Question 1

The accumulated earnings and personal holding company taxes are designed to prevent the accumulation of earnings within a corporation.

Accepted Answer

The accumulated earnings tax and personal holding company tax are both provisions in the tax code that are intended to discourage corporations from hoarding earnings and investments rather than paying them out as dividends to shareholders.

Question 2

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 3

On December 31, 2018, 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 4, 2019. For Flamingo's 2018 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

Accepted Answer

The answer of On December 31, 2018, Flamingo, Inc., a...

Question 4

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 used to reconcile the differences between financial accounting net income and taxable income reported on the corporation's tax return. It is required for all corporations filing Form 1120.

Question 5

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 6

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. Any income that is included in the company's net income per books but is not taxable (such as non-taxable interest income) must be subtracted on Schedule M-1, which reconciles the company's book income to its taxable income.

Question 7

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

Accepted Answer

The limitation on the deduction of business interest applies to all taxpayers, including noncorporate taxpayers, subject to certain exceptions and thresholds.

Question 8

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 9

Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

Accepted Answer

The statement is true. Katherine has avoided double taxation on the portion of the salary that is considered reasonable compensation, which is $210,000. The remaining $90,000, which is determined to be unreasonable compensation, will be disallowed as a deduction for the corporation and will instead be subject to taxation as dividend income for Katherine.

Question 10

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 statement accurately reflects the definition of a "large corporation" for estimated tax payment purposes.

Question 11

Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation. Canary owns 18% of the Stork Corporation stock. Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.

Accepted Answer

The dividends received deduction for a C corporation that owns less than 20% of a dividend-paying corporation is 50% of the dividend received. Therefore, in this case, Canary's dividends received deduction would be 50% of $80,000, or $40,000. The taxable income limitation would only come into play if the deduction exceeds 50% of taxable income.

Question 12

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Accepted Answer

Schedule M-3 is indeed designed for greater transparency between financial statements and tax returns, which is not the primary objective of Schedule M-1.

Question 13

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 14

The accumulated earnings and personal holding company taxes both can be avoided by distributing sufficient dividends.

Accepted Answer

If a corporation distributes enough dividends to its shareholders, it can avoid being subject to accumulated earnings tax (AET) and personal holding company tax (PHC). AET is a tax imposed on corporations that retain too much of their earnings rather than distributing them as dividends. PHC tax is a tax imposed on corporations that are primarily holding investments and not engaged in active business operations. By distributing dividends, the corporation reduces the amount of retained earnings and therefore can avoid being subject to these taxes.

Question 15

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Accepted Answer

The answer of A corporation with $5 million or more...

Question 16

Schedule M-2 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-2 is indeed used to reconcile the unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Question 17

Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2018. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2018): 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 2018 deduction for organizational expenditures is $5,800.

Accepted Answer

Hornbill Corporation's organizational expenditures include the temporary directors meeting expenses, state of incorporation fee, stock certificate printing expenses, and legal fees for drafting corporate charter and bylaws. However, the deduction for organizational expenditures is limited to $5,800 for the first year of operations. Therefore, the statement that Hornbill Corporation's 2018 deduction for organizational expenditures is $5,800 is true.

Question 18

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

Accepted Answer

A corporation is required to file a Federal income tax return every year, regardless of whether it had taxable income or not. Failure to file a tax return can result in penalties and legal consequences.

Question 19

A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000.

Accepted Answer

A calendar year personal service corporation with taxable income of $100,000 would have a flat tax rate of 21% on its taxable income, resulting in a tax liability of $21,000.

Question 20

In general, all corporations that maintain inventory for sale to customers are required to use the accrual method of accounting for all income and expense items.

Accepted Answer

While many corporations with inventory are required to use the accrual method, there are exceptions, such as small businesses with gross receipts below a certain threshold that may use the cash method.

Quiz 17: Corporations: Introduction and Operating Rules