Deck 11: The Corporate Taxpayer

Question 1

At least three corporations are required to form an affiliated group.

Answer 1

False

Question 2

Bisou Inc. made a $48,200 contribution to charity this year. Only $39,000 of the contribution was deductible. Bisou can carry the $9,200 nondeductible contribution back three years and forward five years.

Answer 2

False

Question 3

After 2017, a 1.4% excise tax applies to the net investment income of all colleges and universities.

Answer 3

False

Question 4

The dividends-received deduction is equal to 65% of any dividends-received by a corporate taxpayer.

Question 5

Donatoni Corporation owns 40% of Market, Inc. voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $15,000 dividends-received deduction.

Question 6

After 2017, a 37% excise tax applies to compensation in excess of $1 million paid to executives of tax-exempt organizations.

Question 7

The corporate characteristic of limited liability is generally more important to the shareholders than the characteristic of centralized management.

Question 8

Eagle, Inc. made a contribution to the Boy Scouts of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000.

Question 9

For 2020, corporations are allowed a deduction for charitable contributions, limited to 25 percent of taxable income before the deduction.

Question 10

An affiliated group consists of a parent company that directly owns 80% of at least one subsidiary corporation plus all other subsidiaries that are 80% owned within the group.

Question 11

The four primary legal characteristics of a corporation are unlimited liability, limited life, free transferability of interests, and centralized management.

Question 12

A nondeductible charitable contribution is a permanent book/tax difference.

Question 13

The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes.

Question 14

The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement and cannot be sold on the open market.

Question 15

Corporations are allowed a deduction for charitable contributions, limited to 10 percent of taxable income before the deduction.

Question 16

After 2017, a 100% dividends-received deduction is permitted for any dividends received from a foreign corporation.

Question 17

A nonprofit corporation may incur a federal income tax if it has unrelated business income.

Question 18

The corporate characteristic of free transferability exists if the corporate stock is subject to a buy-sell agreement.

Question 19

For distributions prior to 2018, dividends-received deductions generally are not allowed for dividends from foreign corporations.

Question 20

Eagle, Inc. made a contribution to the Boy Scouts of $65,000 during 2020. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $65,000.

Question 21

A corporation is required to report differences between book and taxable income on either Schedule M-1 or Schedule M-3 of the corporate income tax return.

Question 22

Corporate taxable income after December 31, 2017 is taxed at a flat rate of 21%.

Question 23

The Schedule M-3 reconciliation requires less detailed information than the Schedule M-1 reconciliation.

Question 24

For a consolidated group of corporations, Schedule M-3 Part 1 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.

Question 25

Hearth, Inc. reported $30,000 of depreciation expense on its financial statements. For federal income tax purposes, it deducted depreciation of $35,000. This book/tax difference would result in an increase to net income per books on the Schedule M-1 or M-3.

Question 26

Generally, the corporate income tax is computed using a regressive rate schedule.

Question 27

The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income.

Question 28

Angel Corporation's current-year regular tax liability is $40,000. Angel is eligible for a general business credit of $45,000. The corporation will receive a $5,000 refund of federal income tax.

Question 29

A corporation that is unable to meet its original filing deadline may obtain an automatic twelve-month extension of the time to file its federal income tax return.

Question 30

A corporation with a June 30 fiscal year earns $1 million for its tax year ended June 30, 2018. Regular tax liability on this income is $210,000.

Question 31

If a corporation has accumulated minimum tax credits from tax years prior to 2018, 100 percent of such credits are refundable on their 2018 tax return.

Question 32

Rogers, Inc. owns 12% of Lampe Corporation's voting common stock. During the current year, Rogers generated $50,000 operating income and received $8,000 dividends from Lampe. Only $2,800 of the dividend is taxable.

Question 33

The corporate alternative minimum tax was designed to insure that corporations with substantial economic income paid their fair share of the federal tax burden.

Question 34

For a corporate taxpayer in the 21% marginal tax bracket, a $20,000 tax credit is equivalent to a $95,238 tax deduction.

Question 35

Under normal circumstances, a corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit.

Question 36

Most tax credits for which a corporate taxpayer would be eligible are nonrefundable.

Question 37

Corporate taxable income after December 31, 2017 is taxed using a progressive rate schedule with a top marginal rate of 21%.

Question 38

Corporate taxable income earned before December 31, 2017 is taxed using a rate schedule that includes rates ranging from 15% to 39%.

Question 39

The minimum tax credit is an example of a nonrefundable credit.

Question 40

If a corporation has accumulated minimum tax credits from tax years prior to 2018, 100 percent of such credits are refundable on either their 2018 or 2019 tax return.

Question 41

When price competition is fierce, companies easily shift the burden of a tax increase to their customers via higher prices.

Question 42

Corporations with less than $1 million of taxable income are not required to make quarterly estimated tax payments.

Question 43

Westside, Inc. owns 15% of Innsbrook's common stock. This year, Westside generated $50,000 operating income and received $20,000 dividends from Innsbrook. Westside's taxable income is:

A) $60,000
B) $70,000
C) $50,000
D) $40,000

Question 44

A significant advantage of issuing stock instead of debt financing is that payment of dividends is discretionary.

Question 45

The double taxation of corporate earnings is one of the dominant characteristics of the federal income tax system.

Question 46

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. and 90% of the stock of Bete, Inc. Bete owns 5% of the stock of Pete and 5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct?

A) Fleet, Zete, Pete, and Bete are an affiliated group.
B) Fleet and Zete are an affiliated group.
C) Fleet and Pete are an affiliated group.
D) Fleet, Pete, and Bete are an affiliated group.

Question 47

In its first taxable year, Platform, Inc. generated a $100,000 net operating loss and made a $10,000 cash donation to a local charity. In its second year, Platform generated $350,000 operating income and made a $20,000 donation to the same charity. Compute Platform's taxable income for its second year. Assume neither year is 2020.

A) $225,000
B) $220,000
C) $320,000
D) $230,000

Question 48

Corporations with more than $1 million taxable income must pay 100% of their current federal income tax liability in the form of quarterly estimate payments to avoid an underpayment penalty.

Question 49

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct?

A) Fleet, Pete, and Zete are an affiliated group.
B) Fleet and Zete are an affiliated group.
C) Fleet and Pete are an affiliated group.
D) There is no affiliated group here.

Question 50

New York, Inc. owns 100% of Brooklyn, Inc. and Queens, Inc. Taxable income for the three corporations for their first year was as follows: $\begin{array}{llr} \text { New York } &\$628,000\\ \text {Brooklyn } &246,000\\ \text { Queens } &(105,000)\end{array}$
Which of the following statements is false?

A) Consolidated taxable income is $769,000.
B) If a consolidated return is filed, Queens, Inc. will receive immediate tax benefit from its operating loss.
C) If Brooklyn, Inc. is a foreign corporation, it can be part of a consolidated return.
D) The corporations are not required to file a consolidated tax return if they are an affiliated group; however, they may elect to do so.

Question 51

Brace, Inc. owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is:

A) $53,000
B) $58,000
C) $50,000
D) $52,000

Question 52

Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: $\begin{array}{lrrr}&\text { Wave}&\text { Surt}\\\text { Ordinary operating income (loss) } & \$ 500,000 & \$(100,000 \\\text { Capital gain (loss) } & (5,000) & 7,000\\\text { Section } 1231 \text { gain (loss) }&3,000&(10,000)\end{array}$
Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

A) $400,000.
B) $395,000.
C) $410,000.
D) $500,000.

Question 53

Corporations report their taxable income and calculate the federal income tax on Form 1040.

Question 54

Loda Inc. made an $8,300 nondeductible charitable contribution and a $2,000 nondeductible political contribution this year. Which of the following statements is true?

A) Both nondeductible contributions are permanent book/tax differences.
B) Both nondeductible contributions are temporary book/tax differences.
C) The nondeductible charitable contribution is a temporary book/tax difference. The nondeductible political contribution is a permanent book/tax difference.
D) The nondeductible charitable contribution is a permanent book/tax difference. The nondeductible political contribution is a temporary book/tax difference.

Question 55

In its first taxable year, Platform, Inc. generated a $100,000 net operating loss and made a $10,000 cash donation to a local charity. In its second year, Platform generated $350,000 operating income and made a $20,000 donation to the same charity. Compute Platform's taxable income for its second year.

A) $225,000
B) $220,000
C) $320,000
D) $230,000

Question 56

The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the outstanding stock of Tire Corporation, a German company. Wheel and Tire each own 50 percent of the outstanding stock of Bumper, Inc., a U.S. company. Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation, a U.S. company. Which of these corporations form an affiliated group eligible to file a consolidated tax return?

A) Wheel, Axle, Tire, Bumper, and Trunk are an affiliated group.
B) Wheel, Axle, and Tire are an affiliated group.
C) Wheel and Axle are an affiliated group.
D) Wheel, Axle, and Trunk are an affiliated group.

Question 57

The only alternative to double taxation of corporate earnings is to treat corporations as passthrough entities, similar to partnerships.

Question 58

Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true?

A) The income from the collection and distribution of food and the income from grocery store are taxable.
B) No income from either of the activities is taxable.
C) Only the income from the collection and distribution of food is taxable.
D) Only the income from the grocery store is taxable.

Question 59

The burden of corporate taxation is often borne by corporate shareholders, customers, employees, and suppliers.

Question 60

Frazier, Inc. paid a $150,000 cash dividend to its shareholders. The corporation cannot deduct this payment on its corporate income tax return.

Question 61

Honu, Inc. has book income of $1,200,000. Book income includes $380,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of business meals expense. Based only on these items, compute Honu's taxable income.

A) $1,580,000
B) $1,665,000
C) $1,720,000
D) $1,645,000

Question 62

Weston Corporation has accumulated minimum tax credits of $134,000 from tax years prior to 2018. If 2018 regular tax before credits is $47,000 and Jackson qualifies for general business credits of $14,000, its allowable minimum tax credit for 2018 is:

A) $134,000
B) $47,000
C) $83,500
D) $100,000

Question 63

John's, Inc. manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000 for its fiscal year ended September 30, 2018?

A) $14,000,000
B) $9,800,000
C) $8,400,000
D) $11,200,000

Question 64

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of realty. Based only on these items, compute Airfreight's taxable income.

A) $370,000
B) $395,000
C) $345,000
D) $420,000

Question 65

Palm Corporation has book income of $424,000. Book income reflects $130,000 federal income tax expense and $55,000 depreciation expense. Tax depreciation expense computed under MACRS is $65,000. Palm received $25,000 of prepaid rent not included in book income. Based only on these items, compute Palm's taxable income.

A) $569,000
B) $539,000
C) $589,000
D) $519,000

Question 66

Forward Inc.'s book income of $739,000 includes a net long-term capital loss of $42,000 and charitable contribution of $170,000. Taxable income shown on the Schedule M-1 would be:

A) $855,900
B) $951,000
C) $781,000
D) $909,000

Question 67

Forward Inc.'s 2021 book income of $739,000 includes a net long-term capital loss of $42,000 and charitable contribution of $170,000. Taxable income shown on the Schedule M-1 would be:

A) $855,900
B) $951,000
C) $781,000
D) $909,000

Question 68

Liston, Inc. had taxable income of $1 million for calendar year 2020. Compute Liston's regular tax liability.

A) $340,000
B) $350,000
C) $210,000
D) $200,000

Question 69

Slipper Corporation has book income of $500,000. Book income includes a $50,000 gain on the sale of equipment. The equipment originally cost $110,000 and was sold for $75,000. Accumulated book depreciation was $85,000; accumulated MACRS depreciation was $90,000. Based only on these items, compute Slipper's taxable income.

A) $505,000
B) $495,000
C) $555,000
D) $445,000

Question 70

Which of the following statements regarding Schedule M-1 is true?

A) The corporate dividends-received deduction is reported on Line 8 of Schedule M-1.
B) A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1.
C) Line 2 of schedule M-1 should reflect the corporation's actual federal income tax liability for the current year.
D) A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would not report that gain on Schedule M-1.

Question 71

TasteCo, Inc. reported $210,500 of taxable income this year. What is its regular tax liability?

A) $44,205
B) $65,345
C) $54,775
D) $71,570

Question 72

Mandrake, Inc. has book income of $569,300. Its income includes a $50,700 bad debt expense, determined by the allowance method. Actual write offs this year were $48,000. Based only on this information, compute Mandrake's taxable income.

A) $569,300
B) $572,000
C) $566,600
D) $528,600

Question 73

Poppy's book income of $739,300 includes a net long-term capital loss of $42,000 and federal income tax expense of $170,000. Based only on these items, Poppy's taxable income is:

A) $739,300
B) $951,300
C) $909,300
D) $781,300

Question 74

Sonic Corporation has a 21% marginal tax rate and received $10,000 of dividends from Roller, Inc., a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is:

A) 21%
B) 0%
C) 10.5%
D) None of these choices are correct

Question 75

Which of the following statements regarding the current year tax treatment of corporate dividends is true?

A) All shareholders receiving dividend payments from U.S. corporations are entitled to a dividends-received deduction.
B) Dividends-received from foreign corporations are not eligible for the dividends-received deduction.
C) Corporations are entitled to deduct dividend payments to shareholders in calculating corporate taxable income.
D) Dividend payments between members of an affiliated group of corporations filing a consolidated return are tax exempt.

Question 76

Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liabilitybefore credits is $450,000. No estimated tax payments have been made. Which of the following statements is true?

A) The corporation should receive a tax refund for the current year.
B) The portion of the rehabilitation credit that cannot be used this year will be lost.
C) The $500,000 current year credit equals 1/5 ^th of the total credit allowed for rehabilitation of a certified historic structure.
D) The credit is available for restoration of a building that is at least ten years old.

Question 77

Thunder, Inc. has invested in the stock of several corporations and has $500,000 current year operating income before dividends: $\begin{array}{lrcl}\text { Corporation } &\text { Dividend }&\text { Ownership\% } & \text { Incorporated }\text { Hail, Inc. } & \$ 52,000 & 14 & \text { Delaware } \\\text { Hurricane Company } & 17,500 & 62 & \text { France } \\\text { Lightening, Inc. } & 2,800 & 41 & \text { Utah } \\\text { Tornado Corporation } & 131,000 & 92 & \text { New Jersev }\end{array}$
Calculate Thunder's dividends-received deduction and taxable income:

A) DRD, $152,920; taxable income, $347,080.
B) DRD, $135,420; taxable income, $533,660.
C) DRD, $176,320; taxable income $526,980.
D) DRD $169,640; taxable income, $330,360.

Question 78

A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income?

A) Schedule M-1
B) Schedule M-2
C) Schedule M-3
D) Schedule M-4

Question 79

Which of the following statements regarding Schedule M-3 is false?

A) The IRS developed Schedule M-3 with the goal of increasing transparency between reported net income for financial accounting purposes and reported net income for tax purposes.
B) Schedule M-3 reports the temporary versus permanent characterization of book-tax differences.
C) Part I of Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.
D) Schedule M-3 replaces Schedule M-1 for all corporations for tax years beginning after December 31, 2004.

Question 80

Maxwell, Inc. had taxable income of $2,500,000 for its fiscal year ended June 30, 2018. Compute Maxwell's regular tax liability.

A) $525,000
B) $850,000
C) $687,500
D) $1,000,000