Question 1

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 2

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

Accepted Answer

The tax liability of a personal service corporation with taxable income of $100,000 is not a fixed amount and can vary depending on a variety of factors such as deductions, credits, and the tax rate schedule in effect. The tax liability could be higher or lower than $22,250.

Question 3

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 4

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2013 of $5,000. In 2014, Heron made a further charitable contribution of $20,000. Heron's 2014 deduction is limited to $15,000 (10% of taxable income). The 2014 contribution must be applied first against the $15,000 limitation.

Accepted Answer

The deduction for charitable contributions in a given year is limited to a percentage of the corporation's taxable income. Any excess charitable contributions can be carried forward and deducted in future years. In this scenario, Heron Corporation had an excess charitable contribution in 2013, meaning it could not fully deduct the entire amount in that year. When the corporation made an additional contribution in 2014, the deduction was limited to 10% of taxable income, which was $15,000. Therefore, the 2014 contribution of $20,000 must be applied first against the $15,000 limitation, so only $5,000 can be carried forward to future years.

Question 5

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 6

Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2014. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2014): 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

The total organizational expenses incurred by Hornbill Corporation during its first year of operations are $24,200 ($10,500 + $5,000 + $1,200 + $7,500). However, only $5,800 of these expenses are deductible as organizational expenditures in the current year. The remaining $18,400 must be capitalized and amortized over a period of 180 months (15 years) beginning with the month that Hornbill Corporation began business.

Question 7

On December 19, 2014, 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 10, 2015, may be claimed as a deduction for tax year 2014.

Accepted Answer

The answer of On December 19, 2014, the directors of...

Question 8

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 for reconciling net income for financial accounting purposes with taxable income reported on the corporation's income tax return.

Question 9

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...

Question 10

Peach Corporation had $210,000 of 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

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

Question 11

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 12

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 13

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

Each corporation will have a Federal tax liability of $11,125 based on the current corporate tax rate of 21% on taxable income over $50,000.

Question 14

For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

Accepted Answer

This is the correct definition of a "large corporation" for purposes of estimated tax payments.

Question 15

On December 31, 2014, 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, 2015. For Flamingo's 2014 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

Accepted Answer

The bonus is not deductible in 2014 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. It is deductible in the year it is paid, 2015.

Question 16

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

When a taxpayer donates a property with a fair market value greater than their basis in the property, they can take a charitable deduction for the full fair market value of the property. In this case, Oriole Corporation donated a painting with a fair market value of $30,000, which is greater than their basis in the painting of $10,000. Therefore, they can take a charitable contribution deduction of $30,000.

Question 17

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,...

Question 18

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

Accepted Answer

All corporations are required to file a Federal income tax return, regardless of whether or not they have taxable income for the year.

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

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 true according to current tax laws in the United States.

Quiz 2: Corporations: Introduction and Operating Rules