Question 1

Which of the following statements is incorrect regarding the taxation of C corporations for tax years beginning after 2017?
A) NOLs are subject to a 2 year carryback and 20 year carryforward period.
B) Taxable income of a personal service corporation is taxed at a flat rate of 21%.
C) A tax return must be filed whether or not the corporation has taxable income.
D) The alternative minimum tax does not apply.
E) None of the above.

Accepted Answer

NOLs for tax years beginning after 2017 are subject to a 5 year carryforward period only, not a 2 year carryback and 20 year carryforward period.

Question 2

Which of the following statements is incorrect regarding the dividends received deduction?
A) A corporation must hold stock for more than 90 days in order to qualify for a deduction with respect to dividends on such stock.
B) The taxable income limitation does not apply with respect to the 100% deduction available to members of an affiliated group.
C) If a stock purchase is financed 75% by debt, the deduction for dividends on such stock is reduced by 75%.
D) The taxable income limitation does not apply if the normal deduction (i.e., 50% or 65% of dividends) results in a net operating loss for the corporation.
E) None of the above.

Accepted Answer

A corporation must hold stock for more than 45 days, not 90 days, to qualify for the dividends received deduction.

Question 3

In the current year, Red Corporation (a calendar year C corporation), which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct?
A) Red owns 80% of Blue Corporation.
B) Red owns 20% or more, but less than 80% of Blue Corporation.
C) Red owns 80% or more of Blue Corporation.
D) Red owns less than 20% of Blue Corporation.
E) None of the above.

Accepted Answer

Red's dividends received deduction of $20,000 on a $40,000 dividend indicates a 50% deduction, which applies when ownership is less than 20%.

Question 4

During the current year, Jay Corporation, a calendar year personal service C corporation, had operating income of income of $300,000, operating expenses of $200,000, a short-term capital gain of $5,000, and a long-term capital loss of $35,000. How much is Jay's income tax liability for the year?
A) $14,700.
B) $21,000.
C) $22,250.
D) $35,000.
E) None of the above.

Accepted Answer

Jay Corporation's taxable income is $100,000 ($300,000 operating income - $200,000 operating expenses + $5,000 short-term capital gain - $35,000 long-term capital loss, which is not deductible against ordinary income). The corporate tax rate is 21%, so the tax liability is $21,000 ($100,000 * 21%).

Question 5

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?
A) Eduardo must report $80,000 of income on his return.
B) Luis must report $80,000 of income on his return.
C) Eduardo's proprietorship is not required to pay income tax on $80,000.
D) Luis's corporation must pay income tax on $80,000.
E) None of the above.

Accepted Answer

The answer of Luis is the sole shareholder of a...

Question 6

Eagle Corporation, a calendar year C corporation, owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In the current year, Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?
A) $0
B) $50,000
C) $65,000
D) $84,500
E) None of the above

Accepted Answer

The answer of Eagle Corporation, a calendar year C corporation,...

Question 7

Opal Corporation, an accrual method, calendar year taxpayer, was formed and began operations on July 1, 2018. The following expenses were incurred during the first tax year (July 1 through December 31, 2018) of operations.  Assuming a § 248 election, what is Opal's deduction for organizational expenditures for 2018?
A) $593.
B) $460.
C) $5,427.
D) $5,627.
E) None of the above.

Accepted Answer

Opal can elect to amortize up to $5,000 of its organizational expenditures and must reduce the $5,000 limitation by the amount of organizational expenditures in excess of $50,000. In this case, Opal incurred $8,427 ($4,000 + $4,500 + $927) of organizational expenditures during 2018. Therefore, its $5,000 limitation is reduced by $3,427 ($8,427 – $5,000). Opal can deduct $593 of the $3,427 in 2018, and it must amortize the remaining $2,834 over a 180-month period beginning in 2019. Thus, Opal's total deduction for organizational expenditures for 2018 is $5,427 ($593 + $4,834).

Question 8

Rodney, the sole shareholder of Orange Corporation, an accrual method, calendar year corporation, loaned the corporation a substantial amount of money on January 1, 2018. Orange Corporation accrued $45,000 of interest expense on the loan on December 31, 2018. Orange pays the interest to Rodney, a cash basis taxpayer, on January 1, 2019. Based on these facts:
A) Orange Corporation will be allowed to deduct the interest expense in 2018 and Rodney will be required to report the interest income in 2019.
B) Orange Corporation will be allowed to deduct the interest expense in 2019 and Rodney will be required to report the interest income in 2018.
C) Orange Corporation will be allowed to deduct the interest expense in 2018and Rodney will be required to report the interest income in 2018.
D) Orange Corporation will be allowed to deduct the interest expense in 2019 and Rodney will be required to report the interest income in 2019.
E) None of the above.

Accepted Answer

The answer of Rodney, the sole shareholder of Orange Corporation,...

Question 9

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is a subtraction on Schedule M-1?
A) Book depreciation in excess of tax depreciation.
B) Excess of capital losses over capital gains.
C) Proceeds on key employee life insurance.
D) Income subject to tax but not recorded on the books.
E) None of the above.

Accepted Answer

Proceeds on key employee life insurance are typically not taxable and thus would be subtracted from book income to reconcile to taxable income on Schedule M-1.

Question 10

Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket irrespective of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)
A) $40,295
B) $54,995
C) $63,325
D) $64,396
E) None of the above

Accepted Answer

The answer of Nancy Smith is the sole shareholder and...

Question 11

Orange Corporation, a calendar year C corporation, owns stock in White Corporation and has net operating income of $400,000 for the current year. White Corporation pays Orange a dividend of $60,000. What amount of dividends received deduction may Orange claim if it owns 45% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?
A) $30,000
B) $39,000
C) $42,000
D) $60,000
E) None of the above

Accepted Answer

The dividends received deduction for a C corporation that owns between 20% and 80% of another corporation's stock is 70% of the dividend received. Therefore, Orange Corporation's dividends received deduction is $42,000 ($60,000 x 70%).

Question 12

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2018. The following expenses were incurred during the first tax year (April 1 through December 31, 2018) of operations.  Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2018?
A) $0
B) $4,550
C) $5,000
D) $7,400
E) None of the above

Accepted Answer

The answer of Emerald Corporation, a calendar year C corporation,...

Question 13

In working with Schedule M-2 (analysis of unappropriated retained earnings per books) of Form 1120, which of the following is an addition to beginning retained earnings?
A) Cash dividends.
B) Net loss per books.
C) Property dividends.
D) Net income per books.
E) None of the above.

Accepted Answer

Net income per books is an addition to beginning retained earnings as it increases the overall amount of retained earnings. Cash dividends and property dividends are both distributions of earnings to shareholders and decrease the amount of retained earnings, while a net loss per books decreases beginning retained earnings. Therefore, the correct choice is option D.

Question 14

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow's income tax liability for the year?
A) $32,700
B) $33,600
C) $45,650
D) $62,400
E) None of the above

Accepted Answer

Sparrow's taxable income is $160,000 ($425,000 - $280,000 + $25,000 - $10,000). The corporate tax rate is 21%, so the tax liability is $33,600 (21% of $160,000).

Question 15

In the current year, Crimson, Inc., a calendar C corporation, has income from operations of $180,000 and operating deductions of $225,000. Crimson also had $30,000 of dividends from a 15% stock ownership in a domestic corporation. Which of the following statements is correct with respect to Crimson for the current year?
A) Crimson's NOL is $15,000.
B) A dividends received deduction is not allowed in computing Crimson's NOL.
C) The NOL is carried back 3 years and forward 10 years by Crimson.
D) Crimson's dividends received deduction is $15,000.
E) None of the above.

Accepted Answer

Crimson's dividends received deduction is 50% of the $30,000 dividends received, which is $15,000, because they own less than 20% of the domestic corporation.

Question 16

Copper Corporation, a calendar year C corporation, owns stock in Bronze Corporation and has net operating income of $900,000 for the current year. Bronze Corporation pays Copper a dividend of $150,000. What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income)?
A) $75,000
B) $97,500
C) $120,000
D) $150,000
E) None of the above

Accepted Answer

Copper Corporation can claim a dividends received deduction of 100% of the dividend amount because it owns 85% of Bronze Corporation, which qualifies for the 100% deduction under the tax code for ownership of 80% or more.

Question 17

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is an addition on Schedule M-1?
A) Tax depreciation in excess of book depreciation.
B) Proceeds of life insurance paid on death of key employee.
C) Excess of capital losses over capital gains.
D) Tax-exempt interest.
E) None of the above.

Accepted Answer

Excess of capital losses over capital gains is an addition on Schedule M-1 because it is a deduction for book purposes but not for tax purposes, thus it needs to be added back to reconcile to taxable income.

Question 18

Robin Corporation, a calendar year C corporation, had taxable income of $700,000, $1.2 million, and $1 million for 2016, 2017, and 2018, respectively. Robin has taxable income of $1.8 million for 2018. The minimum 2019 estimated tax installment payments for Robin are:
A) April 15, 2019, $52,500? June 17, 2019, $52,500? September 16, 2019, $52,500? December 16, 2019, $52,500.
B) April 15, 2019, $52,500? June 17, 2019, $94,500? September 16, 2019, $94,500? December 16, 2019, $94,500.
C) April 15, 2019, $94,500? June 17, 2019, $94,500? September 16, 2019, $94,500? December 16, 2019, $94,500.
D) April 15, 2019, $52,500? June 17, 2019, $136,500? September 16, 2019, $94,500? December 16, 2019, $94,500.
E) None of the above.

Accepted Answer

The answer of Robin Corporation, a calendar year C corporation,...

Question 19

Which of the following statements is correct regarding the taxation of C corporations?
A) Schedule M-2 is used to reconcile net income computed for financial accounting purposes with taxable income reported on the corporation's tax return.
B) The corporate return is filed on Form 1120S.
C) Corporations can receive an automatic extension of nine months for filing the corporate return by filing Form 7004 by the due date for the return.
D) A corporation with total assets of $7.5 million or more is required to file Schedule M-3.
E) None of the above.

Accepted Answer

The answer of Which of the following statements is correct...

Question 20

For tax years ending after 2017, which of the following statements is incorrect with respect to the treatment of a net operating loss by a calendar year C corporation?
A) The deduction for any carryover year of the NOL is limited to 80% of taxable income (determined without regard to the NOL deduction).
B) A corporation may claim a dividends received deduction in computing an NOL.
C) An NOL is generally carried back 2 years and forward 20 years.
D) Unlike individuals, corporations do not adjust their NOLs for net capital losses or nonbusiness deductions.
E) None of the above.

Accepted Answer

The Tax Cuts and Jobs Act of 2017 eliminated the carryback of NOLs for most taxpayers and allowed indefinite carryforward, with the deduction limited to 80% of taxable income.

Quiz 17: Corporations: Introduction and Operating Rules

Which of the following statements is incorrect regarding the taxation of C corporations for tax years beginning after 2017?

Which of the following statements is incorrect regarding the dividends received deduction?

In the current year, Red Corporation (a calendar year C corporation) , which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct?

During the current year, Jay Corporation, a calendar year personal service C corporation, had operating income of income of $300,000, operating expenses of $200,000, a short-term capital gain of $5,000, and a long-term capital loss of $35,000. How much is Jay's income tax liability for the year?

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is a subtraction on Schedule M-1?

In working with Schedule M-2 (analysis of unappropriated retained earnings per books) of Form 1120, which of the following is an addition to beginning retained earnings?

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow's income tax liability for the year?

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is an addition on Schedule M-1?

Robin Corporation, a calendar year C corporation, had taxable income of $700,000, $1.2 million, and $1 million for 2016, 2017, and 2018, respectively. Robin has taxable income of $1.8 million for 2018. The minimum 2019 estimated tax installment payments for Robin are:

Which of the following statements is correct regarding the taxation of C corporations?

For tax years ending after 2017, which of the following statements is incorrect with respect to the treatment of a net operating loss by a calendar year C corporation?