Deck 1: Income Taxation of Corporations

Question 1

Although recognized as partnerships under state law, certain partnerships are treated and taxed as corporations for Federal income tax purposes.

Answer 1

True

Question 2

The proprietorship uses gross ordinary income as the basis for calculating any self-employment tax due.

Answer 2

False

Question 3

A corporation may be required to recapture (as ordinary income) a greater portion of its gain on the sale of depreciable real property than would an individual taxpayer.

Answer 3

True

Question 4

In computing a corporation's limitation on the dividends-received deduction, its taxable income is determined without the deductions for dividends received, net operating loss carryovers, and capital loss carrybacks.

Question 5

Section 11 of the Code imposes a tax on all corporations, including nonprofit organizations.

Question 6

A corporation is an artificial "person" created by Federal law.

Question 7

At its election, a corporation can either deduct all organizational costs paid during the current year or amortize the expenditures over a period not less than 180 months.

Question 8

All bad debts of a corporation are treated as business rather than nonbusiness bad debts.

Question 9

Because organizational costs are assets with indefinite lives (i.e., they have value for the life of the corporation), they may not be expensed or amortized.

Question 10

A corporation is allowed a dividends-received deduction only if the corporation is a member of an affiliated group and the dividends are received from another member of the same group.

Question 11

If an accrual basis corporation incurs an additional expense in setting up its accounting system after the close of its first tax year but before the due date of its initial return, the expense qualifies as an organizational expense and may be amortized.

Question 12

A corporation is not allowed a dividends-received deduction in computing its net operating loss for any given year.

Question 13

Unlike individuals, corporations with excess capital losses in the current year are allowed to carry these losses back five years and forward three years to offset capital gains in the carryback or carryforward years.

Question 14

Organizational expenses incurred by an accrual basis corporation in its first year of existence but paid in a later year will not qualify for amortization.

Question 15

In planning for its annual charitable contributions, a corporation should take into account any net operating loss or capital loss carryforwards since such items reduce the corporation's taxable income base for purposes of the annual deduction limitation.

Question 16

If an individual taxpayer creates a legal corporation under state law, the government (i.e., the IRS) cannot disregard the entity and tax the individual taxpayer on the income.

Question 17

Where a dividends-received deduction adds to or creates a net operating loss, the taxable income limitation decreases from 70 percent to 34 percent.

Question 18

A corporation's annual charitable contribution deduction is limited to 10 percent of its taxable income without reduction for charitable contributions, the dividends-received deduction, net operating loss carrybacks, and capital loss carrybacks.

Question 19

In contrast to a regular corporation, an S corporation's pass-through of income and deductions to its shareholders allows it to avoid double taxation of the same source of income.

Question 20

In transactions between the partners and the partnership, the parties are generally treated like unrelated parties.

Question 21

A newly formed corporation elected to use a fiscal year ending June 30.On July 17, 2012, the corporation began business and incurred $8,000 of qualified organizational expenses.Assuming that the corporation properly elected to deduct/amortize these costs, what is the amount of organization expenses that it should deduct on its tax return for the fiscal year ending June 30, 2012.

A)$0
B)$533
C)$5,000
D)$5,200

Question 22

Corporation A is equally owned by 10 unrelated individual shareholders.Corporation B is 100 percent owned by one of the shareholders that owns stock of Corporation A.As a result of this common stock ownership, Corporations A and B are members of a brother-sister controlled group.

Question 23

Which of the following is treated the same for individuals and corporations?

A)Depreciation recapture
B)Charitable contributions
C)Capital losses
D)Depreciation
E)Bad debts

Question 24

X Corporation, which files its tax return on a cash basis, incurred organizational costs (not to a related party) of $5,000 during its first year.$1,875 of these expenses were paid in the fourth month after the close of its taxable year.What is the maximum deduction the corporation is entitled to claim on its first tax return if that tax return is for a period of 1½ months and a proper election is made?

A)$0, because organizational costs have an indefinite life
B)$200
C)$3,125
D)$5,000

Question 25

For its taxable year ending December 31, 2012, T Corporation has the following taxable income and deductible expenses: $$\begin{array} { l r } \text { Gross income from operations } & \$ 205,000 \\\text { Deductible expenses of operations } & 218,000 \\\text { Dividends received } & 35,000\end{array}$$ The dividends were received from a taxable domestic corporation in which T owns 15 percent of the stock (not debt-financed).What is T Corporation's dividends-received deduction for 2012?

A)$0
B)$15,400
C)$21,000
D)$24,500
E)$35,000

Question 26

Z Corporation had 2012 taxable income of $600,000 before considering the following: Gain on the sale of equipment $\quad$$\$ 15,000$
Loss on the sale of equipment $\quad$ $( 29,000 )$
Gain on the sale of land used in the business $\quad$ 70,000
Loss on the sale of investment held five months $\quad$ (5,000)
Loss on the sale of investment held two years $\quad$$( 18,000 )$ The equipment sold at a gain originally cost $150,000, and $90,000 of depreciation had been claimed.What is Z Corporation's taxable income for 2012?

A)$618,000
B)$633,000
C)$647,000
D)$671,000
E)$685,000

Question 27

Which of the following is different for corporations than it is for individuals?

A)The definition of capital asset
B)The determination of holding period for capital assets
C)The capital gain and loss netting process
D)The treatment of capital loss carryovers

Question 28

A personal service corporation with taxable income of $10,000 for its 2012 calendar year will have a regular Federal income tax liability of $3,500 before credits or prepayments.

Question 29

R Corporation had 2012 gross income of $200,000, including $100,000 of dividends received from a less than 20 percent owned taxable domestic corporation.R had deductible business expenses of $110,000 before considering its dividends-received deduction.What is R Corporation's dividends-received deduction for 2012, assuming no restrictions other than the taxable income limitation may apply?

A)$63,000
B)$68,000
C)$70,000
D)$80,000
E)$100,000

Question 30

Which of the following is not true?

A)Because all activities of a corporation are considered to be business activities, a corporation cannot have a nonbusiness bad debt.
B)The proprietorship, partnership, and S corporation pass through to individuals, partners, and shareholders all items of income, deduction, gain, loss, or credit for Federal income tax purposes.
C)Unlike individuals, a corporation's charitable deduction is limited to 10 percent of taxable income figured before certain deductions.
D)A corporation is allowed to deduct 70 percent of dividends paid to shareholders provided that it is a taxable domestic corporation.
E)By making a proper election on its tax return for the year of the loss, a corporation may forgo the two-year carryback and, instead, carry its net operating loss forward up to 20 years.

Question 31

Which one of the following statements is true for a regular corporation?

A)Charitable contributions in excess of the 10 percent limitation may be carried over to subsequent years indefinitely.
B)A contribution carryover is allowed as a deduction even if it increases a net operating loss.
C)Charitable contributions in excess of the 10 percent limitation may, subject to limitations, be carried back to each of the preceding three years.
D)Charitable contributions in excess of the 10 percent limitation may, subject to limitations, be carried over to each of the following five years.
E)Subject to the 10 percent limitation, a carryover of excess contributions is used before the contributions made in the carryover year.

Question 32

Which of the following is not a corporate characteristic?

A)Free transferability
B)Ability to sue and be sued
C)Continuity of life
D)Centralized management
E)Limited liability

Question 33

An accrual basis corporation must use the cash method in claiming deductions for amounts paid to its cash basis sole shareholder.

Question 34

New Corporation was organized and began active business on January 7, 2012.New incurred the following expenses in connection with opening the business:
Legal fees for drafting the charter and bylaws $ 750
Legal fees for the transfer of the ownership titles of assets from shareholders to the corporation 100
State incorporation fees 250
Printing cost for stock certificates 175
Fees paid to temporary directors for first two organization meetings 300
Accounting fees to set up initial recordkeeping system 400
Total $1,975
Assuming New Corporation adopts a calendar year for tax purposes, what is the maximum amount of organizational expenses that may be deducted on the corporation's initial tax return?

A)$0
B)$
C)$1,800
D)$1,975

Question 35

The 2012 Federal income tax rate for a calendar year corporation with taxable income of $335,000 up to $10 million is 34 percent.

Question 36

During its first year of operation, K Corporation had a gross profit from operations of $180,000 and deductions of $250,000 before considering its dividend income or dividends-received deduction.K received dividends of $50,000 from a taxable domestic corporation in which K owned 4.5 percent of the stock.Assuming its ownership of the dividend-paying corporation's stock is not debt financed, what is K Corporation's net operating loss for the year?

A)$20,000
B)$49,000
C)$55,000
D)$65,000
E)$70,000

Question 37

The charitable deduction for a corporation is limited both by type of property contributed and an annual maximum amount.Which of the following is a false statement?

A)An accrual basis corporation may deduct contributions authorized during the tax year but actually paid within two and one-half months after the close of the tax year.
B)The annual maximum amount of charitable deduction for a corporation is 10 percent of taxable income calculated before certain deductions.
C)Generally, a corporation is allowed a deduction for the fair market value of capital gain and ordinary income property.
D)In certain cases where a corporation donates capital gain property, the allowable deduction is limited to the fair market value, reduced by the amount of unrealized appreciation (i.e., the deduction is limited to the property's adjusted basis).

Question 38

A corporation with alternative minimum taxable income of $20,000 will be subject to an alternative minimum tax of $4,000.

Question 39

Corporations A, B, and C are taxable domestic corporations.All are members of an affiliated group.Corporation A pays a $50,000 dividend to B and a $50,000 dividend to C.Corporations B and C are each entitled to a dividends-received deduction of

A)$35,000
B)$40,000, subject to the taxable income limitation
C)$50,000
D)$0
E)None of the above

Question 40

T Corporation's taxable income for 2012 was $100,000, computed by erroneously deducting the corporation's total charitable contributions of $12,000.The correct contribution deduction for T Corporation is

A)$6,000
B)$8,800
C)$10,000
D)$11,200
E)$12,000

Question 41

A calendar year corporation is required to file its Federal tax return by

A)March 15
B)April 15
C)May 15
D)June 15
E)none of the above

Question 42

T Corporation sold a commercial building for $200,000 on January 2, 2012 (purchased for $150,000 on December 16, 2007).The building was depreciated using the straight-line method, and depreciation in the amount of $20,000 has been taken.The amount and nature of the gain upon sale is

A)$70,000 §1231 gain
B)$50,000 § 1231 gain and $20,000 ordinary income
C)$66,000 § 1231 gain and $4,000 ordinary income
D)$70,000 ordinary income
E)None of the above

Question 43

Two or more corporations owned by five or fewer noncorporate shareholders, who collectively own more than 50 percent of the stock of each corporation, would best describe

A)Brother-sister controlled group
B)Association
C)S corporation pending proper election
D)Parent-subsidiary controlled group
E)Controlled group

Question 44

The principal activity of several corporations is shown below.Which of the following could not be classified as a personal service corporation?

A)Engineering
B)Actuarial science
C)Performing arts
D)Manufacture of personal computers
E)Veterinary medicine

Question 45

X Corporation determines it cannot meet the filing deadline for Form 1120 (U.S.Corporation Income Tax Return) and files an extension on Form 7004.Which of the following is not true?

A)The corporation claims an automatic six-month extension of time to file the tax return and to pay the tax due.
B)With permission of the IRS, corporations may be granted an additional three-month extension to submit Form 1120.
C)The corporation extension (Form 7004) must be filed on or before the 15th day of the 3rd month following the close of the taxable year.
D)None; all are true.

Question 46

B Corporation reported taxable income in 2012 of $1 million.Additional information concerning B's 2012 tax return is as follows: Alternative minimum taxable income (without regard to the ACE adjustment item) $1.2 million
Adjusted current earnings (ACE) 2.0 million
B Corporation's alternative minimum tax for 2012 is

A)$20,000
B)$240,000
C)$320,000
D)None of the above

Question 47

Which of the following statements is not true?

A)A corporation is generally allowed to choose either a calendar year or fiscal year for its reporting period.
B)A personal service corporation must use a fiscal year unless it can satisfy IRS requirements that there is a business purpose for a calendar year.
C)S corporations must generally use a calendar year.
D)Because corporations are "persons" only in the legal sense of the word, they are not entitled to the earned income credit.
E)None; all are true.

Question 48

Which of the following statements about the corporate alternative minimum tax is false?

A)Generally, the tax is computed at a 20 percent rate on alternative minimum taxable income (AMTI) in excess of $40,000.
B)Alternative minimum tax (AMT) liability exists only if the corporation's tentative AMT (reduced by allowable credits) exceeds its regular tax liability for the year.The difference is called the AMT.
C)AMT adjustments simply reflect timing differences between allowed deductions and gain recognition reporting methods for regular tax purposes and for AMT purposes.
D)AMT preference items act only to increase tentative AMTI.
E)The $40,000 exemption is reduced by 25 percent of the amount of AMTI in excess of $150,000 and is completely phased out for AMT in excess of $250,000.

Question 49

Which of the following is not true concerning the obligation of a corporation to make estimated tax payments?

A)The estimates are due the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.
B)One-fourth of the estimated tax due is to be paid on each payment date.
C)Generally, unless each payment is for 25 percent or more of the tax (after credits) shown on Form 1120, an underpayment penalty will be imposed.
D)A corporation whose tax liability for the year is less than $500 is not subject to the underpayment penalty.
E)None; all are true.

Question 50

A regular corporation and a personal service corporation each have taxable income of $20,000 for the 2012 calendar year.Ignoring the alternative minimum tax provisions, which one of the following statements is true regarding the Federal income tax liabilities of these two corporations?

A)Both corporations will have the same tax liability before credits or prepayments.
B)The regular corporation will have a slightly lower tax liability before credits or prepayments.
C)The personal service corporation will have a slightly lower tax liability before credits or prepayments.
D)The regular corporation's tax liability will be exactly $2,000 less than the tax liability of the personal service corporation.
E)The regular corporation's tax liability will be less than half that of the personal service corporation.

Question 51

Which of the following is not true for purposes of the corporate estimated tax payments?

A)A "large" corporation is one with taxable income of $1 million or more in any of the three preceding taxable years.
B)All timely paid estimated tax installments for a "large" corporation will avoid a penalty if they are for 25 percent of the tax shown on the prior year's return if it was for a period of 12 months and showed a tax liability.
C)Both "small" and "large" corporations can use the annualized income exception.
D)None; all are true.

Question 52

A brother-sister controlled group consists of two or more corporations connected through the stock ownership of certain types of shareholders, including

A)Regular corporations, but not S corporations
B)S corporations, but not regular corporations
C)Individuals and estates, but not trusts
D)Individuals, estates, or trusts
E)Regular or S personal service corporations

Question 53

Which of the following is a positive adjustment to income per books on Schedule M-1 of Form 1120?

A)Proceeds of key person life insurance
B)Excess of capital losses over capital gains
C)Excess of tax depreciation over book depreciation
D)Tax-exempt interest

Question 54

J is a 60 percent shareholder in the JS Corporation.In 2009, he sold property to the corporation for $60,000 (basis in his hands of $70,000).In 2012, the corporation sold the property for $65,000 to an unrelated party.The amount of gain or loss the JS Corporation must recognize in 2012 is

A)$(5,000)
B)$0
C)$5,000
D)$10,000

Question 55

Z Corporation's 2012 calendar year taxable income is $2,000,000.The corporation's 2012 Federal income tax liability before credits and prepayments is

A)$680,000
B)$769,460
C)$899,740
D)$920,000
E)$1,020,000

Question 56

Large Corporation, with over $1 million in taxable income for each of the last several years, paid estimated tax payments of $30,000 each quarter for the current year.The actual tax liability for the current year is $160,000; last year's tax liability was $145,000.Income is earned evenly throughout the year.What is the quarterly amount that may be subject to the underestimation penalty?

A)There is no underpayment amount subject to penalty.
B)$6,250
C)$10,000
D)$40,000

Question 57

Which of the following is a false statement regarding transactions between corporations and their shareholders?

A)Corporations are not allowed to deduct a loss incurred in a transaction between related parties.
B)A shareholder owning 50 percent of a corporation's outstanding stock is a related party according to the general rule.
C)In the case of a personal service corporation, any employer-owner that owns any of the corporation's stock is a related party under certain conditions.
D)The sale of property at a gain between a corporation and its controlling shareholders is not affected by the related parties rules.