Tax Corp Chapter 3

1. During 2019, Savannah Corporation, a calendar year C corporation, had operating income of $730,000, operating expenses of $400,000, a short-term capital loss of $30,000, and a long-term capital gain of $90,000. What is Savannah's tax liability for 2019?

a.$81,900

b.$153,300

c.$44,100

d.$56,700

e.$165,900

Savannah's taxable income is $390,000 [$730,000 operating income – $400,000 operating expenses + $60,000 net capital gain ($90,000 long-term capital gain – $30,000 short-term capital loss)]. Corporate income tax on taxable income of $390,000 is $81,900 ($390,000 × 21% flat tax rate). Corporations do not receive a preferential tax rate on long-term capital gains.

Explanation

Savannah's taxable income is $390,000 [$730,000 operating income – $400,000 operating expenses + $60,000 net capital gain ($90,000 long-term capital gain – $30,000 short-term capital loss)]. Corporate income tax on taxable income of $390,000 is $81,900 ($390,000 × 21% flat tax rate). Corporations do not receive a preferential tax rate on long-term capital gains.

2. Which of the following is considered a startup expenditure?

a.Printing of stock certificates

b.Depreciation of store equipment

c.Rent and payroll incurred before a corporation actually begins to produce any gross income

d.Accounting services incident to organization

e.Expenses of temporary directors meetings

Startup expenditures include various investigation expenses involved in entering a new business (e.g., travel, market surveys, financial audits, and legal fees) and operating expenses such as rent and payroll that are incurred by a corporation before it actually begins to produce any gross income. "Expenses of temporary directors meetings" and "Accounting services incident to organization" are organizational expenditures, and "Printing of stock certificates" must be capitalized.

Explanation

Startup expenditures include various investigation expenses involved in entering a new business (e.g., travel, market surveys, financial audits, and legal fees) and operating expenses such as rent and payroll that are incurred by a corporation before it actually begins to produce any gross income. "Expenses of temporary directors meetings" and "Accounting services incident to organization" are organizational expenditures, and "Printing of stock certificates" must be capitalized.

3. _____ is only available to corporate taxpayers.

a.A Federally declared disaster loss

b.The deduction for charitable contributions

c.The dividends received deduction

d.The Section 179 deduction

e.All of these choices are correct.

Certain deductions are specific to corporate taxpayers, including the dividends received deduction and the organizational expenditures deduction.

Explanation

Certain deductions are specific to corporate taxpayers, including the dividends received deduction and the organizational expenditures deduction.

4. What amount of accumulated earnings of a corporation is considered within the reasonable needs of a business without the corporation having to show a bona fide business reason for the accumulation?

a.$250,000 or less

b.$300,000 or less

c.$150,000 or less

d.$200,000 or less

e.$400,000 or less

Most businesses are allowed a $250,000 minimum credit. As a result, most corporations can accumulate $250,000 in earnings over a series of years without fear of an accumulated earnings tax.

Explanation

Most businesses are allowed a $250,000 minimum credit. As a result, most corporations can accumulate $250,000 in earnings over a series of years without fear of an accumulated earnings tax.

5. The personal holding company tax rate is 20%.

True

False

Correct. The personal holding company tax is imposed at the rate of 20% and is designed to force a corporation to distribute earnings to shareholders.

Explanation

Correct. The personal holding company tax is imposed at the rate of 20% and is designed to force a corporation to distribute earnings to shareholders.

6. Dalmatian Corporation acquired intellectual property in 2019 and expensed amortization of $101,000 on its financial statements, which were prepared according to GAAP. For Federal income tax purposes, Dalmatian deducted $131,000. How much tax return amortization would Dalmatian Corporation report on Part III of Schedule M–3?

a.$20,000

b.$131,000

c.$0

a.$232,000

b.$0

c.$131,000

a.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.

b.The deduction tends to yield better tax results when the corporation uses the cash method of accounting.

c.Using the deduction and the accrual method of accounting is generally counterproductive.

d.The corporation's method of accounting is of no consequence.

e.Using the deduction and the cash method of accounting is generally counterproductive.

An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.

Explanation

An expense incurred by a cash basis corporation in its first tax year qualifies even though it is not paid until a subsequent year.

29. Tundra Corporation, a calendar year C corporation, was formed and began operations on July 1, 2019. The following expenses were incurred during the first tax year (July 1 through December 31, 2019) of operations:

Expenses of temporary directors and of organizational meetings $9,000

Fee paid to the state of incorporation 1,000

Accounting services incident to organization 2,500

Legal services for drafting the corporate charter and bylaws 3,500

Expenses incident to the printing and sale of stock certificates 4,000

Assuming a p 248 election, what is Tundra's deduction for organizational expenditures for 2019?

a.$533

b.$5,367

c.$5,500

d.$0

e.$5,000

Qualifying organizational expenditures include these items:

Expenses of temporary directors and of organizational meetings $ 9,000
Fee paid to the state of incorporation 1,000
Accounting services incident to organization 2,500
Legal services for drafting the corporate charter and bylaws 3,500
Expenses incident to the printing and sale of stock certificates 4,000

Tundra Corporation’s deduction under § 248 for 2019 is determined as follows:

Immediate expensing $5,000
Amortization [($16,000 – $5,000) ÷ 180] × 6 (months in tax year) = 367
Total

Explanation

Qualifying organizational expenditures include these items:

Expenses of temporary directors and of organizational meetings $ 9,000
Fee paid to the state of incorporation 1,000
Accounting services incident to organization 2,500
Legal services for drafting the corporate charter and bylaws 3,500
Expenses incident to the printing and sale of stock certificates 4,000

Tundra Corporation’s deduction under § 248 for 2019 is determined as follows:

Immediate expensing $5,000
Amortization [($16,000 – $5,000) ÷ 180] × 6 (months in tax year) = 367
Total

30. For a net operating loss arising in 2019, the NOL can be carried back two years and forward 20 years.

True

False

For NOLs arising after 2017, the NOL can be carried forward indefinitely to offset taxable income in those future years. NOLs arising after 2017 cannot be carried back.

Explanation

For NOLs arising after 2017, the NOL can be carried forward indefinitely to offset taxable income in those future years. NOLs arising after 2017 cannot be carried back.

31.

Like individuals, corporations are not allowed a deduction for interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities.

True

False

Corporations are not allowed to deduct the interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities. This is because tax-exempt securities are already exempt from taxation, so allowing a deduction for the interest paid on the borrowed funds would result in a double tax benefit. Therefore, the statement is true.

Explanation

Corporations are not allowed to deduct the interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities. This is because tax-exempt securities are already exempt from taxation, so allowing a deduction for the interest paid on the borrowed funds would result in a double tax benefit. Therefore, the statement is true.

32.

Schedule M–3 is required of corporations with more than $10 million of total assets.

True

False

Schedule M-3 is a tax form that is required to be filed by corporations with more than $10 million of total assets. This form provides a more detailed breakdown of the corporation's financial information, including balance sheet and income statement items. Therefore, the statement "Schedule M-3 is required of corporations with more than $10 million of total assets" is true.

Explanation

Schedule M-3 is a tax form that is required to be filed by corporations with more than $10 million of total assets. This form provides a more detailed breakdown of the corporation's financial information, including balance sheet and income statement items. Therefore, the statement "Schedule M-3 is required of corporations with more than $10 million of total assets" is true.

33. What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under p 248?

a.The corporation's method of accounting is of no consequence.

b.Using the deduction and the cash method of accounting is generally counterproductive.

c.The deduction tends to yield better tax results when the corporation uses the accrual method of accounting.

True

False

Correct. The loss is an expense for book purposes but not deductible for tax purposes. Therefore, the $5,000 net capital loss must be added in reconciling from book income to taxable income.

Explanation

Correct. The loss is an expense for book purposes but not deductible for tax purposes. Therefore, the $5,000 net capital loss must be added in reconciling from book income to taxable income.

48. Oliver is the sole shareholder of a C corporation, and Lonnie owns a sole proprietorship. Both businesses were started in 2019, and each business has a long-term capital gain of $20,000 for the year. Neither business made any distributions during the year. With respect to this information, which of the following statements is false?

a.Oliver must report a $20,000 long-term capital gain on his 2019 tax return.

b.Oliver's corporation pays a tax of $4,200 on the capital gain.

c.Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain.

d.Lonnie receives a preferential tax rate on a long-term capital gain of $20,000.

e.Lonnie must report a $20,000 long-term capital gain on his 2019 tax return.

Correct. A C corporation is a separate taxpaying entity, and income of a C corporation is not taxed to shareholders until distributed as dividends. A C corporation does not receive preferential tax rate treatment on LTCG ("Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain" and "Oliver's corporation pays a tax of $4,200 on the capital gain"). Income of a sole proprietorship is taxed currently on the tax return of the proprietor, and the LTCG of the entity is reported as such by the proprietor ("Lonnie must report a $20,000 long-term capital gain on his 2019 tax return"), with the preferential tax rate applicable ("Lonnie receives a preferential tax rate on a long-term capital gain of $20,000").

Explanation

Correct. A C corporation is a separate taxpaying entity, and income of a C corporation is not taxed to shareholders until distributed as dividends. A C corporation does not receive preferential tax rate treatment on LTCG ("Oliver's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain" and "Oliver's corporation pays a tax of $4,200 on the capital gain"). Income of a sole proprietorship is taxed currently on the tax return of the proprietor, and the LTCG of the entity is reported as such by the proprietor ("Lonnie must report a $20,000 long-term capital gain on his 2019 tax return"), with the preferential tax rate applicable ("Lonnie receives a preferential tax rate on a long-term capital gain of $20,000").

49. Hirsch, Incorporated, is a calendar year corporation that has had revenues of less than $500,000 since inception. In 2017, Hirsch had a net operating loss that was able to be used in full via a carryback to 2016. For 2018, Hirsch expects to have taxable income of $100,000. How will Hirsch avoid a penalty for underpayment of estimated Federal taxes in the current year?

a.Hirsch must pay 100% of the tax shown on its 2018 return via estimated taxes to avoid an underpayment penalty.

b.Hirsch must pay the amount of taxes owed on its 2017 return via estimated taxes to avoid an underpayment penalty.

c.Hirsch must pay 90% of the tax shown on its 2018 return via estimated taxes to avoid an underpayment penalty.

In order to avoid an underpayment penalty, corporations (other than large corporations) must generally pay estimated tax in the amount of the lower of 100 percent of the tax shown on the return for the current year or 100 percent of the tax shown on the return for the preceding year. In this case, however, Hirsch did not have taxable income in the prior year. Therefore, it cannot use the 100 percent of the preceding year method to avoid an underpayment penalty for the current year. It must pay 100 percent of the tax shown on its current return via estimated taxes to avoid an underpayment penalty.

Explanation

In order to avoid an underpayment penalty, corporations (other than large corporations) must generally pay estimated tax in the amount of the lower of 100 percent of the tax shown on the return for the current year or 100 percent of the tax shown on the return for the preceding year. In this case, however, Hirsch did not have taxable income in the prior year. Therefore, it cannot use the 100 percent of the preceding year method to avoid an underpayment penalty for the current year. It must pay 100 percent of the tax shown on its current return via estimated taxes to avoid an underpayment penalty.

50. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Life insurance proceeds received as a result of the death of a key employee.

True

False

The life insurance proceeds received as a result of the death of a key employee would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return.

Explanation

The life insurance proceeds received as a result of the death of a key employee would be "Added" to the net income per books on Schedule M-1 to arrive at the income per the tax return.

51. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

True

False

No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days. This restriction was enacted to close a tax loophole involving dividends on stock that is held only briefly.

Explanation

No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days. This restriction was enacted to close a tax loophole involving dividends on stock that is held only briefly.

52. Naveen Gupta is the sole shareholder and employee of Opal Corporation, a calendar year C corporation that is engaged exclusively in engineering services. During the year, Opal has gross revenues of $420,000 and operating expenses (excluding salary) of $200,000. Further, Opal Corporation pays Naveen a salary of $190,000, which is considered reasonable in amount. Assuming that Opal Corporation distributes all after-tax income as dividends, how much Federal income tax does Opal pay in the current year?

a.$10,500

b.$88,200

c.$48,300

d.$6,300

e.$46,200

Correct. Personal service corporations are subject to a 21% flat tax rate. Opal has taxable income of $30,000 [$420,000 (gross receipts) – $190,000 (salary expense) – $200,000 (other operating expenses)]; thus, the corporate income tax is $6,300 ($30,000 × 21%). Opal does not receive a deduction for any dividends paid.

True

False

An organization not qualifying as a corporation under state law cannot be treated as such for Federal income tax purposes. This means that even if an organization is considered a corporation under Federal tax law, if it does not meet the requirements set by the state, it cannot be treated as a corporation for Federal income tax purposes. Therefore, the statement is false.

Explanation

An organization not qualifying as a corporation under state law cannot be treated as such for Federal income tax purposes. This means that even if an organization is considered a corporation under Federal tax law, if it does not meet the requirements set by the state, it cannot be treated as a corporation for Federal income tax purposes. Therefore, the statement is false.

57.

Gains and losses from property transactions are handled similarly. Whether a gain or loss is capital or ordinary depends upon the nature of the asset in the hands of the taxpayer making the taxable disposition.

True

False

The explanation for the given correct answer is that gains and losses from property transactions are indeed handled similarly. Whether a gain or loss is considered capital or ordinary depends on the nature of the asset for the taxpayer making the taxable disposition. This means that the classification of the gain or loss depends on the specific circumstances and characteristics of the asset being disposed of. Therefore, the statement "Gains and losses from property transactions are handled similarly" is true.

Explanation

The explanation for the given correct answer is that gains and losses from property transactions are indeed handled similarly. Whether a gain or loss is considered capital or ordinary depends on the nature of the asset for the taxpayer making the taxable disposition. This means that the classification of the gain or loss depends on the specific circumstances and characteristics of the asset being disposed of. Therefore, the statement "Gains and losses from property transactions are handled similarly" is true.

58. The dividends received deduction (DRD) is a tax deduction that may be taken by which of the following?

a.An individual

b.An S corporation

d.April 15, 2019, $157,500; June 15, 2019, $157,500; September 15, 2019, $157,500; January 15, 2020, $157,500.

e.April 15, 2019, $68,250; June 15, 2019, $68,250; September 15, 2019, $68,250; December 15, 2019, $68,250.

Payment Amount
April 15, 2019 $68,250*
June 15, 2019 246,750**
September 15, 2019 157,500
December 15, 2019 157,500
Total $630,000

*Based on preceding year’s tax, for first installment only: $1.3 million taxable income × 21% = $273,000 ÷ 4 = $68,250.

**Based on current year’s tax, for remaining installments: $3 million taxable income × 21% = $630,000 ÷ 4 = $157,500. Second installment must include shortfall from first installment: [$157,500 + ($157,500 – $68,250)] = $246,750.

Explanation

Payment Amount
April 15, 2019 $68,250*
June 15, 2019 246,750**
September 15, 2019 157,500
December 15, 2019 157,500
Total $630,000

*Based on preceding year’s tax, for first installment only: $1.3 million taxable income × 21% = $273,000 ÷ 4 = $68,250.

**Based on current year’s tax, for remaining installments: $3 million taxable income × 21% = $630,000 ÷ 4 = $157,500. Second installment must include shortfall from first installment: [$157,500 + ($157,500 – $68,250)] = $246,750.

70.

Like individuals, corporations must be concerned with classifying deductions into deduction for and deduction from categories.

True

False

Corporations do not need to classify deductions into deduction for and deduction from categories. This statement is false because corporations are not individuals and have different tax regulations and requirements. Deductions for corporations are classified based on specific tax laws and regulations applicable to businesses, rather than being categorized as deduction for or deduction from.

Explanation

Corporations do not need to classify deductions into deduction for and deduction from categories. This statement is false because corporations are not individuals and have different tax regulations and requirements. Deductions for corporations are classified based on specific tax laws and regulations applicable to businesses, rather than being categorized as deduction for or deduction from.

71. Sapphire Corporation, a C corporation, has two equal individual shareholders, Kelley and Alex. In the current year, Sapphire earned a net profit of $200,000 and paid a dividend of $40,000 to each shareholder. Regardless of any tax consequences resulting from their interests in Sapphire, Kelley is in the 22% marginal tax bracket (15% capital gains and qualified dividend tax rate) and Alex is in the 35% marginal tax bracket (20% capital gains and qualified dividend tax rate). With respect to the current year, which of the following statements is false?

a.Sapphire can avoid the corporate tax altogether by paying out all $200,000 of net profit as dividends to the shareholders.

b.Kelley incurs income tax of $6,000 on her dividend income.

c.Sapphire pays corporate tax on $200,000.

d.Alex incurs income tax of $8,000 on his dividend income.

e.Sapphire pays corporate tax on $80,000.

Dividend distributions are not deductible by a corporation; thus, Sapphire still incurs corporate tax on $200,000 even if all profits were distributed to shareholders. A preferential tax rate of 15% applies to Kelley and 20% to Alex on the dividends, resulting in tax of $6,000 ($40,000 × 15%) on the dividend for Kelley and $8,000 ($40,000 × 20%) for Alex.

Explanation

Dividend distributions are not deductible by a corporation; thus, Sapphire still incurs corporate tax on $200,000 even if all profits were distributed to shareholders. A preferential tax rate of 15% applies to Kelley and 20% to Alex on the dividends, resulting in tax of $6,000 ($40,000 × 15%) on the dividend for Kelley and $8,000 ($40,000 × 20%) for Alex.

72.

For calendar year corporations, the corporate tax return is due March 15 of each year.

True

False

The explanation for the answer "False" is that for calendar year corporations, the corporate tax return is actually due on April 15 of each year, not March 15.

Explanation

The explanation for the answer "False" is that for calendar year corporations, the corporate tax return is actually due on April 15 of each year, not March 15.

73. In any single year, a corporation can be subject to both the accumulated earnings tax and the personal holding company tax.

True

False

Both taxes are designed to prevent corporations and their shareholders from avoiding the double tax on dividend distributions. Therefore, in any single year, the IRS cannot impose both the accumulated earnings tax and the personal holding company tax.

Explanation

Both taxes are designed to prevent corporations and their shareholders from avoiding the double tax on dividend distributions. Therefore, in any single year, the IRS cannot impose both the accumulated earnings tax and the personal holding company tax.

74. Dalmatian Corporation acquired intellectual property in 2019 and expensed amortization of $101,000 on its financial statements, which were prepared according to GAAP. For Federal income tax purposes, Dalmatian deducted $131,000. How much tax return amortization would Dalmatian Corporation report on Part III of Schedule M–3?

a.$20,000

b.$101,000

c.$232,000

d.$131,000

e.$0

The corporation must report the amortization on line 28, Part III as follows: $101,000 book amortization in column (a), $20,000 temporary difference in column (b), and $131,000 tax return amortization in column (d).

Explanation

The corporation must report the amortization on line 28, Part III as follows: $101,000 book amortization in column (a), $20,000 temporary difference in column (b), and $131,000 tax return amortization in column (d).

75. Summer Corporation had operating income of $100,000, a long-term capital loss of $6,000, and a long-term capital gain of $1,000. As a result of these transactions, Summer has no capital loss to carry back or carry forward.

True

False

A corporation cannot deduct a net capital loss in the year incurred. For corporations, a net capital loss must be carried back three years or forward five years and be offset against capital gains in the carryback/forward years. Summer can use $1,000 of the long-term capital gain to offset the capital loss, leaving a $5,000 ($6,000 – $1,000) loss carryback.

Explanation

A corporation cannot deduct a net capital loss in the year incurred. For corporations, a net capital loss must be carried back three years or forward five years and be offset against capital gains in the carryback/forward years. Summer can use $1,000 of the long-term capital gain to offset the capital loss, leaving a $5,000 ($6,000 – $1,000) loss carryback.

76. Which of the following is not considered a reasonable need of the business for purposes of the accumulated earnings tax?

a.Working capital needs

b.Replacement of plant and equipment

c.Debt retirement

d.Product liability losses

e.Loans to shareholders

Earnings can be accumulated for the reasonable needs of the business. Reasonable needs include expansion of the business, replacement of plant and equipment, working capital needs, product liability losses, debt retirement, self-insurance, and loans to suppliers and customers. Reasonable needs do not include loans to shareholders, investments in unrelated properties or businesses, and unrealistic hazards and contingencies.

Explanation

Earnings can be accumulated for the reasonable needs of the business. Reasonable needs include expansion of the business, replacement of plant and equipment, working capital needs, product liability losses, debt retirement, self-insurance, and loans to suppliers and customers. Reasonable needs do not include loans to shareholders, investments in unrelated properties or businesses, and unrealistic hazards and contingencies.

77. Johnny, an individual, incorporates two separate businesses that he owns by establishing two new corporations on January 1, 2019. Each corporation generates taxable income of $50,000. Each corporation will have a tax liability of $7,500 ($50,000 m 15%).

True

False

For 2019, all corporations are subject to a flat 21% rate. Therefore, each corporation's tax liability is $10,500.

Explanation

For 2019, all corporations are subject to a flat 21% rate. Therefore, each corporation's tax liability is $10,500.

78. Entities with average annual gross receipts of $25 million or less for the most recent three-year period can use the _____ method to account for inventories.

a.Capital

b.Limited hybrid

c.Accrual

d.Hybrid

e.Cash

In general, entities that maintain inventory for sale to customers are required to use the accrual method of accounting for determining sales and cost of goods sold. For tax years beginning after 2017, the TCJA of 2017 allows entities with average annual gross receipts of $25 million or less for the most recent three-year period to use the cash method to account for inventories.

Explanation

In general, entities that maintain inventory for sale to customers are required to use the accrual method of accounting for determining sales and cost of goods sold. For tax years beginning after 2017, the TCJA of 2017 allows entities with average annual gross receipts of $25 million or less for the most recent three-year period to use the cash method to account for inventories.

79. Tapper Corp., an accrual basis calendar year corporation, was organized on January 2, year 1. During year 1, revenue was exclusively from sales proceeds and interest income. The following information pertains to Tapper:

Taxable income before charitable contributions for the year ended December 31, year 1 $500,000

Tapper's matching contribution to employee-designated qualified universities made during year 1 10,000

Board of Directors' authorized contribution to a qualified charity (authorized December 1, year 1, made February 1, year 2) 30,000

What is the maximum allowable deduction that Tapper may take as a charitable contribution on its tax return for the year ended December 31, year 1?

a.$0

b.$10,000

c.$30,000

d.$40,000

Tapper's college matching contributions are deductible; Tapper made the contributions; the employees merely directed the proceeds. The Board's authorized contribution is also deductible because it satisfies the two rules under which an accrual-basis corporation can deduct an accrued contribution: 1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 4th month after the end of the taxable year of accrual. Therefore, the total deduction is $40,000 ($10,000 + $30,000).

Explanation

Tapper's college matching contributions are deductible; Tapper made the contributions; the employees merely directed the proceeds. The Board's authorized contribution is also deductible because it satisfies the two rules under which an accrual-basis corporation can deduct an accrued contribution: 1) it was authorized to a qualified charity by Board resolution before the end of the taxable year and 2) it was paid by the 15th day of the 4th month after the end of the taxable year of accrual. Therefore, the total deduction is $40,000 ($10,000 + $30,000).

80. During the current year, Tundra Corporation, a calendar year C corporation, had the following transactions:

Federal income tax per books $9,000

Premiums paid on key employee life insurance policy 1,000

Life insurance proceeds received as a result of the death of a key employee 250,500

Excess of capital losses over capital gains 3,500

Tax-exempt interest 4,000

What amount will Tundra add to net income on Schedule M–1?

a.$268,000

b.$0

c.$17,500

d.$13,500

e.$14,000

The following are items that must be added back to net income on Schedule M–1:

Federal income tax per books $9,000
Premiums paid on key employee life insurance policy 1,000
Excess of capital losses over capital gains 3,500
Legal services for drafting the corporate charter and bylaws $13,500

The life insurance proceeds and the tax-exempt interest are subtracted from net income on Schedule M–1.

Explanation

The following are items that must be added back to net income on Schedule M–1:

Federal income tax per books $9,000
Premiums paid on key employee life insurance policy 1,000
Excess of capital losses over capital gains 3,500
Legal services for drafting the corporate charter and bylaws $13,500

The life insurance proceeds and the tax-exempt interest are subtracted from net income on Schedule M–1.

81. Parent Corp. owns 40% of Sub Corp. In the current year, Parent has gross income of $43,000 and allowable deductions of $30,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 of dividends from Sub. What is the maximum DRD available to Parent?

a.$4,000

b.$5,200

c.$8,000

d.$8,450

Based on the large ownership percentage, which is over 20%, the applicable DRD rate is 65%. The total dividend is $8,000, and 65% of that is $5,200. This is limited to 65% of the taxable income before the DRD of $13,000 ($43,000 - $30,000). That limitation is $8,450 ($13,000 × 65%). The full DRD of $5,200 is allowed.

Explanation

Based on the large ownership percentage, which is over 20%, the applicable DRD rate is 65%. The total dividend is $8,000, and 65% of that is $5,200. This is limited to 65% of the taxable income before the DRD of $13,000 ($43,000 - $30,000). That limitation is $8,450 ($13,000 × 65%). The full DRD of $5,200 is allowed.

82. Which of the following is considered a reasonable need of the business for purposes of the accumulated earnings tax?

a.Unrealistic contingencies

b.Investments in unrelated properties

c.Loans to shareholders

d.Expansion of the business

e.Investments in unrelated businesses

Earnings can be accumulated for the reasonable needs of the business. Reasonable needs include expansion of the business, replacement of plant and equipment, working capital needs, product liability losses, debt retirement, self-insurance, and loans to suppliers and customers. Reasonable needs do not include loans to shareholders, investments in unrelated properties or businesses, and unrealistic hazards and contingencies.

Explanation

Earnings can be accumulated for the reasonable needs of the business. Reasonable needs include expansion of the business, replacement of plant and equipment, working capital needs, product liability losses, debt retirement, self-insurance, and loans to suppliers and customers. Reasonable needs do not include loans to shareholders, investments in unrelated properties or businesses, and unrealistic hazards and contingencies.

83. Before the provision for Federal income tax, Karas Corporation had book income of $400,000 for the current year. The book income included $100,000 of dividends received from a 15% owned domestic corporation. What was Karas Corporation's taxable income for the current year?

a.$300,000

b.$335,000

c.$350,000

400,000

Karas Corporation qualifies to report a "dividends-received deduction" of 50 percent of the dividends from the taxable unaffiliated domestic corporation. It is assumed that if the paying corporation is unaffiliated, then the receiving corporation owns less than 20 percent.

Book net income before federal income tax $ 400,000
Less: Dividends received deduction (50,000)
Taxable income $350,000

Explanation

Karas Corporation qualifies to report a "dividends-received deduction" of 50 percent of the dividends from the taxable unaffiliated domestic corporation. It is assumed that if the paying corporation is unaffiliated, then the receiving corporation owns less than 20 percent.

Book net income before federal income tax $ 400,000
Less: Dividends received deduction (50,000)
Taxable income $350,000

84. Match the following

Accumulated earnings tax

Organizational expenditures

Passive activity loss rules

Dividends received deduction

Personal holding company tax

C corporations

Submit

85. For 2019, Mindy is the newly hired chief executive officer of Snow Corporation, a publicly traded corporation. For the current year, her compensation package included cash compensation of $3,500,000, taxable fringe benefits of $210,000, a bonus tied to company performance of $4,000,000, and nontaxable fringe benefits of $120,000. How much of Mindy's total compensation package can Snow Corporation deduct?

a.$1,000,000

b.$1,120,000

c.$7,830,000

d.$7,500,000

e.$0

Correct. For publicly traded corporations, the deduction for compensation for any covered employee is $1 million annually. Covered employees are the principal executive officer, the principal financial officer, and the three other most highly compensated officers. In general, the $1 million maximum applies to compensation, commissions based on individual performance, and performance-based compensation tied to overall company performance. The limitation also does not apply to retirement plan contributions or employer-provided benefits that are excludable from gross income by the employee (e.g., health care benefits). Snow Corporation can deduct $1,000,000 for compensation + $120,000 of nontaxable fringe benefits for a total of $1,120,000.

Explanation

Correct. For publicly traded corporations, the deduction for compensation for any covered employee is $1 million annually. Covered employees are the principal executive officer, the principal financial officer, and the three other most highly compensated officers. In general, the $1 million maximum applies to compensation, commissions based on individual performance, and performance-based compensation tied to overall company performance. The limitation also does not apply to retirement plan contributions or employer-provided benefits that are excludable from gross income by the employee (e.g., health care benefits). Snow Corporation can deduct $1,000,000 for compensation + $120,000 of nontaxable fringe benefits for a total of $1,120,000.

86. Match the following

Regular corporations

Personal service corporations (PSCs)

Schedule M–3

Schedule M–2

Schedule M–1

Reasonable needs of the business

Submit

87. Which of the following statements is not true for tax years beginning after 2017?

a.Affiliated corporations that file consolidated returns can take a 100% dividends received deduction.

b.The dividends received deduction for a small investment in an unrelated corporation is 50%.

c.The dividends received deduction for a large investment in a corporation is 65%.

d.There is no income limitation on the dividends received deduction.

There is an income limitation on the dividends received deduction.

Explanation

There is an income limitation on the dividends received deduction.

88. During 2019, Savannah Corporation, a calendar year C corporation, had operating income of $510,000, operating expenses of $370,000, a short-term capital loss of $25,000, and a long-term capital gain of $80,000. How much is Savannah's tax liability for 2019?

a.$47,250

b.$101,850

c.$123,900

d.$107,100

e.$40,950

Savannah's taxable income is $195,000 [$510,000 operating income – $370,000 operating expenses + $55,000 net capital gain ($80,000 long-term capital gain – $25,000 short-term capital loss)]. Corporate income tax on taxable income of $195,000 is $40,950 ($195,000 × 21% flat tax rate). Corporations do not receive a preferential tax rate on long-term capital gains.

Explanation

Savannah's taxable income is $195,000 [$510,000 operating income – $370,000 operating expenses + $55,000 net capital gain ($80,000 long-term capital gain – $25,000 short-term capital loss)]. Corporate income tax on taxable income of $195,000 is $40,950 ($195,000 × 21% flat tax rate). Corporations do not receive a preferential tax rate on long-term capital gains.

89. Herman is the sole owner of Cliff Company. For 2019, the only income of Cliff was a long-term capital gain of $25,000. The business made no distributions during the year to Herman. Which of the following statements is false?

c.If Cliff Company is an S corporation, a preferential tax rate applies to the $25,000 long-term capital gain.

d.If Cliff Company is a C corporation, a preferential tax rate does not apply to the $25,000 long-term capital gain.

Sole proprietorships and S corporations are not separate taxpaying entities. Instead, the income of such entities passes through to the owners and is reported on their returns. Thus, if Cliff Company is a sole proprietorship or S corporation, Herman must report the $25,000 long-term capital gain on his personal income tax return ("If Cliff Company is a sole proprietorship, Herman must report the $25,000 long-term capital gain on his personal income tax return" is therefore incorrect and "If Cliff Company is an S corporation, Herman will report none of the $25,000 long-term capital gain on his personal tax return" is correct), and the preferential tax rate for such income is applicable ("If Cliff Company is an S corporation, a preferential tax rate applies to the $25,000 long-term capital gain"). C corporations are separate taxpaying entities. Thus, if Cliff Company is a C corporation, Herman will report none of the $25,000 long-term capital gain on his personal income tax return ("If Cliff Company is a C corporation, Herman will report none of the $25,000 long-term capital gain on his personal income tax return"). C corporations do not receive preferential tax rate treatment on LTCG ("If Cliff Company is a C corporation, a preferential tax rate does not apply to the $25,000 long-term capital gain").

Explanation

Sole proprietorships and S corporations are not separate taxpaying entities. Instead, the income of such entities passes through to the owners and is reported on their returns. Thus, if Cliff Company is a sole proprietorship or S corporation, Herman must report the $25,000 long-term capital gain on his personal income tax return ("If Cliff Company is a sole proprietorship, Herman must report the $25,000 long-term capital gain on his personal income tax return" is therefore incorrect and "If Cliff Company is an S corporation, Herman will report none of the $25,000 long-term capital gain on his personal tax return" is correct), and the preferential tax rate for such income is applicable ("If Cliff Company is an S corporation, a preferential tax rate applies to the $25,000 long-term capital gain"). C corporations are separate taxpaying entities. Thus, if Cliff Company is a C corporation, Herman will report none of the $25,000 long-term capital gain on his personal income tax return ("If Cliff Company is a C corporation, Herman will report none of the $25,000 long-term capital gain on his personal income tax return"). C corporations do not receive preferential tax rate treatment on LTCG ("If Cliff Company is a C corporation, a preferential tax rate does not apply to the $25,000 long-term capital gain").

90. Markson, the sole shareholder of Garnet Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Markson would prefer to have the payment treated as salary instead of a dividend.

True

False

Markson must include in gross income both salary and dividends, but he would prefer dividend income due to the preferential tax rate accorded such income.

Explanation

Markson must include in gross income both salary and dividends, but he would prefer dividend income due to the preferential tax rate accorded such income.

91. Tundra Corporation, a calendar year C corporation, was formed and began operations on July 1, 2019. The following expenses were incurred during the first tax year (July 1 through December 31, 2019) of operations:

Expenses of temporary directors and of organizational meetings $9,000

Fee paid to the state of incorporation 1,000

Accounting services incident to organization 2,500

Legal services for drafting the corporate charter and bylaws 3,500

Expenses incident to the printing and sale of stock certificates 4,000

Assuming a p 248 election, what is Tundra's deduction for organizational expenditures for 2019?

a.$533

b.$5,367

c.$5,500

d.$5,000

e.$0

Qualifying organizational expenditures include these items:

Expenses of temporary directors and of organizational meetings $ 9,000
Fee paid to the state of incorporation 1,000
Accounting services incident to organization 2,500
Legal services for drafting the corporate charter and bylaws 3,500
Expenses incident to the printing and sale of stock certificates 4,000

Tundra Corporation’s deduction under § 248 for 2019 is determined as follows:

Immediate expensing $5,000
Amortization [($16,000 – $5,000) ÷ 180] × 6 (months in tax year) = 367
Total

Explanation

Qualifying organizational expenditures include these items:

Expenses of temporary directors and of organizational meetings $ 9,000
Fee paid to the state of incorporation 1,000
Accounting services incident to organization 2,500
Legal services for drafting the corporate charter and bylaws 3,500
Expenses incident to the printing and sale of stock certificates 4,000

Tundra Corporation’s deduction under § 248 for 2019 is determined as follows:

Immediate expensing $5,000
Amortization [($16,000 – $5,000) ÷ 180] × 6 (months in tax year) = 367
Total

a.$40,000

b.$41,000

c.$43,000

d.$45,000

The charitable contribution deduction is limited to 10% of taxable income before the dividends received deduction and the charitable contribution deduction. 10% ($410,000 + $20,000) = $43,000. There will be a $2,000 carryforward to Year 7.

Explanation

The charitable contribution deduction is limited to 10% of taxable income before the dividends received deduction and the charitable contribution deduction. 10% ($410,000 + $20,000) = $43,000. There will be a $2,000 carryforward to Year 7.

96. Creek Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive activity loss during the year. If Creek is a closely held C corporation that is not a personal service corporation (PSC), it can deduct $230,000 of the passive activity loss in the year.

True

False

If Creek is a closely held corporation, the passive activity loss is deductible to the extent of the corporation's active income, or $210,000.

Explanation

If Creek is a closely held corporation, the passive activity loss is deductible to the extent of the corporation's active income, or $210,000.

97. The dividends were received from a corporation of which Acorn owns 30%. In Acorn's current-year corporate income tax return, what amount should be reported as income before special deductions?

a.$525,000

b.$505,000

c.$275,000

d.$250,000

Income before special deductions includes sales, dividends received and cost of sales. It excludes the dividends received deduction, which is a "special" deduction.

Sales $ 500,000
Cost of sales (250,000)
Gross profit 250,000
Dividends received 25,000
Income before special deductions $275,000

Explanation

Income before special deductions includes sales, dividends received and cost of sales. It excludes the dividends received deduction, which is a "special" deduction.

Sales $ 500,000
Cost of sales (250,000)
Gross profit 250,000
Dividends received 25,000
Income before special deductions $275,000

98. Parent Corp. owns 15% of Sub Corp. Parent has gross income of $43,000 and allowable deductions of $40,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 in dividends from Sub. What is the maximum DRD available to Parent?

a.$1,500

b.$1,950

c.$4,000

d.$8,000

Based on the small ownership percentage, which is below 20%, the applicable DRD rate is 50%. The total dividend is $8,000, and 50% of that is $4,000. This is normally limited to 50% of taxable income before the DRD. Taxable income before DRD is $3,000 ($43,000 − $40,000), and the full DRD of $4,000 will create a loss. Therefore, the income limitation does not apply, and the full DRD of $4,000 is allowed.

$1,500 is incorrect. $1,500 is 50% of the taxable income before the DRD of $3,000. This would be correct if the income limitation applied. But due to the resulting loss, it does not apply.

$1,950 is incorrect. $1,950 is the income limitation if we use 65% of $3,000. But the correct limitation percentage is 50% because the ownership is less than 20%

$8,000 is incorrect. $8,000 is the total dividend. Only 50% is allowed as a DRD.

Explanation

Based on the small ownership percentage, which is below 20%, the applicable DRD rate is 50%. The total dividend is $8,000, and 50% of that is $4,000. This is normally limited to 50% of taxable income before the DRD. Taxable income before DRD is $3,000 ($43,000 − $40,000), and the full DRD of $4,000 will create a loss. Therefore, the income limitation does not apply, and the full DRD of $4,000 is allowed.

$1,500 is incorrect. $1,500 is 50% of the taxable income before the DRD of $3,000. This would be correct if the income limitation applied. But due to the resulting loss, it does not apply.

$1,950 is incorrect. $1,950 is the income limitation if we use 65% of $3,000. But the correct limitation percentage is 50% because the ownership is less than 20%

$8,000 is incorrect. $8,000 is the total dividend. Only 50% is allowed as a DRD.

Expenses of temporary directors and of organizational meetings	$9,000
Fee paid to the state of incorporation	1,000
Accounting services incident to organization	2,500
Legal services for drafting the corporate charter and bylaws	3,500
Expenses incident to the printing and sale of stock certificates	4,000

Federal income tax per books	$9,000
Premiums paid on key employee life insurance policy	1,000
Life insurance proceeds received as a result of the death of a key employee	250,500
Excess of capital losses over capital gains	3,500
Tax-exempt interest	4,000

Tax Corp Chapter 3

1. During 2019, Savannah Corporation, a calendar year C corporation, had operating income of $730,000, operating expenses of $400,000, a short-term capital loss of $30,000, and a long-term capital gain of $90,000. What is Savannah's tax liability for 2019?

2.

What first name or nickname would you like us to use?

2. Which of the following is considered a startup expenditure?

3. _____ is only available to corporate taxpayers.

4. What amount of accumulated earnings of a corporation is considered within the reasonable needs of a business without the corporation having to show a bona fide business reason for the accumulation?

5. The personal holding company tax rate is 20%.

7. The election under the Check-the-Box Regulations is not available to entities that are actually incorporated under state law or to entities that are required to be corporations under Federal law (e.g., certain publicly traded partnerships).

8. The Check-the-Box Regulations allow an entity with more than one owner to elect to be classified as either a partnership or a corporation.

9. No entity-level Federal income tax is typically assessed on S corporations, limited liability companies (LLCs), or partnerships.

10. The net income of a proprietorship is subject to the self-employment tax, as are some partnership allocations of income to partners.

13. Gully, a C corporation, had $115,000 net income from operations, a short-term capital gain of $15,000, and a $10,000 short-term capital loss in 2019. Gully Corporation's taxable income is $115,000.

15. For a C corporation that has been in existence for three years, losses cannot be passed through to the shareholders.

16. Markson, the sole shareholder of Garnet Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Markson would prefer to have the payment treated as salary instead of a dividend.

17. Tax planning to reduce corporate income taxes should occur before the end of the tax year.

18. The income of a C corporation is subject to double taxation.

19. As a result of the TCJA of 2017, high-income individuals might consider the corporate entity form as a means to reduce their tax burden.

20. A corporation must make payments of estimated tax unless its tax liability can reasonably be expected to be less than $500.

21. Corporate-source income maintains its identity as it passes through the corporation to the shareholders.

22. Corporate taxpayers with total assets of $10 million or more are required to report much greater detail relative to differences between income (loss) reported for financial purposes and income (loss) reported for tax purposes.

24. For 2019, the individual marginal tax rates range from 10% to 37%, while the corporate marginal tax rates range from 10% to 39.6%.

25. For 2019, a corporation is required to apply a minimum tax rate to an expanded base and pay an AMT equal to the difference between the tentative AMT and the regular tax.

26. The purpose of the dividends received deduction is to mitigate multiple taxation of corporate income.

27. To be considered a personal holding company (PHC), more than 50% of the stock must be owned by 10 or fewer individuals at any time during the last half of the year.

28. What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under p 248?

30. For a net operating loss arising in 2019, the NOL can be carried back two years and forward 20 years.

31. Like individuals, corporations are not allowed a deduction for interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities.

32. Schedule M–3 is required of corporations with more than $10 million of total assets.

33. What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under p 248?

34. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return. Federal income tax per books.

35. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return. Excess of capital losses over capital gains.

36. The due date (not including extensions) for filing a 2019 Federal income tax return for a calendar year C corporation (Form 1120) is March 15, 2020.

37. One objective of Schedule M–3 is to create greater transparency between corporate financial statements and tax returns.

38. Any corporation that files Schedule M–3 must also file Schedule M–1.

39. The AMT rules are the same for individuals and corporations.

40. An unincorporated entity with only one owner is, by default, classified as a disregarded entity (or DRE).

41. A corporation must make estimated tax payments unless its tax liability can reasonably be expected to be less than $1,000.

42. Summer Corporation had operating income of $100,000, a long-term capital loss of $6,000, and a long-term capital gain of $1,000. As a result of these transactions, Summer has no capital loss to carry back or carry forward.

43. NOLs arising before 2017 and carried over to years after 2017 are subject to the 80% taxable income limitation.

44. Creek Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive activity loss during the year. If Creek is a closely held C corporation that is not a personal service corporation (PSC), it can deduct $230,000 of the passive activity loss in the year.

46. Which of the following is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at year-end?

47. Slope Corporation, which sustained a $5,000 net capital loss during the year, will enter $5,000 as an addition item on Schedule M–1.

50. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return. Life insurance proceeds received as a result of the death of a key employee.

51. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

53. When either the accumulated earnings tax or the personal holding company tax applies, they reduce the regular corporate income tax.

56. An organization not qualifying as a corporation under state law can not be treated as such for Federal income tax purposes.

57. Gains and losses from property transactions are handled similarly. Whether a gain or loss is capital or ordinary depends upon the nature of the asset in the hands of the taxpayer making the taxable disposition.

58. The dividends received deduction (DRD) is a tax deduction that may be taken by which of the following?

59. For 2019, if a corporation owns less than 20% of the stock of another domestic corporation, the dividends received deduction is 65%.

60. An employee who pays corporate expenses for which they are not reimbursed by the corporation can deduct the expenses on their personal return as miscellaneous itemized deductions.

61. The tax attributes of income and expense items of a C corporation pass through the corporate entity to the shareholders.

64. The $100 floor and 10 percent-of-AGI limitations on the deductible portion of personal casualty and theft losses applicable to individuals apply to corporations.

65. Corporate-source income maintains its identity as it passes through the corporation to the shareholders.

66. A corporation does not have to file a Federal income tax return unless it has taxable income.

67. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

68. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return. Interest income from tax-exempt bonds.

69. Tourmaline Corporation, a calendar year C corporation, has taxable income of $1.3 million and $3 million for 2018 and 2019, respectively. The minimum 2019 estimated tax installment payments for Tourmaline are:

70. Like individuals, corporations must be concerned with classifying deductions into deduction for and deduction from categories.

72. For calendar year corporations, the corporate tax return is due March 15 of each year.

73. In any single year, a corporation can be subject to both the accumulated earnings tax and the personal holding company tax.

75. Summer Corporation had operating income of $100,000, a long-term capital loss of $6,000, and a long-term capital gain of $1,000. As a result of these transactions, Summer has no capital loss to carry back or carry forward.

76. Which of the following is not considered a reasonable need of the business for purposes of the accumulated earnings tax?

77. Johnny, an individual, incorporates two separate businesses that he owns by establishing two new corporations on January 1, 2019. Each corporation generates taxable income of $50,000. Each corporation will have a tax liability of $7,500 ($50,000 m 15%).

78. Entities with average annual gross receipts of $25 million or less for the most recent three-year period can use the _____ method to account for inventories.

82. Which of the following is considered a reasonable need of the business for purposes of the accumulated earnings tax?

83. Before the provision for Federal income tax, Karas Corporation had book income of $400,000 for the current year. The book income included $100,000 of dividends received from a 15% owned domestic corporation. What was Karas Corporation's taxable income for the current year?

84. Match the following

86. Match the following

87. Which of the following statements is not true for tax years beginning after 2017?

88. During 2019, Savannah Corporation, a calendar year C corporation, had operating income of $510,000, operating expenses of $370,000, a short-term capital loss of $25,000, and a long-term capital gain of $80,000. How much is Savannah's tax liability for 2019?

89. Herman is the sole owner of Cliff Company. For 2019, the only income of Cliff was a long-term capital gain of $25,000. The business made no distributions during the year to Herman. Which of the following statements is false?

90. Markson, the sole shareholder of Garnet Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Markson would prefer to have the payment treated as salary instead of a dividend.

93. What is the effect of a corporation's method of accounting on the corporation's use of the organizational expenditures deduction under p 248?

96. Creek Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive activity loss during the year. If Creek is a closely held C corporation that is not a personal service corporation (PSC), it can deduct $230,000 of the passive activity loss in the year.

97. The dividends were received from a corporation of which Acorn owns 30%. In Acorn's current-year corporate income tax return, what amount should be reported as income before special deductions?

98. Parent Corp. owns 15% of Sub Corp. Parent has gross income of $43,000 and allowable deductions of $40,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 in dividends from Sub. What is the maximum DRD available to Parent?

7.

The election under the Check-the-Box Regulations is not available to entities that are actually incorporated under state law or to entities that are required to be corporations under Federal law (e.g., certain publicly traded partnerships).

8.

The Check-the-Box Regulations allow an entity with more than one owner to elect to be classified as either a partnership or a corporation.

9.

No entity-level Federal income tax is typically assessed on S corporations, limited liability companies (LLCs), or partnerships.

10.

The net income of a proprietorship is subject to the self-employment tax, as are some partnership allocations of income to partners.

18.

The income of a C corporation is subject to double taxation.

20.

A corporation must make payments of estimated tax unless its tax liability can reasonably be expected to be less than $500.

22.

Corporate taxpayers with total assets of $10 million or more are required to report much greater detail relative to differences between income (loss) reported for financial purposes and income (loss) reported for tax purposes.

31.

Like individuals, corporations are not allowed a deduction for interest paid or incurred on amounts borrowed to purchase or carry tax-exempt securities.

32.

Schedule M–3 is required of corporations with more than $10 million of total assets.

34. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Federal income tax per books.

35. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Excess of capital losses over capital gains.

37.

One objective of Schedule M–3 is to create greater transparency between corporate financial statements and tax returns.

38.

Any corporation that files Schedule M–3 must also file Schedule M–1.

40.

An unincorporated entity with only one owner is, by default, classified as a disregarded entity (or DRE).

50. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Life insurance proceeds received as a result of the death of a key employee.

56.

An organization not qualifying as a corporation under state law can not be treated as such for Federal income tax purposes.

57.

Gains and losses from property transactions are handled similarly. Whether a gain or loss is capital or ordinary depends upon the nature of the asset in the hands of the taxpayer making the taxable disposition.

61.

The tax attributes of income and expense items of a C corporation pass through the corporate entity to the shareholders.

64.

The $100 floor and 10 percent-of-AGI limitations on the deductible portion of personal casualty and theft losses applicable to individuals apply to corporations.

66.

A corporation does not have to file a Federal income tax return unless it has taxable income.

68. Indicate whether the following items would be "Added" to or "Deducted" from the net income per books on Schedule M-1 to arrive at the income per the tax return.

Interest income from tax-exempt bonds.

70.

Like individuals, corporations must be concerned with classifying deductions into deduction for and deduction from categories.

72.

For calendar year corporations, the corporate tax return is due March 15 of each year.