Deck 3: Corporations: Special Situations

Question 1

A company with a NOL carryforward for a tax year is ineligible for the DPAD if the carryforward eliminates current income.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Martin, a real estate developer, pays Alan, a general contractor, to construct a housing project. Alan has no DPGR since he does not own the property.

Answer 3

False

Question 4

In terms of the effect of DPAD, the maximum tax savings for a corporation with $11 million of taxable income is $346,500 in 2011.

Question 5

If QPAI cannot be used in any one year due to the TI limitation, it can be carried over for 5 years.

Question 6

The domestic production activities deduction is limited to manufacturers.

Question 7

For purposes of the DPAD wage limitation, amounts paid to independent contractors can be considered.

Question 8

DPAD for 2011 is 9% of the greater of QPAI or TI, but not to exceed the W-2 wages limitation.

Question 9

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 qualifies as DPGR.

Question 10

Red Company, a U.S. corporation based in Mississippi, manufactures and sells a product which includes some components made in Mexico. None of Red's income from sales constitute DPGR.

Question 11

Modified AGI means AGI without any DPAD allowance.

Question 12

The DPAD is not available to estates and trusts.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

As taxable income is reduced by an NOL carryback, there is a corresponding increase in the DPAD.

Question 18

May Corporation, a Miami contractor, pays Crane Engineering a fee to design bridges for a highway May will build in the Cayman Islands. The fee Crane receives is DPGR.

Question 19

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

Question 20

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 21

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 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

NOLs are negative adjustments.

Question 29

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

Question 30

The DPAD is not allowed for AMT purposes.

Question 31

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

Question 32

The ACE adjustment can be positive or negative.

Question 33

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

Question 34

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

Question 35

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 36

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

Question 37

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

Question 38

Grebe Corporation was formed in 2000. If in 2011, it has average gross receipts of under $5 million, the company cannot be subject to the AMT.

Question 39

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 40

Passive activity losses of certain closely held corporations and personal service corporations are tax preferences.

Question 41

Tanweer, Inc., manufactures and sells glassware. The company also sells dinnerware that is purchased from unrelated foreign producers. During tax year 2011, Tanweer had a U.S. profit of $1.2 million (QPAI) and a loss from the imported dinnerware of $200,000. What is Tanweer's DPAD?

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

Question 42

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

Question 43

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) 9% credit.
E) All of the above.

Question 44

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

Question 45

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 46

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 47

ATI = Taxable Income - Adjustments - Dividends paid - Accumulated earnings credit.

Question 48

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 49

May Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is purchased from unrelated foreign producers. During the tax year 2011, May had a U.S. profit of $1.2 million (QPAI) and a profit from the imported merchandise of $100,000. What is May's DPAD?

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

Question 50

The AMT exemption amount of $40,000 phases out entirely once a corporation's average gross receipts exceeds $5 million.

Question 51

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 not dependent on the existence of a tax avoidance motive.
D) In the case of a sole proprietor, the DPAD is a deduction from adjusted gross income.
E) All are true.

Question 52

The AMT NOL deduction is limited to 90%.

Question 53

The penalty tax in 2011 for AET and PHC situations is the highest rate applicable to individual taxpayers.

Question 54

A negative ACE adjustment is beneficial to a corporation.

Question 55

Reasonable needs for purposes of the accumulated earnings tax include loans to shareholders.

Question 56

Lemon, Inc., has taxable income of $15 million in 2011. What is the maximum DPAD tax savings for this C corporation?

A) $132,600.
B) $265,200.
C) $273,000.
D) $472,500.
E) None of the above.

Question 57

Yvonne Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is purchased from unrelated foreign producers. During tax year 2011, 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) $33,000.
B) $66,000.
C) $99,000.
D) $1,080,000.
E) None of the above.

Question 58

Staff, Inc., has taxable income of $14 million in 2011. What is the maximum DPAD tax savings for this C corporation?

A) None.
B) $204,000.
C) $210,000.
D) $428,400.
E) $441,000.

Question 59

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 60

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

Question 61

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 62

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 63

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 64

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 65

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 66

Lee, Inc., an S corporation, has taxable income of $15 million in 2011. Assume there are two shareholders, each in the top individual tax bracket. What is the maximum total DPAD tax savings for the S corporation shareholders?

A) None.
B) $294,000.
C) $472,500.
D) $1,260,000.
E) None of the above.

Question 67

Peggy'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 $1 million. If Peggy files a joint return and her modified AGI is $119,500, what is her allowable DPAD, if any, for 2011?

A) None.
B) $6,000.
C) $9,000.
D) $10,755.
E) Some other amount.

Question 68

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 69

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

A) $0.
B) $7,126,000.
C) $9,426,000.
D) $18,251,000.
E) None of the above.

Question 70

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 71

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 72

Bacon Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kershaw Corporation for $1,000 in 2011. Kershaw incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600. If Bacon 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 73

Boasso Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kirby Corporation for $1,000 in 2011. Kirby incurs TV advertising expenses of $300 and sells the machine by phone order for $1,700. If Boasso and Kirby corporations are members of an expanded affiliated group (EAG), their QPAI is:

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

Question 74

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 75

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

A) $0.
B) $7,099,060.
C) $8,703,900.
D) $18,300,580.
E) None of the above.

Question 76

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 77

Which of the following would not be a positive tax preference item in 2010?

A) Accelerated depreciation on real property in excess of straight-line.
B) Intangible drilling costs.
C) Private activity bond interest income.
D) Percentage depletion in excess of adjusted basis.
E) None of the above.

Question 78

Nickel Corporation has average gross receipts of $5.6 million, $4.6 million, and $4.7 million in 2009, 2010, and 2011, respectively. Nickel is:

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

Question 79

Bow Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kite Corporation for $1,000 in 2011. Kite incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600. If Bow and Kite corporations are members of an expanded affiliated group (EAG), their DPAD is:

A) $30.
B) $45.
C) $72.
D) $500.
E) None of the above.

Question 80

Which statement, if any, is false?

A) An S corporation is not 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.