Deck 3: Corporations: Special Situations

Question 1

The DPAD cannot exceed 50% of the W-2 wages paid.

Answer 1

True
The limitation is 50% of the W-2 wages paid.

Question 2

A large NOL carryover from a prior year when combined with large QPAI for the current year will substantially increase a corporation's DPAD for the current year.

Answer 2

False
If anything,the NOL carryover may reduce (not increase)DPAD.Recall that DPAD is a percentage of the lesser of QPAI or TI.As an NOL carryover reduces TI,this could limit the DPAD allowed.

Question 3

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 an embedded service that does not qualify as DPGR.

Answer 3

False
Architectural services qualify for DPAD and constitute a separate category of DPGR.

Question 4

Andrew,a process engineer for an oil company,inherited a beachfront lot from an uncle.In his spare time,he builds a beach cottage on the lot and later sells the property through a realtor.The sale proceeds Andrew receives are not DPGR.

Question 5

A taxpayer who prepares and sells Chinese 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 6

Green Company,a U.S.corporation based in Arkansas,manufactures and sells a product which includes some components made in Mexico.All of Green's income from sales might constitute DPGR.

Question 7

DPAD for 2008 is 6% of the greater of QPAI or TI,but not to exceed the W-2 wages limitation.

Question 8

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

Question 9

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

Question 10

Maize Corporation,a Miami contractor,pays Crane Engineering a fee to design bridges for a highway Maize will build in the Dominican Republic.The fee Crane receives is not DPGR.

Question 11

For testing purposes as to DPAD,taxable income is replaced by modified adjusted gross income in the case of an individual.

Question 12

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

Question 13

In arriving at the W-2 wages limitation,only the wages paid that are properly allocable to DPGR can be considered in 2008.

Question 14

Like the ETI it replaced,DPAD is intended to encourage U.S.exports to foreign countries.

Question 15

The overall effect of the DPAD is similar to that of a rate reduction or a tax credit.

Question 16

DPAD decreases as the cost of manufacturing a product increases.

Question 17

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

Question 18

The percentage applicable for computing DPAD will ultimately increase to 9%.

Question 19

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

Question 20

A taxpayer that has no QPAI can still be able to claim a DPAD.

Question 21

Percentage depletion claimed in excess of the adjusted bases of property can be a tax preference item.

Question 22

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

Question 23

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

Question 24

An S corporation can be subject to the ACE provisions.

Question 25

The starting point for computing ACE is AMTI,which is defined as regular taxable income after AMT adjustments (other than the NOL and ACE adjustments)and after tax preferences.

Question 26

Regular tax depreciation lives cannot be used for AMT purposes.

Question 27

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

Question 28

The ACE adjustment can be a negative amount.

Question 29

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 30

The AMT NOL deduction is limited to 80%.

Question 31

A corporation that passes the $5 million average gross receipts test will continue to be treated as a small business corporation (e.g.,no AMT)for 3 years automatically.

Question 32

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 33

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

Question 34

The AMT rate for corporations is lower than the rates for individuals.

Question 35

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

Question 36

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

Question 37

A positive ACE adjustment is beneficial to a corporation.

Question 38

A business with taxable income less than $1 million cannot be subject to the AMT.

Question 39

The regular foreign tax credit is not available to reduce AMT liability.

Question 40

Passive activity losses of certain closely held corporations and personal service corporations may be an AMT adjustment.

Question 41

Chev Corporation,a calendar year corporation,has alternative minimum taxable income (before any exemption)of $1.28 million for 2008.The company is not a small corporation.If the regular corporate tax is $209,000,Chev's alternative minimum tax for 2008 is:

A)$47,000.
B)$209,000.
C)$256,000.
D)$1,280,000.
E)None of the above.

Question 42

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 43

The exemption amount is phased out entirely when AMTI reaches:

A)$40,000.
B)$310,000.
C)$1,000,000.
D)$5,000,000.
E)Some other amount.

Question 44

Silver Corporation has average gross receipts of $5.7 million,$4.6 million,and $4.8 million in 2006,2007,and 2008,respectively.Silver 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)Not a small corporation with respect to the AMT.
E)None of the above.

Question 45

Yvonne Corporation manufactures and sells ceramic dinnerware.The company also sells dinnerware that is purchased from unrelated foreign producers.During tax year 2008,Yvonne had a U.S.profit of $1.2 million (QPAI)and a loss from the imported merchandise of $100,000.What is Yvonne's DPAD?

A)None.
B)$33,000.
C)$66,000.
D)$72,000.
E)None of the above.

Question 46

Staff,Inc.,has taxable income of $10 million in 2008.What is the maximum DPAD tax savings for this C corporation?

A)None.
B)$204,000.
C)$210,000.
D)$600,000.
E)None of the above.

Question 47

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 not 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 48

A corporation has the following items related to the AMT.

The corporation's AMT,if any,is:

A)$0.
B)$8,196,080.
C)$8,703,900.
D)$18,300,580.
E)None of the above.

Question 49

If a corporation is subject to the § 541 penalty tax on personal holding companies,it cannot also be subject to the penalty tax on unreasonable accumulations under § 531.

Question 50

Gem Corporation,a calendar year taxpayer,has AMTI (before adjustment for adjusted current earnings)of $6 million for 2008.If Gem Corporation's ACE is $15 million,its tentative minimum tax for 2008 is:

A)$4.2 million.
B)$3.45 million.
C)$2.55 million.
D)$2.02 million.
E)None of the above.

Question 51

Maria Corporation manufactures and sells ceramic dinnerware.The company also sells dinnerware that is purchased from unrelated foreign producers.During the tax year 2008,Maria had a U.S.profit of $1.2 million (QPAI)and a profit from the imported merchandise of $100,000.What is Maria's DPAD?

A)None.
B)$36,000.
C)$72,000.
D)$78,000.
E)None of the above.

Question 52

Boasso Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kershaw Corporation for $1,000 in 2008.Kershaw incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600.If Boasso and Kershaw corporations are members of an expanded affiliated group (EAG),their DPGR is:

A)$30.
B)$500.
C)$1,000.
D)$1,600.
E)None of the above.

Question 53

In 2008,Jay Corporation (a calendar year taxpayer)had the following transactions:

For 2008,Jay Corporation's AMTI is:

A)$6,900,000.
B)$7,150,000.
C)$7,250,000.
D)$7,300,000.
E)None of the above.

Question 54

Boat Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kite Corporation for $1,000 in 2008.Kite incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600.If Boat and Kite corporations are members of an expanded affiliated group (EAG),their DPAD is:

A)$30.
B)$500.
C)$1,000.
D)$1,600.
E)None of the above.

Question 55

If a corporation's income is solely from rents,it will not be subject to the § 541 penalty tax on personal holding companies.

Question 56

Which entity is subject to the ACE provisions?

A)S corporation.
B)Real estate investment trust (REITs).
C)Real estate investment companies.
D)Real estate mortgage investment conduits.
E)None of the above.

Question 57

Bacon Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kirby Corporation for $1,000 in 2008.Kirby incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600.If Bacon and Kirby corporations are members of an expanded affiliated group (EAG),their QPAI is:

A)$30.
B)$500.
C)$1,000.
D)$1,600.
E)None of the above.

Question 58

During 2008,Brown Corporation (a calendar year taxpayer)has $4,000,000 of taxable income and the following transactions:

Brown Corporation's alternative minimum tax (AMT)for 2008 is:

A)$90,000.
B)$500,000.
C)$700,000.
D)$1,360,000.
E)None of the above.

Question 59

For purposes of the penalty tax on accumulated earnings under § 531,reasonable needs of the business does not include:

A)Loans to shareholders.
B)Self-insurance.
C)Loans to suppliers and customers.
D)Product liability losses.
E)Plant expansion.

Question 60

Which of the following items will be added to unadjusted AMTI in arriving at ACE?

A)Tax-exempt income.
B)80% dividends received deduction.
C)Federal income tax.
D)Penalties and fines.
E)None of the above.

Question 61

Why is the DPAD benefit somewhat unique?

Question 62

Swan Corporation has gross receipts of $3 million of which $1 million are non-DPGR.CGS identified with DPGR is $1.3 million,while overall selling and administrative expenses are $600,000.Under the simplified deduction method,determine Swan's QPAI.

Question 63

Maize Corporation has average gross receipts of $5.5 million,$4.7 million,and $4.6 million in 2005,2006,and 2007,respectively.Is the company a small corporation with respect to the AMT?

Question 64

With respect to the AMT,what is the minimum tax credit?

Question 65

What is the accumulated earnings credit?

Question 66

Baker Corporation manufactures and sells birdhouses and feeders.The company also sells similar items that are imported from foreign countries.During the current year,Baker had a profit of $600,000 from its own products but a loss of $50,000 from the imported goods.
a.What is Baker's QPAI?
b.What is Baker's DPAD if the current year is 2006? 2008? 2010?

Question 67

The controller of Palm,Inc.,provides you with the following information.
Calculate any PHC tax.

Question 68

Grey,Inc.,has $2 million in gross receipts of which $1.2 million is DPGR.CGS is $850,000 and other deductions (marketing,administrative)are $350,000.Using the small business simplified deduction method,determine Grey's QPAI.

Question 69

What is the small corporation exemption?

Question 70

A calendar year corporation reports the following information for the years listed:
Compute the ACE adjustment for each year.

Question 71

Owl Corporation,a calendar year taxpayer,has a beginning balance in accumulated E & P of $3.5 million and current earnings of $1 million.If Owl can justify accumulations for the needs of the business of $3.7 million,its accumulated earnings credit for ATI purposes is:

A)$0.
B)$200,000.
C)$250,000.
D)$3.7 million.
E)None of the above.

Question 72

Cordinal,Inc.engages in production activities that generate QPAI of $460,000 and taxable income (without taking into account the DPAD and NOL)of $600,000 in 2008.The company also has an NOL carryover to 2008 of $500,000 and qualified W-2 wages of $300,000.Calculate any DPAD.

Question 73

Wren Corporation,a calendar year taxpayer,manufactures and sells candles.It has several factories in the U.S.and one in Jamaica.During 2008,it had DPGR of $4.1 million from the U.S.factories.
a.If the gross receipts from the products made in Jamaica are $200,000, what is Wren's DPGR for 2008?
b.If the gross receipts sourced to the Jamaica plant are $300,000, what is Wren's DPGR for 2008?

Question 74

Calculate the alternative minimum tax for a retail corporation whose tax return reflects the following amounts:

Question 75

Rose Corporation sells customized outdoor grills.It purchases various parts and materials from foreign sources for $500 and incurs $160 in labor costs at a factory in South Carolina to fabricate and assemble the product.Rose also incurs packaging,selling,and other costs of $40 and sells the grill for $800.If tax year 2008 is involved,calculate Rose's per unit:
a.DPGR
b.QPAI
c.DPAD

Question 76

Explain the wages limitation.