Deck 3: Corporations: Special Situations

Question 1

Modified AGI means AGI without any DPAD allowance.

Answer 1

True

Question 2

In the case of an individual, modified AGI is substituted for taxable income in the DPAD formula.

Answer 2

True

Question 3

The domestic production activities deduction is intended to preserve U.S. manufacturing jobs and discourage their outsourcing.

Answer 3

True

Question 4

Harvey, a real estate developer, pays Abe, a general contractor, to construct an office building. Abe has no DPGR since he does not own the property.

Question 5

If QPAI cannot be used in any one year due to the TI limitation, it can be carried over for 3 years.

Question 6

The formula in determining the DPAD for individual taxpayers is the same as that applicable to corporations.

Question 7

The domestic production activities deduction is limited to corporations.

Question 8

The percentage applicable for computing the DPAD will ultimately increase to 12%.

Question 9

Fewer corporations are subject to the AMT than to the domestic production activities deduction.

Question 10

The DPAD is limited by 50% of the total W-2 wages paid by a taxpayer.

Question 11

June Corporation, a Tampa contractor, pays Gull Engineering a fee to design bridges for a highway June will build in Haiti. The fee Gull receives is DPGR.

Question 12

In connection with the construction of a housing project, a contractor pays an architect to design the homes being built. The architect's fee is not an embedded service that qualifies as DPGR.

Question 13

The overall effect of the domestic production activities deduction is similar to a deduction.

Question 14

One of the components of DPGR is qualified production property (QPP). The QPP must be manufactured, produced, grown, or extracted entirely within the U.S.

Question 15

The W-2 wages limitation as to the DPAD encourages the use of independent contractors.

Question 16

In terms of the effect of the DPAD, the maximum tax savings for a corporation with $10 million of taxable income is $316,000 in 2014.

Question 17

DPGR - Allowable Indirect Costs = QPAI. Is this formula correct?

Question 18

DPAD for 2014 is 9% of the greater of QPAI or TI, but not to exceed the W-2 wages limitation.

Question 19

DPGR cannot include the cost of an embedded service that is part of in the sale of a manufactured product.

Question 20

Green Company, a U.S. corporation based in Texas, manufactures and sells a product which includes some components made in the Dominican Republic. None of Green's income from sales constitute DPGR.

Question 21

Intangible drilling costs are a tax preference item only for integrated oil companies.

Question 22

Junco Corporation is a member of an expanded affiliated group (EAG) and has QPAI but no W-2 wages. Junco cannot claim a DPAD.

Question 23

Some of the meals a food service company prepares for its chain of restaurants is frozen and shipped to supermarkets for resale. The proceeds from such sales will qualify as DPGR.

Question 24

In working with the W-2 wage limitation on DPAD, a partner can count any guaranteed payments he receives from the partnership.

Question 25

Once a small corporation for AMT purposes, always a small corporation.

Question 26

Tax-exempt interest on state and local private activity bonds (issued in 2010) is a tax preference item.

Question 27

The ACE adjustment can be positive or negative.

Question 28

Under some circumstances, the sale of prepared food at a taxpayer's retail facility can qualify as DPGR.

Question 29

The AMT rate for corporations is the same as for individuals.

Question 30

In the case of corporations that are members of an expanded affiliated group (EAG), the DPAD is determined by treating the group as a single taxpayer.

Question 31

Dennis, an advertising executive, pays a contractor to build a lodge on property he owns in Colorado. If Dennis sells the lodge, the proceeds (less the cost of the land) will be DPGR.

Question 32

Netting refers to the process of AMT adjustments reversing themselves and then being deducted from taxable income to arrive at AMTI.

Question 33

The definition of an expanded affiliated group (EAG) for DPAD purposes is broader than that applicable to the filing of consolidated tax returns.

Question 34

Passive activity losses of certain closely held corporations and personal service corporations are not tax preferences.

Question 35

NOLs are negative adjustments.

Question 36

The DPAD is not allowed for AMT purposes.

Question 37

A taxpayer who prepares and sells Mexican food at several of its restaurant locations can qualify for DPAD as to the receipts only from take-out orders and home-delivery sales.

Question 38

The objective of the AMT is to force taxpayers that are more profitable than their taxable income reflects to pay additional income taxes.

Question 39

Gerbil Corporation was formed in 2004. If in 2014, it has average gross receipts of under $7.5 million, the company cannot be subject to the AMT.

Question 40

If mining exploration and development costs are capitalized and written off over 10 years, no adjustment is necessary for AMT purposes.

Question 41

Which statement is false?

A) The AMT is not limited to C corporations.
B) The DPAD is not limited to C corporations.
C) The penalty tax on PHCs is dependent on the existence of a tax avoidance motive.
D) In the case of a sole proprietor, the DPAD is a deduction for adjusted gross income.
E) All are true.

Question 42

Lime, Inc., has taxable income of $13 million in 2014. What is the maximum DPAD tax savings for this C corporation?

A) $132,600
B) $265,200
C) $397,800
D) $409,500
E) None of the above

Question 43

Reasonable needs for purposes of the accumulated earnings tax do not include loans to shareholders.

Question 44

Which, if any, of the following is a characteristic of the DPAD?

A) Not applicable in situations involving S corporations.
B) Applicable only to manufactured goods that are exported from the U.S.
C) Can never apply when the rendition of personal services is involved.
D) Can sometimes apply when some of the components of a product are manufactured in foreign countries.
E) None of the above.

Question 45

In a sole proprietorship situation, a DPAD would be a:

A) Deduction from AGI.
B) Deduction for AGI.
C) Possible deduction from and deduction for.
D) Not deductible.
E) All of the above.

Question 46

The personal holding company tax rate in 2014 is 39.6%.

Question 47

The accumulated earnings credit for a personal service corporation is the greater of $150,000 or the current E & P for the year needed to meet the reasonable needs of the business.

Question 48

Tanweer, Inc., manufactures and sells glassware. The company also sells dinnerware that is purchased from unrelated foreign producers. During the 2014 tax year, Tanweer had a U.S. profit of $1.3 million (QPAI) and a loss from the imported dinnerware of $300,000. What is Tanweer's DPAD?

A) None
B) $33,000
C) $66,000
D) $90,000
E) None of the above

Question 49

Which formula is correct for DPAD?

A) Smaller of 9% of QPAI or 9% of modified AGI, not to exceed 50% of allocable wages.
B) Larger of 9% of QPAI or 9% of taxable income, not to exceed 50% of allocable wages.
C) Smaller of 9% of QPAI or 9% of taxable income, not to exceed 60% of allocable wages.
D) Larger of 9% of QPAI or 9% of alternative minimum tax, not to exceed 60% of allocable wages.
E) None of the above.

Question 50

The regular foreign tax credit is available to reduce AMT liability.

Question 51

The AMT exemption amount of $40,000 phases out entirely once a corporation's average gross receipts exceeds $310,000.

Question 52

Jeff Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is purchased from unrelated foreign producers. During the 2014 tax year, Jeff had a U.S. profit of $1.2 million (QPAI) and a profit from the imported merchandise of $300,000. What is Jeff's DPAD?

A) $36,000
B) $72,000
C) $108,000
D) $117,000
E) None of the above

Question 53

AMTI may be defined as regular taxable income after AMT adjustments (other than the NOL and ACE adjustments) and after tax preferences.

Question 54

The accumulated earnings credit is always the greater of the minimum credit of $250,000 or the current E & P for the year needed to meet the reasonable needs of the business.

Question 55

Yvonne Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is purchased from unrelated foreign producers. During the 2014 tax year, Yvonne had a U. S. profit of $1.3 million (QPAI) and a loss from the imported merchandise of $200,000. What is Yvonne's DPAD?

A) $33,000
B) $66,000
C) $99,000
D) $1,080,000
E) None of the above

Question 56

Long-term capital gains are taxed under the AET and PHC taxes.

Question 57

Stacey, Inc., has taxable income of $10 million in 2014. What is the maximum DPAD tax savings for this C corporation?

A) None
B) $204,000
C) $306,000
D) $315,000
E) None of the above

Question 58

The penalty tax rate for the AET and PHC is the highest rate applicable to individual taxpayers.

Question 59

A negative ACE adjustment is beneficial to a corporation.

Question 60

Which statement is false?

A) The overall tax effect of a DPAD is a rate reduction or a tax credit.
B) For a flow-through entity, modified AGI is substituted for taxable income.
C) FASB requires the DPAD to be reported as a special charge.
D) MPGE refers to a merge, paid, gain, and expense.
E) All of the above are correct.

Question 61

Jackson, Inc., has the following items related to the AMT.

Question 62

Boat Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kirby Corporation for $1,000 in 2014. Kirby incurs TV advertising expenses of $200 and sells the machine by phone order for $1,700. If Boat and Kirby corporations are members of an expanded affiliated group (EAG), their QPAI is:

A) $200.
B) $700.
C) $900.
D) $1,500.
E) None of the above.

Question 63

Bozeman Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Denver Corporation for $1,030 in 2014. Denver incurs TV advertising expenses of $315 and sells the machine by phone order for $1,600. If Bozeman and Denver corporations are members of an expanded affiliated group (EAG), their DPGR is:

A) $715.
B) $800.
C) $1,285.
D) $1,600.
E) None of the above.

Question 64

Lemon, Inc., has the following items related to the AMT: The corporation's AMT, if any, is:

A) $0.
B) $755,580.
C) $1,868,080.
D) $2,055,100.
E) None of the above.

Question 65

Which statement is false?

A) The starting point for computing AMTI is taxable income.
B) A tax preference is added to taxable income.
C) The ACE adjustment can be a negative amount.
D) The starting point for computing ACE is taxable income.
E) None of the above.

Question 66

Which of the following is added in arriving at ACE?

A) Tax-exempt income (net of expenses).
B) Federal income tax.
C) Premiums paid on key employees insurance.
D) Loss on sale between related parties.
E) None of the above.

Question 67

Which of the following items will be a deduction from unadjusted AMTI in arriving at ACE?

A) Federal income tax.
B) 80% dividends received deduction.
C) Penalties and fines.
D) Premiums paid on key employee insurance.
E) None of the above.

Question 68

Nickel Corporation, a calendar year corporation formed in 2012, has average gross receipts of $5.7 million, $4.2 million, and $4.8 million in 2012, 2013, and 2014, respectively. In 2014, Nickel is:

A) Not subject to the corporate income tax.
B) A small corporation with respect to the AMT.
C) Not subject to the AMT.
D) Subject to the AMT.
E) None of the above.

Question 69

Kim's sole proprietorship consists of a bakery and retail food sales. The bakery's DPGR is $700,000, but after CGS, direct expenses, and a ratable portion of indirect expenses are deducted, QPAI is $100,000. W-2 wages related to DPGR are significant. The retail food sales have a loss of $900,000. If Kim files a joint return and her modified AGI is $119,500, what is her allowable DPAD, if any, for 2014?

A) None
B) $6,000
C) $7,170
D) $9,000
E) Some other amount

Question 70

Which of the following items will be an addition to AMTI in arriving at ACE?

A) Excess capital loss.
B) Federal income tax.
C) Tax-exempt income.
D) Excess charitable contributions.
E) None of the above.

Question 71

Which of the following would not be a positive tax preference item in 2014?

A) Accelerated depreciation on real property in excess of straight-line.
B) Intangible drilling costs.
C) Alternative minimum tax NOL deduction.
D) Percentage depletion in excess of adjusted basis.
E) None of the above.

Question 72

Which of the following statements does not reflect the rules regarding pass-through entities and DPAD?

A) Since the deduction is determined at the owner level, each owner must make the computation separately.
B) The entity allocates to each owner his or her share of any QPAI.
C) In the case of partnerships, guaranteed payments are regarded as W-2 wages.
D) A partner cannot be allocated any W-2 wages if the share of QPAI is zero.
E) None of the above.

Question 73

Which AMT adjustment would only be negative?

A) Passive activity losses.
B) AMT NOL deduction.
C) DPAD.
D) Completed contract method.
E) None of the above.

Question 74

Which of the following items will have an effect (add or subtract) on unadjusted AMTI to arrive at ACE?

A) Federal income tax.
B) Tax-exempt interest income.
C) Excess capital losses.
D) 80% dividends received deduction.
E) None of the above.

Question 75

Which of the following has no effect in arriving at ACE?

A) Tax-exempt income (net of expenses).
B) Excess charitable contributions.
C) Key employee insurance proceeds.
D) Deferred gain on installment sales.
E) Premiums paid on key employee insurance.

Question 76

Which reason is unlikely to cause a regular corporation to have to pay AMT?

A) A service-type of company with little inventory.
B) A high level of investment in assets such as equipment and structures.
C) Low taxable income due to a cyclical downturn, strong international competition, a low-margin industry, or other factors.
D) Investment at low real interest rates, which increases the company's deductions for depreciation relative to those for interest payments.
E) None of the above.

Question 77

Wow Corporation manufactures an exercise machine at a cost of $700 and sells the machine to Kite Corporation for $1,000 in 2014. Kite incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600. If Wow and Kite corporations are members of an expanded affiliated group (EAG), their DPAD is:

A) $30.
B) $45.
C) $54.
D) $500.
E) None of the above.

Question 78

Rose, Inc., an S corporation, has taxable income of $14 million in 2014. Assume there are two shareholders, each in the 35% tax bracket. What is the maximum total DPAD tax savings for the S corporation shareholders?

A) None
B) $168,000
C) $285,600
D) $441,000
E) None of the above

Question 79

Which statement is false?

A) The stock ownership requirement for the EAG rules is 80%.
B) Members of an EAG are treated as a single taxpayer for purposes of the DPAD.
C) For an EAG, the DPAD is allocated among the members in proportion to each member's respective amount of QPAI.
D) The DPAD of a consolidated group must be allocated to the group's members in proportion to each member's QPAI.
E) None of the above is false.

Question 80

Which statement, if any, is false?

A) An S corporation is subject to the corporate AMT.
B) A high level of investment in assets (e.g., equipment or structures) is a reason a company may be subject to the AMT.
C) Many of the adjustments that apply to individuals also apply to corporations.
D) The AMT is a separate tax system from the corporate income tax.
E) None of the above.