Question 1

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.

Accepted Answer

An expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1, not a subtraction item, because it increases taxable income relative to book income.

Question 2

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).

Accepted Answer

The portion of Katherine's salary deemed reasonable ($210,000) is deductible by Penguin Corporation, thus reducing its taxable income and avoiding double taxation on this amount. The $90,000 deemed unreasonable is not deductible by the corporation, potentially subjecting it to corporate tax and then to personal tax when distributed as dividends, illustrating the concept of double taxation.

Question 3

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.

Accepted Answer

Schedule M-1 of Form 1120 is used to reconcile the income (loss) per books with the income (loss) per tax return, and a net short-term capital loss would be added back to book income to reconcile to taxable income.

Question 4

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.

Accepted Answer

The $4,700 of legal and accounting fees associated with incorporation are considered capital expenditures and must be amortized over a period of 180 months starting with the month the business begins, rather than being fully deductible as startup expenditures in the year the business begins.

Question 5

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

Accepted Answer

Both the accumulated earnings tax and the personal holding company tax are designed to penalize companies for not distributing their profits to shareholders. By distributing sufficient dividends, a company can avoid these taxes, as they are intended to encourage the distribution of earnings to shareholders.

Question 6

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.

Accepted Answer

Schedule M-3, used by certain corporations, partnerships, and trusts, requires more detailed information than Schedule M-1, aiming for greater transparency in the reconciliation of financial accounting income with taxable income.

Question 7

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.

Accepted Answer

If the current year's contributions exceed the allowable deduction limit, the excess can be carried over to future years, potentially requiring deferral of new contributions to maximize deductions.

Question 8

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.

Accepted Answer

While many corporations with inventory are required to use the accrual method, there are exceptions, such as small businesses with gross receipts below a certain threshold that may use the cash method.

Question 9

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

Accepted Answer

A personal service corporation is taxed at a flat rate of 21% on its taxable income, so with $100,000 in taxable income, the tax liability would indeed be $21,000 (21% of $100,000).

Question 10

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

Accepted Answer

The accumulated earnings tax and personal holding company tax are mechanisms in the U.S. tax code designed to prevent corporations from avoiding taxation by accumulating earnings excessively instead of distributing them as dividends to shareholders, who would then pay personal income taxes on those dividends.

Question 11

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.

Accepted Answer

For estimated tax purposes, the IRS defines a "large corporation" as one that had taxable income of $1 million or more for any of its three preceding tax years.

Question 12

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

Accepted Answer

The answer of A corporation with $5 million or more...

Question 13

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.

Accepted Answer

A calendar year C corporation can receive an automatic 6-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Question 14

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

Accepted Answer

The limitation on the deduction of business interest applies to all taxpayers, including noncorporate taxpayers, subject to certain exceptions and thresholds.

Question 15

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

Accepted Answer

Schedule M-1 of the U.S. corporate tax return reconciles financial (book) income with taxable income, and income included in book income but not taxable income is subtracted on Schedule M-1 to reconcile the differences.

Question 16

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.

Accepted Answer

Schedule M-2 is part of a corporate tax return (Form 1120) and is used to reconcile the amounts for the corporation's unappropriated retained earnings at the beginning and end of the tax year, reflecting changes due to net income, distributions, and other adjustments.

Question 17

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.

Accepted Answer

Schedule M-1 is a form used by corporations filing U.S. federal income tax returns to reconcile the difference between financial accounting net income and taxable income reported on the tax return. This reconciliation helps the IRS understand the adjustments made from book to tax income.

Question 18

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.

Accepted Answer

The dividends received deduction (DRD) for a corporation owning less than 20% of another corporation is 50% of the dividends received. Therefore, 50% of $80,000 is $40,000.

Question 19

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.

Accepted Answer

The $50,000 bonus accrued to the president will be a deduction for Flamingo, Inc. on its 2019 Form 1120, not a subtraction item on Schedule M-1, because it is an expense that reduces the corporation's taxable income for 2019, assuming it meets the "all events test" and economic performance has occurred by the end of the year. Schedule M-1 is used to reconcile financial statement income with tax return income, and this expense would be part of the corporation's deductible expenses, not a reconciliation item.

Question 20

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

Accepted Answer

Corporations are required to file a Federal income tax return each year even if they do not have taxable income, to report their income, gains, losses, deductions, and credits to the IRS.

Quiz 17: Corporations: Introduction and Operating Rules