Question 1

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

This statement is true. Any income that is included in the company's financial records (net income per books) but not taxable under the tax laws is considered a subtraction item on Schedule M-1 of the company's tax return.

Question 2

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 5 years ago for $10,000.Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Accepted Answer

This is true as long as Oriole Corporation meets all necessary IRS requirements for a charitable contribution deduction. Deductions for charitable contributions are generally equal to the fair market value of the donated property at the time of the donation. In this case, the fair market value of the painting is $30,000, which is higher than the original purchase price of $10,000, allowing for a deduction of $30,000.

Question 3

A corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years.

Accepted Answer

This is a correct statement according to current US tax laws. A corporate net operating loss can only be carried back 2 years or carried forward for up to 20 years to offset taxable income in those years. This allows corporations to use the loss to reduce their tax liability in past or future years when they have taxable income.

Question 4

On December 16,2015,the directors of Quail Corporation (an accrual basis,calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society,a qualified charity.The payment,which is made on April 11,2016,may be claimed as a deduction for tax year 2015.

Accepted Answer

The payment was made in 2016, so it cannot be claimed as a deduction for tax year 2015. It can only be claimed for tax year 2016.

Question 5

On December 31,2015,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 2,2016.For Flamingo's 2015 Form 1120,the $50,000 bonus will be a subtraction item on Schedule M-1.

Accepted Answer

The bonus is not deductible in 2015 because it was paid to a related party (the president who owns more than 50% of the corporation) after the end of the tax year. Under the accrual method, expenses to related parties are only deductible when paid. Therefore, it would not be a subtraction item on the 2015 Schedule M-1.

Question 6

For a corporation,the domestic production activities deduction is equal to 9% of the lesser of (1) qualified production activities income or (2) taxable income.However,the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

Accepted Answer

The statement accurately describes the rules for the domestic production activities deduction for corporations.

Question 7

Heron Corporation,a calendar year C corporation,had an excess charitable contribution for 2014 of $5,000.In 2015,Heron made a further charitable contribution of $20,000.Heron's 2015 deduction is limited to $15,000 (10% of taxable income).The 2015 contribution must be applied first against the $15,000 limitation.

Accepted Answer

Charitable contributions in excess of the limitation can be carried over to the next year for up to five years. Since Heron Corporation had an excess charitable contribution in 2014, it can use this carryover to offset the excess contribution made in 2015, allowing it to deduct $20,000. Therefore, the 2015 contribution should be applied first against the carryover amount, not the limitation for the current year, as stated in answer A.

Question 8

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 $21,000.

Accepted Answer

The answer of Azul Corporation,a calendar year C corporation,received a...

Question 9

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

Accepted Answer

This is true. Even if a corporation has no taxable income for the year, it must still file a Federal income tax return to report its financial activity to the IRS.

Question 10

A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

Accepted Answer

The answer of A personal service corporation with taxable income...

Question 11

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 12

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).

Accepted Answer

The answer of Crow Corporation,a C corporation,donated scientific property (basis...

Question 13

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 14

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 used to reconcile financial accounting net income with taxable income reported on the corporation's income tax return.

Question 15

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 16

Hornbill Corporation,a cash basis and calendar year C corporation,was formed and began operations on May 1,2015.Hornbill incurred the following expenses during its first year of operations (May 1 - December 31,2015): 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.Hornbill Corporation's current year deduction for organizational expenditures is $5,800.

Accepted Answer

Organizational expenditures are deductible up to $5,000 in the year incurred and the remaining balance is amortized over 180 months.

Question 17

Ed,an individual,incorporates two separate businesses that he owns by establishing two new C corporations.Each corporation generates taxable income of $50,000.As a general rule,each corporation will have a tax liability of $11,125.

Accepted Answer

The current corporate tax rate for taxable income up to $50,000 is 21%, which would result in a tax liability of $10,500 for each corporation. Therefore, the total tax liability for both corporations would be $21,000.

Question 18

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

Accepted Answer

The dividends received deduction (DRD) is allowed even if a corporation has a net operating loss (NOL) for the current taxable year. The limitation affects the amount of DRD that can be used to reduce taxable income, not the allowance of the deduction itself.

Question 19

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

Accepted Answer

The answer of No dividends received deduction is allowed unless...

Question 20

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.

Accepted Answer

A closely held C corporation that is not a PSC can deduct up to $250,000 of passive losses against nonpassive income. Since Peach Corporation had only $210,000 of net active income, it can deduct the entire $230,000 passive loss in the current year.

Quiz 17: Corporations: Introduction and Operating Rules