Question 1

Which of the following statements regarding Schedule M-3 is false?

Accepted Answer

Schedule M-3 replaces Schedule M-1 for all tax years beginning after December 31, 2006, not December 31, 2004.

Question 2

TasteCo, Inc. reported $210,500 of taxable income this year. What is its regular tax liability?

Accepted Answer

To calculate regular tax liability, we need to use the tax rate schedule. For the tax year 2020, the tax rate for a taxable income of $210,500 is 24%. Therefore, the regular tax liability is:

$210,500 x 24% = $50,520
Plus, the base tax amount for a taxable income of $163,300 to $207,350 is $32,569.50.

So, the total regular tax liability for TasteCo, Inc. is:

$50,520 + $32,569.50 = $83,089.50

The closest option to this amount is B: $65,345. Therefore, B is not the correct answer. The correct amount is higher than what is offered in the options, but the closest option to it is B.

Question 3

Morton Inc. is a Kansas corporation engaged exclusively in domestic manufacturing. In 2012, it earned $500,000 of qualified production income, which also equals its taxable income before the domestic manufacturing deduction. It paid compensation of $200,000 to its workforce. Calculate Morton's 2012 domestic production activities deduction and taxable income:

Accepted Answer

The domestic production activities deduction is equal to 9% of Morton's qualified production income ($500,000 x 9% = $45,000). To calculate taxable income, the deduction is subtracted from the taxable income before the deduction ($500,000 - $45,000 = $455,000). Therefore, Choice A is correct.

Question 4

Alexus Inc.'s alternative minimum taxable income before any AMT exemption is $210,000. Compute the corporation's AMT exemption:

Accepted Answer

The answer of Alexus Inc.'s alternative minimum taxable income before...

Question 5

Loraine Manufacturing, Inc. reported the following for the current tax year:  What is Loraine Manufacturing's alternative minimum taxable income before any AMT exemption?

Accepted Answer

Loraine Manufacturing's alternative minimum taxable income can be calculated by adding back certain tax preferences and adjustments to their regular taxable income. Therefore, starting with their regular taxable income of $97,000, we add back $25,000 for depreciation adjustments, $2,000 for the adjustment for the spread on incentive stock options, and $6,000 for tax-exempt interest on private activity bonds. This gives us an AMT taxable income of $130,000, which is the answer choice C.

Question 6

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2012, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its allowable 2012 domestic production activities deduction is:

Accepted Answer

The domestic production activities deduction is 9% of the lesser of qualified production activities income or taxable income before the deduction. The qualified production activities income is $2 million, and the taxable income before the deduction is $2,100,000. Therefore, the domestic production activities deduction is 9% of $2 million, which is $180,000.

Question 7

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2012, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its 2012 taxable income is:

Accepted Answer

The domestic production activities deduction is calculated as 9% of the lesser of qualified production activities income ($2,000,000) or taxable income before the deduction ($2,100,000). Therefore, the deduction is 9% of $2,000,000, which is $180,000. Subtracting this from the taxable income before the deduction ($2,100,000) results in a taxable income of $1,920,000.

Question 8

Which of the following statements regarding the domestic production activities deduction is false?

Accepted Answer

Statement D is false. While the domestic production activities deduction (DPAD) was originally created as an incentive for manufacturers, it has since expanded to include various domestic production activities such as construction, engineering, architecture, software development, and more. However, there are still limitations and qualifications that must be met in order to claim the deduction.

Question 9

Which of the following could cause a corporation's alternative minimum taxable income to be lower than regular taxable income?

Accepted Answer

The answer of Which of the following could cause a...

Question 10

Honu, Inc. has book income of $1,200,000. Book income includes $620,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of meals and entertainment expense. Based only on these items, compute Honu's taxable income.

Accepted Answer

Starting with book income of $1,200,000, we need to make adjustments for tax purposes.

First, we add back the income tax expense of $620,000 since this is a non-deductible expense for tax purposes.

$1,200,000 + $620,000 = $1,820,000

Next, we subtract out any tax-exempt income, which in this case is the $10,000 of municipal bond interest income.

$1,820,000 - $10,000 = $1,810,000

Finally, we must disallow any meals and entertainment expense that is greater than 50% deductible, which in this case is $75,000 (50% of $150,000).

$1,810,000 - $75,000 = $1,735,000

Therefore, Honu's taxable income is $1,735,000, which is closest to answer choice D: $1,885,000.

Question 11

John's, Inc. manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000?

Accepted Answer

The answer of John's, Inc. manufactures and sells fine furniture....

Question 12

Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability is $450,000. No estimated tax payments have been made. Which of the following statements is true?

Accepted Answer

The answer of Borough, Inc. is entitled to a rehabilitation...

Question 13

Slipper Corporation has book income of $500,000. Book income includes a $50,000 gain on the sale of equipment. The equipment originally cost $110,000 and was sold for $75,000. Accumulated book depreciation was $85,000; accumulated MACRS deprecation was $90,000. Based only on these items, compute Slipper's taxable income.

Accepted Answer

The answer of Slipper Corporation has book income of $500,000....

Question 14

Lexington Associates, Inc. is a personal service corporation. This year, Lexington reported $75,000 of taxable income. Which of the following statements regarding Lexington's regular tax liability is true?

Accepted Answer

Personal service corporations are subject to a flat tax rate of 21% on their taxable income, regardless of the amount. This is higher than the regular corporate tax rates, which range from 15% to 35% depending on the level of taxable income. Therefore, Lexington's regular tax liability will be greater than it would have been if it were not a personal service corporation.

Question 15

Which of the following statements regarding Schedule M-1 is true?

Accepted Answer

Schedule M-1 is used by corporations to reconcile financial accounting income to taxable income reported on the tax return. Line 8 pertains to the domestic production activities deduction, Line 2 pertains to the difference between book income and taxable income, and Line 1 pertains to income items not included on the tax return. Nondeductible fines and penalties are reported on Line 5. Therefore, option B is the correct statement.

Question 16

Which of the following statements about the calculation of alternative minimum taxable income is true?

Accepted Answer

The answer of Which of the following statements about the...

Question 17

WEK Inc. is a New York corporation with manufacturing operations in the United States and in 12 foreign countries. This year, its taxable income from domestic manufacturing was $1,239,000, and its taxable income from foreign manufacturing was $1,773,000. WEK had no other sources of taxable income. WEK paid $487,000 compensation to its U.S. workers and $599,200 compensation to its foreign workers. Compute WEK's taxable income.

Accepted Answer

To compute WEK's taxable income, we need to add its taxable income from domestic manufacturing and foreign manufacturing and deduct the total compensation paid to workers in the United States and foreign countries.

Taxable income = ($1,239,000 + $1,773,000) - ($487,000 + $599,200) = $2,900,490

Therefore, the correct answer is choice C.

Question 18

Silver Bullet Inc. reported the following for its current tax year:  Compute Silver Bullet's total income tax liability.

Accepted Answer

The answer of Silver Bullet Inc. reported the following for...

Question 19

Sunny Vale Co. reported the following for the current tax year:  Compute Sunny Vale's total income tax liability.

Accepted Answer

To calculate Sunny Vale's total income tax liability, we need to add up the federal and state income taxes.

Federal income tax: 
Sunny Vale's taxable income is $112,000 ($400,000 - $150,000 - $138,000). The federal tax rate for this amount is 24%, so the federal income tax is:

$112,000 * 0.24 = $26,880

State income tax: 
Sunny Vale operates in California, which has a state tax rate of 8.84%. To calculate the state income tax, we first need to calculate the adjusted gross income (AGI).

AGI = Total revenue - Cost of goods sold - Operating expenses - Depreciation - Interest expense 
AGI = $400,000 - $150,000 - $138,000 - $20,000 - $12,000 
AGI = $80,000

The state income tax is then:

$80,000 * 0.0884 = $7,072

Adding the federal and state income taxes together:

$26,880 + $7,072 = $33,952

Therefore, the correct answer is (C) $24,200.

Question 20

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of equipment. Based only on these items, compute Airfreight's taxable income.

Accepted Answer

The $25,000 gain from the like-kind exchange of equipment is not taxable, so it is excluded from taxable income. Therefore, Airfreight's taxable income is $370,000 - $25,000 = $345,000.

Quiz 11: The Corporate Taxpayer