Question 1

A corporation with no taxable income need not file a Form 1120.

Accepted Answer

No such exemption exists.

Question 2

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

Accepted Answer

A personal service corporation is subject to the 35% rate on all taxable income; thus,the tax liability is $35,000.

Question 3

No dividends received deduction is allowed unless the corporation has held the stock for more than 60 days.

Accepted Answer

The corporation must hold the stock for more than 45 days in order to qualify for the dividends received deduction.

Question 4

Ed,an individual,incorporates two separate businesses that he owns by establishing two new corporations.Each corporation generates taxable income of $50,000.Each corporation will have a tax liability of $7,500.

Accepted Answer

Since the corporations would be a controlled group,their taxable income would be combined in applying the corporate income tax rates.The tax on $100,000 would be $22,250,or $11,125 tax for each corporation.

Question 5

Macayo,Inc.,received $800,000 life insurance proceeds on the death of its president.The $800,000 will be an addition item on Macayo's Schedule M-1.

Accepted Answer

The $800,000 is treated as a subtraction.

Question 6

On April 8,2008,Oriole Corporation donated a painting worth $150,000 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 $75,000.Oriole's charitable contribution deduction is $150,000 (ignoring the taxable income limitation).

Accepted Answer

The painting is capital gain property which the museum puts to a use that is related to its exempt function. Thus,the amount of the deduction is equal to the fair market value of the painting,or $150,000.

Question 7

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.

Question 8

Bass Corporation received a dividend of $80,000 from Trout Corporation.Bass owns 15% of the Trout Corporation stock.Assuming it is not subject to the taxable income limitation,Bass's dividends received deduction is $64,000.

Accepted Answer

The deduction percentage for less than 20% ownership is 70%.The dividends received deduction would be $56,000 ($80,000 F1F1F1S1F1F1F10 70%).

Question 9

Zircon Corporation donated scientific property worth $350,000 to City University (a qualified charitable organization)to be used in research.The basis of the property was $100,000,and Zircon had held it for ten months as inventory.Zircon Corporation may deduct $225,000 as a charitable contribution (ignoring the taxable income limitation).

Accepted Answer

The scientific property is ordinary income property but it qualifies for the increased deduction amount available for certain corporate contributions of inventory. As such,the amount of the deduction is equal to the lesser of (1)the sum of inventory's basis plus 50% of the appreciation on the property [$225,000 = $100,000 + 50%($350,000 - $100,000)] or (2)twice the basis [$200,000 = $100,000 × 2]. In this case,the ceiling applies,and the deduction amount is $200,000.

Question 10

Aqua,Inc.,paid $15,000 interest on a loan to purchase tax-exempt bonds.The $15,000 is a subtraction on Aqua's Schedule M-1.

Accepted Answer

The interest is deductible for book purposes but not for tax purposes; thus,an addition on Schecule M-1 is required.

Question 11

For a corporation,the domestic production activities deduction is equal to 6% of the lower of (1)qualified production activities income or (2)taxable income. However,the deduction cannot exceed the W-2 wages related to qualified production activities income.

Accepted Answer

The deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

Question 12

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.

Accepted Answer

A net short-term capital loss is entered as an addition on Schedule M-1.The loss is deductible for book purposes but not for tax purposes.Therefore,the $5,000 capital loss must be added in reconciling from book income to taxable income.

Question 13

A cash basis corporation that incurs (but does not pay)qualifying organizational expenditures in its first year of operations may include such expenses in the 180-month amortization period.

Accepted Answer

As long as they are incurred,such expenses do not have to be paid in the first year.

Question 14

Egret Corporation,a calendar year taxpayer,had an excess charitable contribution for 2007 of $10,000.In 2008,it made a further charitable contribution of $14,000.Its 2008 deduction is limited to $16,000.In applying the 10% limitation,the $10,000 carryover must be used after the current year contribution.

Accepted Answer

The current (2008)contribution must be used first and the carryover (2007)used last.

Question 15

On December 30,2008,Debbie,a sole proprietor,pledged to make a $10,000 charitable contribution on or before January 15,2009.Green Corporation,an accrual basis corporation,made a similar pledge on the same date,and the contribution was authorized by Green's board of directors.Debbie and Green Corporation,both calendar year taxpayers,can deduct these contributions in 2008.

Accepted Answer

Individuals cannot deduct contributions until they are actually made.Therefore,Debbie must wait until 2009 to deduct the contribution,assuming she honors the pledge.Green Corporation,whose board of directors authorized the contribution in 2008,can deduct the contribution in 2008,assuming the pledge is paid on or before March 15,2008.

Question 16

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 indeed used to reconcile net income for financial accounting purposes with taxable income reported on the corporation's income tax return. This helps to ensure that the corporation is accurately reporting its income in both contexts.

Question 17

A corporation that is not required to file Schedule M-3 is permitted to file a Schedule M-3 voluntarily.

Accepted Answer

A corporation may file Schedule M-3 even if it is not required to file the schedule.

Question 18

Bluebird Corporation received a $200,000 dividend from Canary Corporation.Bluebird,which owns 80% of Canary Corporation,may take a dividends received deduction of $200,000.

Accepted Answer

The allowable dividends received deduction for a corporation that owns 80% or more of the dividend-paying corporation is 100%.Therefore,Bluebird can take a dividends received deduction of $200,000.

Question 19

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. Schedule M-1 is used to reconcile the differences between net income per books and taxable income. If certain income is included in net income per books but not included in taxable income, it is subtracted on Schedule M-1 to reconcile the two amounts.

Question 20

A corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years.

Accepted Answer

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

Quiz 2: Corporations: Introduction and Operating Rules