Deck 17: Corporations: Introduction and Operating Rules

Question 1

On December 31, 2019, Lavender, Inc., (an accrual basis, calendar year C corporation), accrues a $50,000 bonus to Barry, its vice president and a 40% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 14, 2020. Lavender can deduct the bonus in 2020, the year in which it is included in Barry's gross income.

Answer 1

False

Question 2

Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1,2019. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2019): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Wanting to deduct as much as possible in the current year, Hornbill Corporation's 2019 deduction for organizational expenditures is $5,800.

Answer 2

True

Question 3

In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

Answer 3

False

Question 4

Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation's taxable income is $140,000.

Question 5

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

Question 6

For tax years beginning before 2018, the corporate marginal income tax rates ranged from 15% to 39%.

Question 7

In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation. Azul owns 25% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

Question 8

Thrush Corporation, a calendar year C corporation, files its current year Form 1120, which reports taxable income of $200,000 for the year. The corporation's tax is $42,000.

Question 9

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2018 of $5,000. In 2019, Heron made a further charitable contribution of $20,000. Heron's 2019 deduction is limited to $15,000 (10% of taxable income). The 2019 contribution must be applied first against the $15,000 limitation.

Question 10

Azure Corporation, a C corporation, had a long-term capital gain of $50,000 in the current year. The maximum amount of tax applicable to the capital gain is $7,500 ($50,000 × 15%).

Question 11

If a C corporation uses straight-line depreciation on real estate (§ 1250 property), no portion of a recognized gain on the sale of the property will be recaptured as ordinary income.

Question 12

The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and board of directors.

Question 13

The passive loss rules apply to closely held C corporations and to personal service corporations but not to S
corporations.

Question 14

A corporate net operating loss arising in 2019 for a calendar year C corporation can be carried back 2 years and forward 20 years to offset taxable income for those years.

Question 15

Peach Corporation had $210,000 of net active income, $45,000 of portfolio income, and a $230,000 passive loss during the current year. If Peach is a closely held C corporation that is not a PSC, it can deduct $210,000 of the passive loss in the year.

Question 16

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting five years ago for $10,000. Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Question 17

On December 20, 2019, the directors of Quail Corporation (an accrual basis, calendar year C corporation) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April
6, 2020, may be claimed as a deduction for tax year 2019.

Question 18

No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

Question 19

A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

Question 20

As a general rule, C corporations must use the cash method of accounting. However, under several exceptions to
this rule (e.g., average annual gross receipts of $25 million or less for the most recent 3-year period), a C corporation can use the accrual method.

Question 21

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

Question 22

Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

Question 23

Canary Corporation, which sustained a $5,000 net short-term capital loss during the year, will enter $5,000 as an addition on Schedule M-1 of Form 1120.

Question 24

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Question 25

The accumulated earnings and personal holding company taxes both can be avoided by distributing sufficient dividends.

Question 26

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Question 27

In tax planning for charitable contributions, a current-year's contribution might have to be deferred to a later year in order to deduct a contribution carryover amount.

Question 28

In general, all corporations that maintain inventory for sale to customers are required to use the accrual method of accounting for all income and expense items.

Question 29

A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000.

Question 30

The accumulated earnings and personal holding company taxes are designed to prevent the accumulation of earnings within a corporation.

Question 31

For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

Question 32

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Question 33

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120)
by timely filing a Form 7004 for the tax year.

Question 34

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

Question 35

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule
M-1.

Question 36

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Question 37

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

Question 38

Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation. Canary owns 18% of the Stork Corporation stock. Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.

Question 39

On December 31, 2019, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer) who owns 75% of the corporation's outstanding stock. The $50,000 bonus is paid to the president on February 4, 2020. For Flamingo's 2019 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

Question 40

A corporation must file a Federal income tax return even if it has no taxable income for the year.

Question 41

Saleh, an accountant, is the sole shareholder of Turquoise Corporation, a C corporation. Turquoise is a personal service corporation with a fiscal year ending September 30 (pursuant to a § 444 election). The corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2019. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2019, if the corporation is to continue to use its fiscal year without negative tax effects?

A) $0
B) $27,500
C) $82,500
D) $247,500
E) None of these.

Question 42

In general, the purpose of ASC 740 is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments for the current year and all future years.

Question 43

In 2019, Bluebird Corporation had net income from operations of $100,000. Further, Bluebird recognized a long-term capital gain of $30,000 and a short-term capital loss of $45,000. Which of the following statements is correct?

A) Bluebird Corporation will have taxable income in 2019 of $100,000 and will have a net capital loss of $15,000 that can be carried back 3 years and forward 5 years.
B) Bluebird Corporation may use the capital loss to offset the capital gain and must carry the net capital loss of $15,000 forward five years as a short-term capital loss.
C) Bluebird Corporation may deduct $33,000 of the capital loss in 2019 and may carry forward the remainder of the capital loss indefinitely to offset capital gains.
D) Bluebird Corporation will have taxable income in 2019 of $85,000.
E) None of these.

Question 44

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

Question 45

Only U.S. corporations are included in a combined GAAP financial statement.

Question 46

Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2019, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2019, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2020, compute Ivory Corporation's 2019 deduction for the above amounts.

A) $250,000
B) $225,000
C) $200,000
D) $125,000
E) None of these.

Question 47

A deferred tax liability represents a potential future tax benefit associated with income reported in the current-year
GAAP financial statements.

Question 48

Temporary differences are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return but not in the same reporting period.

Question 49

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

Question 50

Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current year. In addition, Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss. Elk's taxable income is:

A) $63,000.
B) $73,000.
C) $80,000.
D) $90,000.
E) None of these.

Question 51

On December 31, 2019, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

A) In 2019, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2020.
B) In 2020, if payment was made at any time during that year.
C) In 2019, if payment was made on or before April 15, 2020.
D) In 2020, but only if payment was made on or before April 15, 2020.
E) None of these.

Question 52

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return if a proper election is made.

Question 53

Patrick, an attorney, is the sole shareholder of Gander Corporation, a C corporation. Gander is a personal service corporation with a fiscal year ending November 30 (pursuant to a § 444 election). The corporation paid Patrick a salary of $180,000 during its fiscal year ending November 30, 2019. How much salary must Gander pay Patrick during the period December 1 through December 31, 2019, to permit the corporation to continue to use its fiscal year without negative tax effects?

A) $0
B) $30,000
C) $165,000
D) $180,000
E) None of these

Question 54

Permanent differences include items that appear in the Federal income tax return as income or deduction and in the
GAAP financial statements as revenue or expense but in different reporting periods.

Question 55

Sunset Corporation (a C corporation) had operating income of $200,000 and operating expenses of $175,000. In addition, Sunset had a $30,000 long-term capital gain, a $52,000 short-term capital loss, and $5,000 tax-exempt interest income. What is Sunset Corporation's taxable income for the year?

A) $0
B) $3,000
C) $22,000
D) $30,000
E) None of these.

Question 56

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

Question 57

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. It's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

Question 58

Copper Corporation, a C corporation, had gross receipts of $25 million in 2016, $26 million in 2017, and $23 million in2018. Gold Corporation, a personal service corporation (PSC), had gross receipts of $24 million in 2016, $27 million in 2017, and $25 million in 2018. Which of the corporations will be allowed to use the cash method of accounting in
2019?

A) Copper Corporation only.
B) Gold Corporation only.
C) Both Copper Corporation and Gold Corporation.
D) Neither Copper Corporation nor Gold Corporation.
E) None of these.

Question 59

Carrot Corporation, a C corporation, has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2019. Carrot Corporation had taxable income from other sources of $720,000. Prior years'
Transactions included the following: $$\begin{array} { l l r } 2015 & \text { Net long-term capital gain } & \$ 150,000 \\2016 & \text { Net short-term capital gain } & 60,000 \\2017 & \text { Net short-term capital gain } & 45,000 \\2018 & \text { Net long-term capital gain } & 35,000\end{array}$$ Compute the amount of Carrot's capital loss carryover to 2020.

A) $0
B) $32,000
C) $45,000
D) $185,000
E) None of these.

Question 60

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current-year
GAAP financial statements.

Question 61

Violet, Inc., a closely held corporation (not a PSC), has $55,000 of passive activity loss, $80,000 of net active income, and $20,000 of portfolio income. How much is Violet's taxable income for the current year?

A) $20,000
B) $45,000
C) $80,000
D) $100,000
E) None of these.

Question 62

Plum Corporation (a C corporation and a computer manufacturer) donated 100 laptop computers to a local university (a qualified educational organization) this year. The computers were constructed by Plum earlier this year, and the university will use the computers for research and research training. Plum's basis in the computers is $35,000, and their fair market value is $120,000. What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation)?

A) $35,000
B) $70,000
C) $77,500
D) $85,000
E) $120,000

Question 63

In the current year, Red Corporation (a calendar year C corporation), which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct?

A) Red owns 80% of Blue Corporation.
B) Red owns 20% or more, but less than 80% of Blue Corporation.
C) Red owns 80% or more of Blue Corporation.
D) Red owns less than 20% of Blue Corporation.
E) None of these.

Question 64

Grebe Corporation, a closely held corporation that is not a PSC, had $75,000 of net active income, $60,000 of portfolio income, and a $105,000 passive activity loss during the year. How much of the passive activity loss can Grebe deduct in the current year?

A) $0
B) $60,000
C) $105,000
D) $135,000
E) None of these.

Question 65

Grackle Corporation, a personal service corporation, had $230,000 of net active income, $40,000 of portfolio income and a $250,000 passive activity loss during the year. How much is Grackle's taxable income?

A) $20,000
B) $40,000
C) $270,000
D) $520,000
E) None of these.

Question 66

Beige Corporation, a C corporation, purchases a warehouse on August 1, 2003, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 12, 2019, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty?

A) Ordinary income of $0 and § 1231 gain of $611,750.
B) Ordinary income of $411,750 and § 1231 gain of $200,000.
C) Ordinary income of $82,350 and § 1231 gain of $529,400.
D) Ordinary income of $117,650 and § 1231 gain of $494,100.
E) None of these.

Question 67

Kingbird Corporation (a calendar year C corporation) reports the following income and expenses this year: $\begin{array}{lr}\text { Income from operations } & \$ 200,000 \\\text { Expenses from operations } & 140,000 \\\text { Dividends received (15\% ownership) } & 15,000\end{array}$ On October 1, Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash (not included in any of the above items). Determine Kingbird's charitable contribution deduction.

A) $9,000
B) $7,500
C) $6,750
D) $6,525
E) None of these.

Question 68

Owl Corporation (a C corporation), a retailer of children's apparel, made the following donations to qualified charitable organizations this year. How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation)?

A) $63,000
B) $65,000
C) $90,500
D) $92,500
E) None of these.

Question 69

Wanda is the Chief Executive Officer of Pink corporation, a publicly traded, calendar year C corporation. For the current year, Wanda's compensation package consists of: $\begin{array}{lr}\text { Cash compensation } & \$ 2,500,000 \\\text { Nontaxable fringe benefits } & 250,000 \\\text { Taxable fringe benefits } & 150,000 \\\text { Bonus tied to company performance } & 2,000,000\end{array}$ How much of Wanda's compensation is deductible by Pink Corporation?

A) $1,000,000.
B) $1,250,000.
C) $3,250,000.
D) $4,900,000.
E) None of these.

Question 70

Which of the following statements is incorrect regarding the taxation of C corporations for tax years beginning after 2017?

A) NOLs are subject to a 2-year carryback and 20-year carryforward period.
B) Taxable income of a personal service corporation is taxed at a flat rate of 21%.
C) A tax return must be filed whether or not the corporation has taxable income.
D) The alternative minimum tax does not apply.
E) None of these.

Question 71

Copper Corporation, a calendar year C corporation, owns stock in Bronze Corporation and has net operating income of $900,000 for the current year. Bronze Corporation pays Copper a dividend of $150,000. What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (and the two corporations are members of the same affiliated group)? (Assume Copper's dividends received deduction is not limited by its taxable income.)

A) $75,000
B) $97,500
C) $120,000
D) $150,000
E) None of these.

Question 72

Orange Corporation, a calendar year C corporation, owns stock in White Corporation and has net operating income of $400,000 for the current year. White Corporation pays Orange a dividend of $60,000. What amount of dividends received deduction may Orange claim if it owns 45% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

A) $30,000
B) $39,000
C) $42,000
D) $60,000
E) None of these.

Question 73

Eagle Corporation, a calendar year C corporation, owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In the current year, Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?
"1) Multiply the dividends received by the deduction percentage ($130,000 × 50% =
$65,000)."
2) Multiply the taxable income before the dividends received deduction by the deduction percentage ($100,000 × 50% = $50,000).
"3) Limit the deduction to the lesser of step 1 or step 2, unless subtracting the amount derived in step 1 ($65,000) from taxable income before the dividends received
Deduction ($100,000) generates an NOL ($100,000 - $65,000 = $35,000 taxable income). If so, use the amount derived in step 1 ($65,000). In this case, the NOL exception to the taxable income limitation does not apply, and the deduction equals
$50,000."

A) $0
B) $50,000
C) $65,000
D) $84,500
E) None of these.

Question 74

Which of the following statements is incorrect regarding the dividends received deduction?

A) A corporation must hold stock for more than 90 days in order to qualify for a deduction with respect to dividends on such stock.
B) The taxable income limitation does not apply with respect to the 100% deduction available to members of an affiliated group.
C) If a stock purchase is financed 75% by debt, the deduction for dividends on such stock is reduced by 75%.
D) The taxable income limitation does not apply if the normal deduction (i.e., 50% or 65% of dividends) results in a net operating loss for the corporation.
E) None of these.

Question 75

For tax years ending after 2017, which of the following statements is incorrect with respect to the treatment of a net operating loss by a calendar year C corporation?

A) The deduction for any carryover year of the NOL is limited to 80% of taxable income (determined without regard to the NOL deduction).
B) A corporation may claim a dividends received deduction in computing an NOL.
C) An NOL is generally carried back 2 years and forward 20 years.
D) Unlike individuals, corporations do not adjust their NOLs for net capital losses or nonbusiness deductions.
E) None of these.

Question 76

Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)

A) $40,295
B) $54,995
C) $63,325
D) $64,396
E) None of these.

Question 77

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2019. The following expenses were incurred during the first tax year (April 1 through December 31, 2019) of operations. $\begin{array}{lr}\text { Expenses of temporary directors and of organizational meetings }&\$27,000\\\text { Fee paid to the state of incorporation } & 1,000 \\\text { Accounting services incident to organization } & 15,500 \\\text { Legal services for drafting the corporate charter and bylaws } & 9,500 \\\text { Expenses incident to the printing and sale of stock certificates } & 6,000\end{array}$ Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2019?

A) $0
B) $4,550
C) $5,000
D) $7,400
E) None of these.

Question 78

Woodchuck, Inc., a closely held personal service corporation, has $115,000 of net active income, $40,000 of portfolio income, and $135,000 of passive activity loss. What is Woodchuck's taxable income for the current year?

A) $0
B) $20,000
C) $40,000
D) $155,000
E) None of these.

Question 79

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow's income tax liability for the year?

A) $32,700
B) $33,600
C) $45,650
D) $62,400
E) None of these.

Question 80

In the current year, Crimson, Inc., a calendar C corporation, has income from operations of $180,000 and operating deductions of $225,000. Crimson also had $30,000 of dividends from a 15% stock ownership in a domestic corporation. Which of the following statements is correct with respect to Crimson for the current year?

A) Crimson's NOL is $15,000.
B) A dividends received deduction is not allowed in computing Crimson's NOL.
C) The NOL is carried back 3 years and forward 10 years by Crimson.
D) Crimson's dividends received deduction is $15,000.
E) None of these.