Deck 5: Corporate Operations

Question 1

Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.
Corporations do not have standard deductions.

Answer 1

False

Question 2

For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

Answer 2

True

Question 3

In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.
A corporate capital loss can only be deducted against capital gains.

Answer 3

False

Question 4

Net operating losses generally create permanent book-tax differences.
NOLs are treated as deductible temporary differences.

Question 5

A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.
A corporation carries a net capital loss back 3 years (required) and forward 5 years.

Question 6

Corporations calculate adjusted gross income (AGI) in the same way as individuals.
Corporations do not calculate AGI.

Question 7

In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. Adams has a favorable temporary book-tax difference for that year.
Goodwill impairment in excess of tax goodwill creates either a permanent difference or an unfavorable temporary book-tax difference.

Question 8

Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

Question 9

For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.

Question 10

For incentive stock options granted when ASC 718 applies, the value of the options that accrue in a given year always creates a permanent, unfavorable book-tax difference.

Question 11

Bingo Corporation incurred a net operating loss in 2016. If Bingo carries the loss back, it must first carry the loss back to offset its 2015 taxable income and then carry any remaining loss back to offset its 2014 taxable income.
The NOL offsets the income in the second previous year (2014) before it offsets income in the first previous year (2015).

Question 12

Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

Question 13

In general, a corporation can elect to use either the accrual or cash method of accounting no matter how large the corporation.
Large corporations (average gross receipts exceeding $5 million over the prior three years) are required to use the accrual method.

Question 14

A nonqualified stock option will create a permanent book-tax difference in a given year if it accrues during the year but is exercised in a later year.
A deductible temporary difference (deferred tax asset) is created in the year the option accrues and is recorded as an expense for book purposes.

Question 15

Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.
A corporation may not use the cash method of accounting in the second year if it reported more than $5 million in gross receipts in the first year.

Question 16

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.
Any book-tax difference that requires an add-back to book income to compute taxable income is an unfavorable book-tax difference because it requires an adjustment that increases taxable income relative to book income.

Question 17

Corporations may carry net operating loss sustained in 2015 back two years and forward 20 years.

Question 18

A corporation may carry a net capital loss back two years and forward 20 years.
A corporation carries a net capital loss back 3 years and forward 5 years.

Question 19

A corporation may carry a net capital loss back three years and forward five years.

Question 20

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.
Federal income tax expense generates a permanent book-tax difference for Schedule M-3 purposes.

Question 21

Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability).
Schedule M-1 reconciles net income or loss with taxable income before NOL carryovers and special deductions (line 28 of Form 1120).

Question 22

A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.

Question 23

Three brothers each own 20% of the stock in three corporations. Because no single brother owns more than 50% of a corporation, the tax law would not treat the corporations as a controlled group.
Collectively, the brothers will own more than 50% of the stock of each corporation.

Question 24

Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

Question 25

An affiliated group must file a consolidated tax return.
Filing a consolidated tax return is an election in the first year, after which it is mandatory on a going forward basis.

Question 26

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).

Question 27

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.
Schedule M-1 is less detailed than Schedule M-3 and does not require the taxpayer to distinguish between temporary and permanent differences.

Question 28

Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year.

Question 29

Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.

Question 30

Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation's stock.
The percentages are 70%, 80%, and 100%, depending on the stock ownership level.

Question 31

Accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.
The deduction is allowed in the year authorized provided the payment is made within 3½ months after year-end.

Question 32

Calendar-year corporations that request an extension for filing their 2016 tax returns will have a tax return due date of September 15.
Fiscal year corporations other than those with a June 30 year-end can extend their tax returns to October 15 beginning in 2016.

Question 33

The dividends received deduction is subject to a limitation based on modified taxable income.

Question 34

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2016. GenerUs made payment to FoodBank on February 2, 2017. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2016 tax return.

Question 35

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while NOL and capital loss carrybacks are not.

Question 36

The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.
ASC 810 governs consolidated financial reporting while IRC sections 1501-1504 and the accompanying regulations govern income tax consolidation.

Question 37

Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

Question 38

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

Question 39

A C corporation reports its taxable income or loss on Form 1065.
Form 1120

Question 40

The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero.
A dividends received deduction is limited to 70% or 80% of taxable income unless it creates or increases a net operating loss deduction, in which case the full amount is allowed.

Question 41

Which of the following is not calculated in the corporate income tax formula?

A) Gross income
B) Adjusted gross income
C) Taxable income
D)Regular tax liability

Question 42

Volos Company (a calendar-year corporation) began operations in March of 2014 and was not profitable through December of 2015. Volos has been profitable for the first quarter of 2016 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2016 because it had no tax liability for the 2015 tax year and has been in business for at least 12 months.
Estimated taxes are due if the corporation expects to incur a tax liability of $500 or more for the year. A corporation can base its estimated payments on the prior year's tax liability only if it is positive, which is not the case here.

Question 43

Which of the following statements regarding book-tax differences is true?

A) Corporations are not required to report book-tax differences on their income tax returns.
B) Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
C) Income excludable for tax purposes usually creates a temporary book-tax difference.
D)None of these is true.

Question 44

WFO Corporation has gross receipts according to the following schedule:
If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?
$$\begin{array} { | l | l | } \hline \text { Year 1 } & \$ 2 \text { million } \\\hline \text { Year 2 } & \$ 4 \text { million } \\\hline \text { Year 3 } & \$ 6 \text { million } \\\hline \text { Year 4 } & \$ 4.5 \text { million } \\\hline \text { Year 5 } & \$ 5 \text { million } \\\hline \text { Year 6 } & \$ 7 \text { million } \\\hline\end{array}$$

A) Year 3
B) Year 4
C) Year 5
D)Year 6
E)None of these

Question 45

A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.

Question 46

The adjusted current earnings (ACE) adjustment is 75% of the difference between a corporation's alternative minimum taxable income before the ACE adjustment and its ACE.

Question 47

Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.
Large corporations can use the prior year liability to determine the first quarter estimated tax payment only.

Question 48

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

A) Temporary book-tax differences will reverse in future years whereas permanent differences will not.
B) Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C) Both A and B are reasons for why a corporation might distinguish between temporary and permanent differences.
D)Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.

Question 49

Minimum tax credits generated by the corporate AMT can be carried forward indefinitely.

Question 50

The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax.

Question 51

Which of the following does NOT create a permanent book-tax difference?

A) Organizational and start-up expenses
B) Key employee death benefit income
C) Fines and penalties expenses
D)Municipal bond interest income

Question 52

Which of the following does NOT create a temporary book-tax difference?

A) Deferred compensation
B) Bad-debt expense
C) Depreciation expense
D)Domestic production activities deduction

Question 53

For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.
For estimated tax purposes, a "large" corporation is a corporation with more than $1,000,000 of taxable income in any of the three years prior to the current year.

Question 54

Corporations are allowed to deduct at least some AMT exemption regardless of profitability.
The AMT exemption is phased-out completely for corporations with AMTI of at least $310,000.

Question 55

Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax.

Question 56

A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax.

Question 57

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

Question 58

The tax rate for the corporate alternative minimum tax is a flat 26%.
The corporate AMT rate is a flat 20%.

Question 59

Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

Question 60

Urban Corporation receives tax-exempt income from Denver municipal bonds. All the proceeds from the bonds were used to fund public projects. In computing adjusted current earnings in its AMT computation, Urban must add back the interest income from its municipal bonds.
Only tax-exempt interest from a private activity bond is an adjustment in computing adjusted current earnings in the AMT computation.

Question 61

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs) that were granted when ASC 718 applies?

A) Financial-no expense; tax-no deduction
B) Financial-no expense; tax-deduct bargain element at exercise
C) Financial-expense value over vesting period; tax-no deduction
D)Financial-expense value over vesting period; tax-deduct bargain element at exercise

Question 62

iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense?

A) Permanent; favorable
B) Permanent; unfavorable
C) Temporary; favorable
D)Temporary; unfavorable

Question 63

Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?

A) $11,000 unfavorable
B) $11,000 favorable
C) $16,000 unfavorable
D)$16,000 favorable

Question 64

Which of the following statements regarding incentive stock options (ISOs) is false?

A) If ASC 718 does not apply, ISOs do not create book-tax differences.
B) For ISOs granted when ASC 718 applies, book-tax differences are always unfavorable.
C) If ASC 718 applies, the value expensed for book purposes in a given year is the value of the options that accrue.
D)If ASC 718 applies, book-tax differences associated with ISOs may be either permanent or temporary.

Question 65

Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 applies?

A) Financial accounting-no expense; tax-no deduction
B) Financial accounting-no expense; tax-deduct bargain element at exercise
C) Financial-expense value over vesting period; tax-no deduction
D)Financial-expense value over vesting period; tax-deduct bargain element at exercise

Question 66

Corporation A receives a dividend from Corporation

A) A owns less than 20 percent of the stock of B
B) A owns at least 20 but not more than 50 percent of the stock of B
B) Corporation A includes the dividend in its gross income for tax and financial accounting purposes (no book-tax difference). If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own?
C)
D)Corporations generally include dividends from corporations in which they own less than 20% in both taxable and financial income (dividends are not income for book purposes if Corporation A accounts for its stock ownership under the equity method, which generally begins with a 20% ownership interest).

Question 67

Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2016. Chicken also reports financial accounting earnings of $20,000 for that year. Assume that Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

A) $2,000 unfavorable
B) $2,000 favorable
C) $10,000 unfavorable
D)$10,000 favorable
E)None of these

Question 68

Which of the following statements regarding capital gains and losses is false?

A) In terms of tax treatment, corporations generally prefer capital gains to ordinary income.
B) Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.
C) C corporations can carryback net capital losses three years and they can carry them forward for five years.
D)Corporations must apply capital loss carrybacks and carryovers in a particular order.

Question 69

TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Inc. is the beneficiary. What is the nature of the book-tax difference created by this expense?

A) Permanent; favorable
B) Permanent; unfavorable
C) Temporary; favorable
D)Temporary; unfavorable

Question 70

Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 does not apply?

A) Financial accounting-no expense; tax-no deduction
B) Financial accounting-no expense; tax-deduct bargain element at exercise
C) Financial accounting-expense value over vesting period; tax-no deduction
D)Financial accounting-expense value over vesting period; tax-deduct bargain element at exercise

Question 71

Over what time period do corporations amortize purchased goodwill for tax purposes?

A) 180 months
B) 150 months
C) 60 months
D)None of these

Question 72

For corporations, which of the following regarding net capital losses is true?

A) A corporation that experiences a net capital loss has a favorable book-tax difference in the year of the loss.
B) A corporation that experiences a net capital loss in year 4 first carries the loss back to year 3, then year 2, and then year 1 before carrying it forward.
C) Net capital loss carrybacks are deductible in determining a corporation's net operating loss.
D)Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used before they expire.

Question 73

Corporation A receives a dividend from Corporation

A) A owns less than 20 percent of the stock of B
B) A owns at least 20 but not more than 50 percent of the stock of B
B) It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?
C)
D)If a corporation receiving dividends owns at least 20% but not more than 50% of the stock of a dividend-distributing corporation, it reports a pro-rata portion of the distributing corporation's earnings in its financial accounting income under the equity method and it includes the actual amount of the dividend in its taxable incomE.

Question 74

Which of the following statements regarding book-tax differences associated with purchased goodwill is false?

A) It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.
B) In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book-tax difference will be unfavorable.
C) Temporary book-tax differences associated with goodwill are always favorable.
D)If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognizeD.It is possible to have an unfavorable difference in a year when goodwill impairment exceeds the allowable amortization deduction.

Question 75

In January 2016, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2016, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2016, what is the nature of the book-tax difference due to the options exercised?

A) Favorable and temporary
B) Favorable and permanent
C) Unfavorable and temporary
D)Unfavorable and permanent
E)Not enough information to determinE.The adjustment is unfavorable because the book deduction exceeds the tax deduction. The adjustment is permanent because it will not ever reversE.

Question 76

In January 2015, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2016, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $60,000. For 2016, what is the book-tax difference due to the options exercised?

A) 10,000 unfavorable
B) 10,000 favorable
C) 50,000 unfavorable
D)60,000 favorable

Question 77

Which of the following statements regarding nonqualified stock options (NQOs) is false?

A) If ASC 718 applies, book-tax differences associated with NQOs may be either permanent or temporary.
B) In a given year when ASC 718 applies, if the value of the options that accrue is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable.
C) Before ASC 718 applied, no expense recognition was required for NQOs for financial accounting purposes.
D)If ASC 718 does not apply, all stock option-related book-tax differences are temporary.

Question 78

Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 did not apply?

A) Financial-no expense; tax-no deduction
B) Financial-no expense; tax-deduct bargain element at exercise
C) Financial-expense value over vesting period; tax-no deduction
D)Financial-expense value over vesting period; tax-deduct bargain element at exercise

Question 79

Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years-half in 2016 (the year of issue) and half in 2017. One thousand options are exercised in 2017 with a bargain element on each option of $6. What is the 2017 book-tax difference associated with the stock options?

A) $6,000 unfavorable
B) $6,000 favorable
C) $24,000 unfavorable
D)$24,000 favorable
E)None of these

Question 80

AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale?

A) Permanent; favorable
B) Permanent; unfavorable
C) Temporary; favorable
D)Temporary; unfavorable