Question 1

In the current year, Amber, Inc., a calendar C corporation, has income from operations of $200,000 and operating deductions of $225,000. Amber also had $30,000 of dividends from a 25% stock ownership in a domestic corporation. Which of the following statements is incorrect with respect to Amber's net operating loss deduction?
A)The NOL is carried back 3 years and forward 10 years by Amber.
B)Amber's NOL is $19,000.
C)A dividends received deduction is allowed in computing Amber's NOL.
D)Amber can elect to forgo the carryback period and only carry forward the NOL.
E)None of the above.

Accepted Answer

The answer of In the current year, Amber, Inc., a...

Question 2

Eagle Corporation owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction.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 25% of Hawk's stock?
A)$0.
B)$80,000.
C)$100,000.
D)$104,000.
E)None of the above.

Accepted Answer

The dividends received deduction is calculated as a percentage of the dividend income received from other corporations. The deduction percentage is dependent on the percentage of ownership in the distributing corporation. In this case, Eagle Corporation owns 25% of Hawk Corporation.
The maximum percentage for a 20% or greater ownership is 65%, which means that Eagle can claim a deduction of 65% of the $130,000 dividend received. 
Therefore, the dividends received deduction that Eagle Corporation can claim is $84,500 (65% x $130,000). 
However, the deduction cannot exceed Eagle's taxable income before the deduction, which is $100,000. Therefore, the maximum deduction Eagle can claim is $100,000, and the answer is D ($104,000 is incorrect because it exceeds Eagle's taxable income).

Question 3

In the current year, Plum Corporation, a computer manufacturer, donated 100 laptop computers to a local school district (a qualified educational organization). The computers were constructed by Plum earlier this year, and the school district allocated the computers among its various schools where they will be used for educational purposes. Plum's basis in the computers is $50,000, and their fair market value is $120,000. What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation)?
A)$0.
B)$50,000.
C)$85,000.
D)$100,000.
E)$120,000.

Accepted Answer

For contributions of inventory to a qualified educational organization, the deduction is the lesser of the fair market value or the sum of the basis plus half the appreciation. Here, $50,000 (basis) + $35,000 (half of $70,000 appreciation) = $85,000.

Question 4

Erin Corporation, a personal service corporation, had $230,000 of active income, $40,000 of portfolio income, and a $250,000 passive loss during the year. How much is Erin's taxable income?
A)$20,000.
B)$40,000.
C)$270,000.
D)$520,000.
E)None of the above.

Accepted Answer

Erin Corporation's taxable income will be calculated by deducting passive losses from active income.

Taxable income = Active income - Passive loss 
Taxable income = $230,000 - $250,000 
Taxable income = -$20,000

However, since Erin Corporation is a personal service corporation, it is not allowed to offset its active income with passive losses. Therefore, Erin Corporation's taxable income will be its active income plus its portfolio income.

Taxable income = Active income + Portfolio income 
Taxable income = $230,000 + $40,000 
Taxable income = $270,000

Therefore, the correct answer is C) $270,000.

Question 5

Which of the following statements is correct regarding the taxation of C corporations?
A)Schedule M-2 is used to reconcile net income as 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 6

During 2012, 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 tax liability for 2012?
A)$42,650.
B)$42,800.
C)$45,650.
D)$62,400.
E)None of the above.

Accepted Answer

The answer of During 2012, Sparrow Corporation, a calendar year...

Question 7

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., 70% or 80% of dividends) results in a net operating loss for the corporation.
E)None of the above.

Accepted Answer

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

Question 8

Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the 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)$97,500.
B)$105,000.
C)$120,000.
D)$150,000.
E)None of the above.

Accepted Answer

The answer of Copper Corporation owns stock in Bronze Corporation...

Question 9

Red 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 $28,000.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

The answer of Red Corporation, which owns stock in Blue...

Question 10

Grebe Corporation, a closely held corporation that is not a PSC, had $75,000 of active income, $60,000 of portfolio income, and a $105,000 passive loss during the year. How much of the passive loss can Grebe deduct in the current year?
A)$0.
B)$60,000.
C)$105,000.
D)$135,000.
E)None of the above.

Accepted Answer

The answer of Grebe Corporation, a closely held corporation that...

Question 11

Hippo, Inc., a calendar year C corporation, manufactures golf gloves.For 2012, Hippo had taxable income (before DPAD) of $900,000, qualified domestic production activities income of $750,000, and W-2 wages related to qualified production activities income of $140,000.Hippo's domestic production activities deduction for 2012 is:
A)$0.
B)$12,600.
C)$67,500.
D)$70,000.
E)None of the above.

Accepted Answer

The domestic production activities deduction (DPAD) is calculated as 9% of the lesser of:
- Qualified production activities income (QPAI)
- Taxable income before DPAD

In this case, Hippo's QPAI is $750,000 and their taxable income before DPAD is $900,000. Therefore, the lesser amount is $750,000, and 9% of that is $67,500. However, there is a limitation on the DPAD based on W-2 wages related to qualified production activities income. The limitation is 50% of W-2 wages, which in this case is $70,000 ($140,000 x 50%). Since the calculated DPAD ($67,500) is less than the limitation ($70,000), Hippo's DPAD for 2012 is $67,500.

Therefore, the answer is C.

Question 12

During the current year, Owl Corporation (a C corporation), a retailer of children's apparel, made the following donations to qualified charitable organizations.  How much qualifies for the charitable contribution deduction?
A)$63,000.
B)$65,000.
C)$90,500.
D)$92,500.
E)None of the above.

Accepted Answer

The answer of During the current year, Owl Corporation (a...

Question 13

During the current year, Kingbird Corporation (a calendar year C corporation) had the following income and expenses:  On October 1, Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash (not included in any of the above items). Determine Kingbird's charitable contribution deduction for the current year.
A)$9,000.
B)$7,500.
C)$6,650.
D)$6,450.
E)None of the above.

Accepted Answer

The maximum deductible charitable contribution for a corporation is generally limited to 10% of its taxable income. In this case, Kingbird Corporation's taxable income is $75,000 ($100,000 gross income minus $25,000 deductions), therefore the maximum deductible charitable contribution is $7,500 (10% of $75,000). Even though Kingbird Corporation made a cash contribution of $9,000, it can only deduct $7,500 as a charitable contribution for the current year.

Question 14

Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?
A)A corporation may elect to forgo the carryback period and just carryforward an NOL.
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 answer of Which of the following statements is incorrect...

Question 15

Which of the following statements is incorrect regarding the taxation of C corporations?
A)Similar to those applicable to individuals, the marginal tax rate brackets for corporations are adjusted for inflation.
B)Taxable income of a personal service corporation is taxed at a flat rate of 35%.
C)A tax return must be filed whether or not the corporation has taxable income.
D)The highest corporate marginal tax rate is 39%.
E)None of the above.

Accepted Answer

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

Question 16

George Judson is the sole shareholder and employee of Black Corporation, a C corporation that is engaged exclusively in engineering services. During the year, Black has gross revenues of $420,000 and operating expenses (excluding salary) of $200,000. Further, Black Corporation pays George a salary of $190,000. The salary is reasonable in amount and George is in the 35% marginal tax bracket irrespective of any income from Black. Assuming that Black Corporation distributes all after-tax income as dividends, how much total combined income tax do Black and George pay in the current year? (Ignore any employment tax considerations.)
A)$66,675.
B)$79,925.
C)$83,325.
D)$87,500.
E)None of the above.

Accepted Answer

Black Corporation's taxable income is calculated as follows:

Gross Revenues	$420,000
Operating Expenses	($200,000)
Salary Expense	($190,000)
Taxable Income	$30,000

Since Black Corporation is a C corporation, it will be subject to corporate income tax on this $30,000 of taxable income. Assuming a flat corporate tax rate of 21%, Black Corporation will pay $6,300 in income tax (0.21 x $30,000).

The remaining $23,700 of after-tax income is distributed to George as a dividend. Since George is in the 35% marginal tax bracket, he will owe $8,295 in income tax on this dividend income (0.35 x $23,700).

Therefore, the total combined income tax paid by Black Corporation and George is $6,300 + $8,295 = $14,595.

The correct answer is B) $79,925.

Question 17

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2012. The following expenses were incurred during the first tax year (April 1 through December 31, 2012) of operations:  Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2012?
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 18

During the current year, Violet, Inc., a closely held corporation (not a PSC), has $130,000 of passive loss, $90,000 of active business income, and $70,000 of portfolio income. How much is Violet's taxable income for the current year?
A)$30,000.
B)$70,000.
C)$90,000.
D)$160,000.
E)None of the above.

Accepted Answer

The answer of During the current year, Violet, Inc., a...

Question 19

Orange Corporation owns stock in White Corporation and has net operating income of $400,000 for the year.White Corporation pays Orange a dividend of $60,000.What amount of dividends received deduction may Orange claim if it owns 15% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?
A)$9,000.
B)$42,000.
C)$48,000.
D)$60,000.
E)None of the above.

Accepted Answer

The dividends received deduction for Orange Corporation would be 70% of the $60,000 dividend received from White Corporation, since Orange Corporation owns less than 20% of the White Corporation stock.

$60,000 x 0.70 = $42,000

Therefore, the answer is B, $42,000.

Question 20

Robin Corporation, a calendar year C corporation, had taxable income of $1.9 million, $1.2 million, and $900,000 for 2009, 2010, and 2011, respectively.Robin has taxable income of $1.5 million for 2012. The minimum 2012 estimated tax installment payments for Robin are:
A)April 15, 2012, $76,500; June 15, 2012, $76,500; September 15, 2012, $76,500; December 15, 2012, $76,500.
B)April 15, 2012, $110,500; June 15, 2012, $127,500; September 15, 2012, $127,500; December 15, 2012, $127,500.
C)April 15, 2012, $127,500; June 15, 2012, $127,500; September 15, 2012, $127,500; December 15, 2012, $127,500.
D)April 15, 2012, $76,500; June 15, 2012, $178,500; September 15, 2012, $127,500; December 15, 2012, $127,500.
E)None of the above.

Accepted Answer

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

Quiz 17: Corporations: Introduction and Operating Rules

Erin Corporation, a personal service corporation, had $230,000 of active income, $40,000 of portfolio income, and a $250,000 passive loss during the year. How much is Erin's taxable income?

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

During 2012, 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 tax liability for 2012?

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

Red 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 $28,000.Which of the following statements is correct?

Grebe Corporation, a closely held corporation that is not a PSC, had $75,000 of active income, $60,000 of portfolio income, and a $105,000 passive loss during the year. How much of the passive loss can Grebe deduct in the current year?

During the current year, Owl Corporation (a C corporation) , a retailer of children's apparel, made the following donations to qualified charitable organizations. How much qualifies for the charitable contribution deduction?

Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?

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

During the current year, Violet, Inc., a closely held corporation (not a PSC) , has $130,000 of passive loss, $90,000 of active business income, and $70,000 of portfolio income. How much is Violet's taxable income for the current year?

Robin Corporation, a calendar year C corporation, had taxable income of $1.9 million, $1.2 million, and $900,000 for 2009, 2010, and 2011, respectively.Robin has taxable income of $1.5 million for 2012. The minimum 2012 estimated tax installment payments for Robin are: