Question 1

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.

Accepted Answer

This is correct. Schedule M-1 is used to reconcile the company's net income per books to its taxable income. If an expense is deducted in computing net income per books but not deductible in computing taxable income, it would be added back as an addition item on Schedule M-1.

Question 2

Generally,corporations with no taxable income must file a Form 1120.

Accepted Answer

This is true according to the IRS guidelines. Even if a corporation has no taxable income, it still needs to file a tax return using Form 1120, as it is required by law.

Question 3

Peach Corporation had $210,000 of active income,$45,000 of portfolio income,and a $230,000 passive loss during the 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

Peach Corporation can deduct $210,000 of the passive loss in the year because it is a closely held C corporation that is not a PSC.

Question 4

Bass Corporation received a dividend of $100,000 from Trout Corporation.Bass owns 25% of the Trout Corporation stock.Assuming it is not subject to the taxable income limitation,Bass's dividends received deduction is $80,000.

Accepted Answer

Since Bass owns 25% of Trout Corporation's stock, it is eligible for a dividends received deduction of 70% of the dividend received, which in this case is $70,000 ($100,000 x 0.70). Since this amount is less than the $80,000 deduction limit, Bass's dividends received deduction is limited to $70,000. Therefore, the statement that Bass's dividends received deduction is $80,000 is false.

Question 5

On April 8,2010,Oriole Corporation donated a painting worth $75,000 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 $25,000.Oriole's charitable contribution deduction is $25,000 (ignoring the taxable income limitation).

Accepted Answer

The charitable deduction for donated property is generally equal to the property's fair market value, which in this case is $75,000. The fact that Oriole Corporation purchased the painting for $25,000 five years ago is irrelevant for determining the charitable contribution deduction.

Question 6

For purposes of the estimated tax payment rules,a "large corporation" is defined as a corporation that had an average taxable income of $1 million or more over the preceding three-year period.

Accepted Answer

The answer of For purposes of the estimated tax payment...

Question 7

No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days.

Accepted Answer

This statement is true. In order for a corporation to claim a dividends received deduction, they must have held the stock for more than 45 days. This is to prevent corporations from buying and selling stock solely for the purpose of receiving tax benefits on dividends.

Question 8

Generally,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 true according to the U.S. tax code. Corporations may carry back their net operating losses up to 2 years and forward up to 20 years to reduce taxable income in those years.

Question 9

A personal service corporation with taxable income of $150,000 will have a tax liability of $52,500.

Accepted Answer

A personal service corporation is taxed at a flat rate of 35% on its taxable income. Therefore, $150,000 x 35% = $52,500.

Question 10

Ed,an individual,incorporates two separate businesses that he owns by establishing two new corporations.Each corporation generates taxable income of $90,000.Each corporation will have a tax liability of $26,725.

Accepted Answer

Ed's tax liability will be $53,450 ($26,725 x 2), which is less than the $58,500 he would have paid if the businesses were not incorporated.

Question 11

On December 20,2010,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 15,2011,may be claimed as a deduction for tax year 2010.

Accepted Answer

According to IRS regulations, a donation made in the following year cannot be claimed as a deduction for the previous year's taxes. As the payment is made on April 15, 2011, it cannot be claimed as a deduction for tax year 2010.

Question 12

Egret Corporation,a calendar year C corporation,had an excess charitable contribution for 2009 of $15,000.In 2010,it made a further charitable contribution of $20,000.Its 2010 deduction is limited to $25,000 (10% of taxable income).In applying the 10% limitation,the $15,000 carryover is used before the current year contribution.

Accepted Answer

The answer of Egret Corporation,a calendar year C corporation,had an...

Question 13

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

Accepted Answer

The answer of Income that is included in net income...

Question 14

Zircon Corporation donated scientific property worth $300,000 to City University (a qualified charitable organization)to be used in research.The basis of the property was $140,000,and Zircon had held it for ten months as inventory.Zircon Corporation may deduct $220,000 as a charitable contribution (ignoring the taxable income limitation).

Accepted Answer

The deductible amount for a charitable contribution of inventory is limited to its fair market value, not its basis. In this case, the fair market value is $300,000, so Zircon can deduct that amount as a charitable contribution. The fact that it was held as inventory for ten months does not affect the deduction.

Question 15

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

Accepted Answer

Life insurance proceeds received by a company are generally considered non-taxable income and therefore a subtraction item on the Schedule M-1.

Question 16

Schedule M-1 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-1 is used to reconcile taxable income with accounting income, not retained earnings.

Question 17

A corporation may elect to amortize startup expenditures over the 60-month period beginning with the month in which the corporation begins business.

Accepted Answer

The answer of A corporation may elect to amortize startup...

Question 18

The dividends received deduction may be subject to a limitation based on a percentage of taxable income computed without regard to the NOL deduction,the domestic production activities deduction,the dividends received deduction,and any capital loss carryback to the current tax year.

Accepted Answer

The statement is true. The dividends received deduction is subject to a limitation based on a percentage of taxable income computed without regard to certain deductions and carrybacks.

Question 19

Black Corporation,an accrual basis taxpayer,was formed and began operations on February 1,2010.During its first year of operations (February 1 - December 31,2010),Black incurred the following expenses: fee paid to state of incorporation of $1,000,accounting and legal services incident to organization of $7,000,and expenses related to the printing and sale of stock certificates of $9,000.Black has $17,000 of qualified organizational expenditures that it may elect to amortize.

Accepted Answer

The expenses related to the printing and sale of stock certificates are not considered organizational expenditures and should not be included in the $17,000 total.

Question 20

For a corporation in 2010,the domestic production activities deduction is equal to 9% of the lower 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

This statement is true according to the tax laws in place in 2010. The domestic production activities deduction was calculated as mentioned in the statement.

Quiz 17: Corporations: Introduction and Operating Rules