Deck 11: The Corporate Taxpayer

Question 1

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

Answer 1

False

Question 2

Dividends-received deductions generally are not allowed for dividends from foreign corporations.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

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 $21,000 dividends-received deduction.

Question 6

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

Question 7

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

Question 8

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

Question 9

In terms of dispersal of ownership, corporations are classified as either closely held or publicly held.

Question 10

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

Question 11

The dividends-received deduction is equal to 80% of any dividends-received by a corporate taxpayer.

Question 12

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 13

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.

Question 14

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

Question 15

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

Question 16

The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket.

Question 17

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 18

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 $1,600 of the dividend is taxable.

Question 19

The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement.

Question 20

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 21

For a consolidated group of corporations, 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.

Question 22

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 23

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 24

Corporations with taxable incomes in excess of $18,333,333 have a 35% marginal tax rate and a 35% average tax rate.

Question 25

If a corporation's depreciation expense for regular tax purposes is $32,000 and its depreciation expense for alternative minimum tax purposes is $28,000, such corporation will have a negative (decrease) depreciation adjustment for alternative minimum taxable income.

Question 26

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

Question 27

A corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit.

Question 28

AMT adjustments can only increase a corporation's alternative minimum taxable income.

Question 29

For a corporate taxpayer in the 34% marginal tax bracket, a $20,000 tax credit is equivalent to a $58,824 tax deduction.

Question 30

The corporate alternative minimum tax rate is 26% of AMTI in excess of the AMT exemption.

Question 31

The domestic production activities deduction is computed as a percentage of the greater of taxable income or net income from qualified production activities.

Question 32

The taxable income earned by a personal service corporation is taxed at a flat rate of 35%.

Question 33

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

Question 34

A corporation's minimum tax credit can reduce the corporation's future regular tax liability if regular tax liability exceeds tentative minimum tax in that year.

Question 35

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 36

Generally, the corporate income tax is computed on a proportionate rate schedule.

Question 37

The domestic production activities deduction is a permanent book/tax difference.

Question 38

The rate schedule for determining the regular tax liability of a corporation includes rates ranging from 15% to 39%.

Question 39

Corporations are required to pay their federal tax liability in four quarterly estimated tax installments.

Question 40

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 41

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

Question 42

Which of the following statements regarding the 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 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 43

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

Question 44

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 45

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 46

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) $56,000
B) $66,000
C) $50,000
D) $54,000

Question 47

New York, Inc. owns 100% of Brooklyn, Inc. and Queens, Inc. Taxable income for the three corporations for their first year was as follows: 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 48

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 49

Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: 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 50

Thunder, Inc. has invested in the stock of several corporations and has $500,000 operating income before dividends. Calculate Thunder's dividends-received deduction and taxable income:

A) DRD, $203,300; taxable income, $296,700
B) DRD, $169,640; taxable income, $533,660
C) DRD, $183,640; taxable income, $519,660
D) DRD, $169,640; taxable income, $330,360

Question 51

In its first taxable year, Platform, Inc. generated a $200,000 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) $120,000
B) $135,000
C) $320,000
D) $130,000

Question 52

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 53

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

Question 54

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. and 90% of the stock of Stock ownership 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 55

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

Question 56

Which of the following is a primary legal characteristic of the corporate form of business?

A) The management of the business is centered in a Board of Directors elected by the shareholders.
B) A shareholder must seek permission to sell his stock.
C) The life of the corporation will terminate when a majority of the shareholders die or cease to exist.
D) A shareholder is personally liable for the debts of the corporation.

Question 57

Corporations are rarely targeted in political debates over taxation.

Question 58

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 59

Sonic Corporation has a 35% 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) 35%
B) 24.5%
C) 10.5%
D) None of the above.

Question 60

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 61

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

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

Question 62

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. This year, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its taxable income is:

A) $1,820,000
B) $1,920,000
C) $1,260,000
D) $1,914,000

Question 63

Which of the following items is not used to compute the Domestic Production Activities Deduction?

A) Overseas sales of domestic products
B) Taxable income
C) Compensation paid to U.S. workforce
D) Net income from qualified domestic production activity

Question 64

Palm Corporation has book income of $424,000. Book income reflects $200,000 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) $639,000
B) $609,000
C) $659,000
D) $589,000

Question 65

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 66

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 tax years beginning after December 31, 2004.

Question 67

Lexington Associates, Inc. is a personal service corporation. This year, Lexington reported $75,000 of taxable income. Which of the following statements regarding Lexington's regular tax liability is true?

A) Regular tax liability will be less than it would have been if Lexington were not a personal service corporation.
B) Regular tax liability will be greater than it would have been if Lexington were not a personal service corporation.
C) Regular tax liability will be the same as it would have been if Lexington were not a personal service corporation.
D) Regular tax liability will be zero.

Question 68

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 deprecation 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 69

Which of the following statements regarding the domestic production activities deduction is false?

A) The deduction is equivalent to a reduced tax rate on income from any qualified activity.
B) The amount of the deduction allowed for any tax year cannot exceed 50% of the total compensation paid to the corporation's U.S. workforce.
C) The deduction equals a percentage of the lesser of the corporation's net income from qualified activities or its taxable income before the deduction.
D) The deduction is only available for U.S. taxpayers engaged in manufacturing activities.

Question 70

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 71

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. This year, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its allowable domestic production activities deduction is:

A) $180,000
B) $120,000
C) $189,000
D) $335,000

Question 72

WEK Inc. is a New York corporation with manufacturing operations in the United States and in 12 foreign countries. This year, its taxable income from domestic manufacturing was $1,239,000, and its taxable income from foreign manufacturing was $1,773,000. WEK had no other sources of taxable income. WEK paid $487,000 compensation to its U.S. workers and $599,200 compensation to its foreign workers. Compute WEK's taxable income.

A) $3,012,000
B) $2,852,430
C) $2,900,490
D) $1,127,490

Question 73

Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability 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 credit would have been higher if the company had restored a certified historic structure.
D) The credit is available for restoration of a building that is at least ten years old.

Question 74

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

A) $82,095
B) $65,345
C) $73,675
D) $71,570

Question 75

Doctors Inc. is a corporation owned by four physicians in which they operate their medical practice. For the current year, Doctors Inc. had taxable income of $135,000. What is its regular tax liability?

A) $32,450
B) $35,900
C) $45,900
D) $47,250

Question 76

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 77

Morton Inc. is a Kansas corporation engaged exclusively in domestic manufacturing. This year, it earned $500,000 of qualified production income, which also equals its taxable income before the domestic manufacturing deduction. It paid compensation of $200,000 to its workforce. Calculate Morton's domestic production activities deduction and taxable income:

A) Deduction $45,000; taxable income $455,000
B) Deduction $30,000; taxable income $470,000
C) Deduction $0; taxable income $500,000
D) Deduction $45,000; taxable income $255,000

Question 78

John's, Inc. manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000?

A) $14,000,000
B) $13,600,000
C) $15,600,000
D) $16,000,000

Question 79

Honu, Inc. has book income of $1,200,000. Book income includes $620,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of meals and entertainment expense. Based only on these items, compute Honu's taxable income.

A) $1,820,000
B) $1,905,000
C) $1,960,000
D) $1,885,000

Question 80

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.