expenses 140,000
What is Bebop's taxable income?

Question 69

Bermuda Corporation reports the following results in 2018 and 2019?
What is Bermuda's contribution deduction in 2018 and 2019? What is the disposition of any remaining amount?

Question 70

Jackel, Inc. has the following information for the current tax year:
Gross sales $350,000
Cost of goods sold 50,000
Dividends received (10%) 40,000
Operating expenses 30,000
Charitable contributions 45,000
What is Jackel's charitable contribution deduction? What is Jackel's taxable income?

Question 71

Francine Corporation reports the following income and expense items for the tax year ending December 31:
Gross receipts from sales $50,000
Dividends received from 15%-owned domestic corporation 30,000
Expenses connected with sales 20,000
What is Francine Corporation's taxable income?

Question 72

Paul, who owns all the stock in Rodgers Corporation, purchases a truck from the corporation in January. The truck cost $11,000 and has an adjusted basis of $9,000. Paul pays Rodgers the truck's $7,000 FMV. Paul sells the truck later in the tax year to an unrelated party for $12,000. What is the amount and character of the income that Paul will report on this year's tax return?

Question 73

What are the various levels of stock ownership by corporate shareholders for the dividends-received deduction (DRD)? What is the DRD% for each level of ownership?

Question 74

James Corporation purchased residential real estate in 2013 for $225,000, of which $25,000 was allocated to land and $200,000 was allocated to the building. James Corporation took straight-line MACRS deductions of $30,000 during the years 2013-2018. In 2019, James Corporation sold the property for $285,000, of which $60,000 is allocated to the land and $225,000 is allocated to the building. What are the amounts and character of James Corporation's recognized gain or loss on the sale?

Question 75

Prince Corporation donates inventory having an adjusted basis of $26,000 and an FMV of $40,000 to County Hospital, which is a qualified public charity. What is the amount of Prince's deduction?

Question 76

When computing corporate taxable income, what is the proper sequencing of deductions?

Question 77

What are start-up expenditures?

Question 78

For corporations, what happens to excess charitable contributions?

Question 79

What impact does an NOL carryforward have on the proper sequencing of deductions to compute corporate taxable income?

Question 80

Vanda Corporation sold a truck with an adjusted basis of $50,000 to Barbara for $30,000. Vanessa owns 25% of the Vanda stock. What tax issues should Vanda and Vanessa consider with respect to the sale/purchase?