AC402 Exam
Which tax classification(s) can potentially apply to legal corporations?
S corporation and C corporation
A short tax year can end on any day of any month.
True
(ch.9) Steven operates a landscaping service on the accrual method. In September of this year Steven received a payment of $18,000 for 24 months of landscape services ($750 per month commencing on November 1st of this year). When must Steven recognize the income if his accounting methods are selected to minimize income recognition?
$1,500 is recognized in this year, $16,500 next year. ($750 × 2) for this year and the remainder ($18,000 − $1,500) next year. Prepayments for services can be deferred for one year if the payments are also unearned for financial reporting purposes.
(ch.15) Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $200,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $200,000 and a tax basis of $150,000 for a 40 percent ownership interest, and Taylor is contributing legal services for a 20 percent ownership interest. What amount of gain is each owner required to recognize under each of the following alternative situations? [Hint: Look at IRC §351 and §721.] MMT is formed as a C corporation.
$100,000 a.Under §351, Mickey and Mickayla do not recognize any gain. However, because Taylor is contributing services (and services are not property) Taylor must recognize $100,000 of ordinary income on the receipt of the $100,000 worth of stock she receives from MMT ($200,000 + $200,000 = $400,000 ÷ 80% = $500,000 × 20% = $100,000).
(ch.16) Ski Inc. owns 30 percent of Snow Inc., both of which are domestic C corporations. Snow pays Ski a dividend of $20,000 in 2020. What is the amount of Ski's dividend's received deduction, assuming the taxable income limitation does not apply?
$13,000 Ski is entitled to a 65% dividends received deduction ($20,000 × 65% = $13,000) because it owns 30% of the stock of Snow Inc.).
(ch.16) Chairs-R-Us Inc. reported a net capital loss of $25,000 in year 4. It reported net capital gains of $10,000 in year 3 (before any capital loss carryback) and $20,000 of net capital gains in year 5 (before any capital loss carryovers). What is the amount and nature of the book-tax difference in year 5 related to the net capital loss carryover?
$15,000 favorable Chairs-R-Us carries back $10,000 of the loss to year 3 and then carries the remaining $15,000 forward to year 5. In year 5 it deducts $15,000 for tax purposes and $0 for book purposes.
(ch.16) Wildcat Corp. uses the annualized income method to determine its quarterly federal income tax payments. It had $50,000, $25,000, and $45,000 of taxable income for the first, second, and third quarters, respectively ($120,000 in total through the first three quarters). What is Wildcat's annual estimated taxable income as of the end of the third quarter?
$150,000 The annual estimated taxable income for the third quarter is determined by annualizing cumulative taxable income for the first half of the year. $150,000 = 2 × ($50,000 first quarter income + $25,000 second quarter income).
(ch.9) Drake operates a trucking business, and one of his trucks was damaged in a traffic accident. The truck was purchased for $52,000 and the adjusted basis was $22,000 at the time of the accident. The truck was repaired at a cost of $5,000 and insurance reimbursed Drake $2,000 of this cost. What is the amount of Drake's casualty loss deduction?
$3,000 Lesser of adjusted basis or decline in value (repair cost) less insurance reimbursement, i.e., lesser of $22,000 or ($5,000 − $2,000).
(ch.16) June Inc. issued 9,000 nonqualified stock options valued at $27,000. Each option entitles the holder to purchase one share of stock at $5 per share. The options vest over three years - one-third in 2020 (the year of issue), one-third in 2021, and one-third in 2022. Three thousand options are exercised in 2021 at a time when the stock price of the stock was $9. What is the 2021 book-tax difference associated with the stock options?
$3,000 favorable The tax deduction in 2021 is the difference between the $5 exercise price and the $9 valuation of the stock at the exercise date multiplied by the number of options exercised [($9 - $5) × 3,000 = $12,000]. The book deduction is the value of the options over the vesting period in 2021. One-third of the $27,000 of options vests in each period. The value of the options vesting in 2021 = $27,000/3 = $9,000. The $3,000 excess tax deduction is favorable.
(ch.9) Charley Inc is a large corporation that reported revenue of $80 million and income of $620,000 this year. Included in the calculation of income was $10,000 of interest income, depreciation deductions of $170,000, and interest expense deductions of $420,000. What is the maximum amount of interest expense deduction this year?
$370,000 ($620,000 − $10,000 + $420,000 + $170,000) = $1,200,000 adjusted taxable income; $1,200,000 × 30% = $360,000 + 10,000 interest income = $370,000 maximum interest deduction.
(ch.9) Charley Inc is a large corporation that reported revenue of $80 million and income of $620,000 in 2020. Included in the calculation of income was $10,000 of interest income, depreciation deductions of $170,000, and interest expense deductions of $420,000. What is the maximum amount of interest expense deduction this year?
$610,000 ($620,000 − $10,000 + $420,000 + $170,000) = $1,200,000 adjusted taxable income; $1,200,000 × 50% = $600,000 + 10,000 interest income = $610,000 maximum interest deduction.
(ch.9) Manny hired his brother's firm to provide accounting services to his business. During the current year, Manny paid his brother's firm $99,000 for services even though other firms were willing to provide the same services for $term-5374,000. How much of this expenditure, if any, is deductible as an ordinary and necessary business expenditure?
$74,000.Only reasonable amounts of compensation are deductible ($74,000), and the remainder would be reclassified probably as a gift to his brother.
LNS Corporation reports revenues of $2,900,000. Included in the $2,900,000 is $32,500 of tax-exempt interest income. LNS reports $2,755,000 in ordinary and necessary business expenses. What is LNS Corporation's taxable income for the year? (ch.16)
(1)Total revenue$2,900,000 (2)Tax-exempt interest income (32,500) (3)Deductions (2,755,000) Taxable income$112,500 (1) + (2) + (3)
(ch.15) SCC corporation (a C corporation) has a net operating loss (NOL) carryover to 2020 in the amount of $30,000. How much tax will SCC pay in 2020 if it reports taxable income from operations of $20,000 before considering loss carryovers under the following assumptions? b. The NOL originated in 2018.
840 $840 ($4,000 taxable income after NOL deduction × 21 percent). The year 2018 loss is carried forward indefinitely but it can only offset 80 of taxable income (before the NOL deduction) for a given year. In this case, the NOL deduction is limited to $16,000 ($20,000 taxable income before NOL × 0.8). Consequently, SCC's taxable income in 2020 after the NOL deduction is $4,000. SCC will have a $14,000 loss carryover ($30,000 − $16,000 used in 2020) that will not expire.
Which of the following is not a payment liability?
Accrued compensation
(ch.15) Damarcus is a 50 percent owner of Hoop (a business entity). In the current year, Hoop reported a $100,000 business loss. Answer the following questions associated with each of the following alternative scenarios. (Leave no answer blank. Enter zero if applicable.) a. Hoop is organized as a C corporation and Damarcus works full time as an employee for Hoop. Damarcus has a $20,000 basis in his Hoop stock. How much of Hoop's loss is Damarcus allowed to deduct against his other income?
Allowable deduction of loss; $0 a.$0. Losses of C corporations do not flow through to shareholders.
Which of the following is a true statement? The cost of meals is fully deductible as long as the meal is unrelated to entertainment. An employer can deduct the full cost of meals provided to employees as compensation. The cost of business meals is extravagant if incurred away from home. A taxpayer can only deduct the full cost of a meal for a prospective client. All of these statements are false.
An employer can deduct the full cost of meals provided to employees as compensation. The cost of meals must be reasonable in amount. Employee meals can be fully deductible as compensation and 50% of the cost of business meals can be deducted even if associated with entertainment if the cost of the meal is accounting for separately.
What document must corporations file with the state to organize their business? (ch.15)
Articles of incorporation
(ch.9) Blue Corporation began business on April 1 of last year and reported gross receipts of $18 million. Which of the following is true statement about the gross receipts test as applied to Blue?
Blue will qualify because their average gross receipts is only $24 million The gross receipts test for a partial year is applied by annualizing the gross receipts for the short year. This is done by multiplying the short year receipts by 12 and dividing the product by the number of months in the short year [($18 million × 12)/9] < $26 million.
Which of the following does not create a permanent book-tax difference?
Charitable contributions in excess of the 10% of taxable income limitation. Excess charitable contributions may be carried forward five years. When used, the temporary book-tax difference will reverse.
Which of the following does not create a permanent book-tax difference? Assume CARES Act applies.
Charitable contributions in excess of the percentage of taxable income limitation.
Which of the following cannot be selected as a valid tax year end?
December 15 will not qualify for a fiscal or a 52/53 week year.
A current year temporary book-tax difference is unfavorable if it causes taxable income to decrease relative to book income.
False
All C corporations are required to file a Schedule M-3 with their tax returns.
False
All corporate deductions are deductions from AGI deductions.
False
All-Star Corporation has a net operating loss in 2020. It can carry the loss back to the previous two years, starting with 2018.
False
All-Star Corporation has a net operating loss in 2020. It is not allowed to carry the loss back. Assume CARES Act applies.
False
Business income allocations from an S corporation to its shareholders are self-employment income to the shareholders. (ch.15)
False
Corporations are legally formed by filing articles of agreement with the state in which the corporation will be created.
False
Federal income tax expense reported on a corporation's financial statement generates an unfavorable temporary book-tax difference.
False
Highway speeding fines can be deducted as long as the speeding was done in the line of business.
False
LLC members don't have as much flexibility as corporate shareholders to alter their legal arrangements with respect to one another, the corporation, and with outsiders.
False
Lansing Inc. incurred a net operating loss of $10,000,000 in 2020. Lansing Inc. reports $10,000,000 of taxable income before the NOL deduction in 2021. Lansing Inc. can offset all of its 2021 taxable income with the 2020 NOL carryover.
False
Shareholders of C corporations are allowed to deduct their share of corporate losses on their own tax returns.(ch.15)
False
Similar to individuals, corporations are not subject to any limitations relating to the carryforward of unused net capital losses.
False
Taxpayers can always defer recognition of advance payments into gross income until the payment is included in income for financial reporting purposes.
False
The corporate tax rate is slightly higher than the top individual marginal tax rate.(ch.15)
False
The cost of a business meal is deductible only if the meal was provided to an existing client.
False
The deduction for business interest in 2020 cannot exceed 20 percent of adjusted taxable income plus allocable interest income.
False
The gross receipts test is only applied to firms that have complete financial data for a minimum of 4 years.
False
(ch.16) P Corporation receives a dividend from Q Corporation. P Corporation includes the dividend in its gross income for tax and financial accounting purposes. If P accounted for the dividend as gross income for book and tax purposes, what can we conclude about P's ownership in Q?
P likely owns less than 20 percent of the stock of Q. Corporations usually include dividends from corporations in which they own less than 20 percent in both taxable and financial income. There is no book-tax difference with respect to dividend income (the associated 50% dividends received deduction will create a favorable permanent difference).
If partnerships retain their earnings, when will partners be taxed on the earnings?
Partners will be taxed as partnership earnings are allocated to them at the end of the year whether they actually receive a distribution or not.
(ch.16) Puma Inc. sold equipment at a loss. Puma depreciated the property using the straight-line method for financial accounting purposes and immediately expensed the property for tax purposes. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes on the date of the sale, what is the nature of the book-tax difference associated with the loss on the sale?
Temporary; unfavorable. The loss recognized by Puma is lower for tax purposes than it is for book purposes because the tax accumulated depreciation is higher than the book accumulated depreciation (the basis is higher for book purposes than for tax purposes). This adjustment is the reversal of the favorable book-tax difference for depreciation on the asset in prior years.
(ch.16) In year 1 (the current year), LAA Inc. made a charitable donation of $100,000 to the American Red Cross (a qualifying charity). For the year, LAA reported taxable income of $550,000, which included a $100,000 charitable contribution deduction (before limitation), a $50,000 dividends-received deduction, and a $10,000 net operating loss carryover from year 0.What is LAA Inc.'s charitable contribution deduction for year 1?
The charitable contribution deduction for the year is limited to 10% of taxable income before any charitable contribution and before the dividends received deduction. But, it is determined after deducting NOL carryovers. Consequently, LAA's modified taxable income is $700,000 ($550,000 + $100,000 + $50,000). LAA's charitable contribution deduction is limited to $70,000 ($700,000 × 10%). The remaining $30,000 ($100,000 donation minus $70,000 deductible amount) is carried over for up to five years. taxable income before the charitable contribution limitation, charitable contribution deduction before limitation, and dividends-received deductions are summed. This sum is then multiplied by 10% per IRC § 170(b)(2)(a). These factors result in the charitable contribution deduction limitation Taxable income before charitable 550,000 Charitable contribution deduction b4 limit 100,000 DRD 10,000 = 700,000 Modified taxable income *10% (limitation) = 70,000 The charitable contribution carryover is then calculated by subtracting the lesser of charitable contribution deduction before limitation or charitable contribution deduction limitation. 70,000<100,000 ($100,000 donation minus $70,000 deductible amount) is carried over for up to five years.
(ch.16) In 2021 (the current year), LAA Inc. made a charitable donation of $158,250 to the American Red Cross (a qualifying charity). For the year, LAA reported taxable income of $612,000, which included a $158,250 charitable contribution deduction (before limitation), a $71,500 dividends-received deduction, and a $11,600 net operating loss carryover from year 0. Assume CARES Act applies.What is LAA Inc.'s charitable contribution deduction for 2021?
The charitable contribution deduction for the year is limited to 10% of taxable income before any charitable contribution and before the dividends received deduction. But, it is determined after deducting NOL carryovers. Consequently, LAA's modified taxable income is $841,750 ($612,000 + $158,250 + $71,500). LAA's charitable contribution deduction is limited to $84,175 ($841,750 × 10%). The remaining $74,075 ($158,250 donation minus $84,175 deductible amount) is carried over for up to five years taxable income before the charitable contribution limitation, charitable contribution deduction before limitation, and dividends-received deductions are summed. This sum is then multiplied by 10% per IRC § 170(b)(2)(a). These factors result in the charitable contribution deduction limitation Taxable income before charitable 612,000 Charitable contribution deduction b4 limit 158,250 DRD = $71,500 $841,750 Modified taxable income *10% (limitation) = $84,175 The charitable contribution carryover is then calculated by subtracting the lesser of charitable contribution deduction before limitation or charitable contribution deduction limitation. $84,175<100,000 ($158,250 donation minus $84,175 deductible amount) is carried over for up to five years
Which of the following is a true statement?
The cost of business entertainment is not deductible
Which of the following is a true statement? ( cost of lodging)
The cost of lodging is deductible if the taxpayer is away from home overnight on business When the travel has both business and personal aspects, the deductibility of the transportation costs depends upon whether business is the primary purpose for the trip. If the primary purpose of a trip is business, the transportation costs are fully deductible, but meals (50%), lodging, and incidental expenditures are limited to those incurred during the business portion of the trave
Although corporate income is subject to double tax, in some circumstances, the overall tax rate for corporate income is lower than the tax rate for flow-through income. (ch.15)
True
For tax purposes, a single-member LLC is treated as either a sole proprietorship or a disregarded entity.
True
LLCs with multiple members may elect to be taxed as corporations.
True
Qualified dividends may be subject to a marginal tax rate of 23.8 percent (20 percent for the capital gain and 3.8 percent tax on net investment income) for taxpayers with income over a certain threshold (ch.15)
True
Reasonable in amount means that expenditures cannot be exorbitant even if the amount is motivated by profit.
True
The deduction for business interest cannot exceed 30 percent of adjusted taxable income plus allocable interest income.
True
The limitation on the deduction of business interest does not apply to businesses that qualify under the gross receipts test.
True
The "all-events" test for income determines the amount of income will be included in taxable income for accrual method taxpayers.
True The all-events test determines which period income is realized.
The arm's length transaction test would most likely not apply to which of the following?
Whether an expenditure should be deducted in a later period Arm's length is the test used to determine whether an expenditure is reasonable or exorbitant in amount.
(ch.15) Willow Corp. (a C corporation) reported taxable income before the net operating loss deduction (NOL) in the amount of $100,000 in 2020. Willow had an NOL carryover of $90,000 to 2020. Assume CARES Act applies. How much tax will Willow Corp. pay in 2020, what is its NOL carryover to 2021, and what is its NOL carryover to 2021 under the following assumptions? b. $50,000 of the NOL was generated in 2018 and $40,000 was generated in 2019. Assume that Willow elects to forgo the carryback period on all NOLs eligible for carryback.
Willow Corp tax liability year 3= $2,100 Willow Corp NOL carryover year 4= 0 b. Tax is $2,100 and NOL carryover is $0. If there were a NOL carryover, it would be carried forward indefinitely. Under the CARES Act, net operating losses can offset 100 percent of the taxable income before the net operating loss deduction for tax years beginning before 2021. For tax years beginning after 2020, the net operating loss deduction for NOLs incurred in tax years beginning after 2017 is limited to 80% of taxable income after deducting NOLs incurred in tax years beginning before 2018. In this case the full NOLs would be available to offset taxable income before the NOL deduction. Under the CARES Act, NOLs incurred in tax years beginning after 2017 and before 2021 can be carried back five-years. Taxpayers can elect to forgo the carryback. Willow elected to forgo the carryback option for both the 2018 and 2019 NOLs.
(ch.15) Willow Corp. (a C corporation) reported taxable income before the net operating loss deduction (NOL) in the amount of $100,000 in 2020. Willow had an NOL carryover of $90,000 to 2020. Assume CARES Act applies. How much tax will Willow Corp. pay in 2020, what is its NOL carryover to 2021, and what is its NOL carryover to 2021 under the following assumptions? a. $50,000 of the NOL was generated in 2016 and $40,000 of the NOL was generated in 2017.
Willow Corp tax liability year 3= $2,100 Willow Corp NOL carryover year 4= 0 is $2,100 and NOL carryover is $0. The expiration date is not applicable because there is no NOL. Description (1)2020 taxable income before NOL$100,000 (2)2016 NOL carryforward (50,000) (3)2017 NOL carryforward (40,000) (4)Taxable income reported$10,000 (1) + (2) + (3) (5)Tax rate 21%Flat corporate tax rate Taxes paid in year 3$2,100 (4) × (5)
(ch.16) Boise Corporation has gross receipts according to the following schedule: Year 1$23 million Year 2$22 million Year 3$25 million Year 4$27 million Year 5$29 million Year 6$30 million If Boise began business as a cash-method corporation in Year 1, in which year would it first have been required to use the accrual method?
Year 6 Corporations with $26 million or less in average annual gross receipts can use the cash method of accounting for tax purposes. Corporations that have not been in existence for at least three years can compute average annual gross receipts over the years they have been in existence. The three years preceding Year 6 have average annual gross receipts of $27 million.
Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC's deductible DRD in each of the following situations: a. WC's taxable income (loss) without the dividend income or the DRD is $10,000. b. WC's taxable income (loss) without the dividend income or the DRD is $(10,000). c. WC's taxable income (loss) without the dividend income or the DRD is $(99,000) d. WC's taxable income (loss) without the dividend income or the DRD is $(101,000). e. WC's taxable income (loss) without the dividend income or the DRD is $(500,000). f. What is WC's book-tax difference associated with its DRD in part (a)? Is the difference favorable or unfavorable? Is it permanent or temporary? (ch.16)
a. $100,000. Because Wasatch owns less than 20 percent of Tager, its DRD is percentage is 50%. So, its full DRD is $100,000 (0.5 × $200,000). Wasatch's modified taxable income for the taxable income limitation is $210,000 ($10,000 + $200,000 dividend). Thus, the taxable income limit is $105,000 ($210,000 × 50%). Because the full $100,000 DRD is less than the taxable income limit, Wasatch may deduct the entire $100,000 DRD. b.$95,000. Because Wasatch owns less than 20 percent of Tager, its DRD is percentage is 50%. So, its full DRD is $100,000 (0.5 × $200,000). Wasatch's modified taxable income for the taxable income limitation is $190,000 [($10,000) + $200,000 dividend]. Thus, the taxable income limit is $95,000 ($190,000 × 50%). Because the taxable income limitation of $95,000 is less than the full DRD of $100,000 and because deducting the full DRD does not leave Wasatch in a loss position ($190,000 − $100,000 > $0), Wasatch's DRD is limited to $95,000. c.$50,500. Because Wasatch owns less than 20 percent of Tager, its DRD is percentage is 50%. So, its full DRD is $100,000 (0.5 × $200,000). Wasatch's modified taxable income for the taxable income limitation is $101,000 [($99,000) + $200,000 dividend]. Thus, the taxable income limit is $50,500 ($101,000 × 50%). In this case the taxable income limitation of $50,500 is less than the full DRD of $100,000 and because deducting the full DRD does not leave Wasatch in a loss position ($101,000 − $100,000 > $0), Wasatch's DRD is limited to $50,500. d. $100,000. Because Wasatch owns less than 20 percent of Tager, its DRD is percentage is 50%. So, its full DRD is $100,000 (0.5× $200,000). Wasatch's modified taxable income for the taxable income limitation is $99,000 [($101,000) + $200,000 dividend]. Thus, the taxable income limit is $49,500 ($99,000 × 50%). In this case the taxable income limitation of $49,500 is less than the full DRD of $100,000, however, because deducting the full DRD leaves Wasatch in a loss position ($99,000 − $100,000 < $0), Wasatch's DRD is not limited by the taxable income limitation. So, it is allowed to deduct the full $100,000 DRD. e.$100,000.Because Wasatch owns less than 20 percent of Tager, its DRD is percentage is 50%. So, its full DRD is $100,000 (0.5 × $200,000). Wasatch's modified taxable income for the taxable income limitation is ($300,000) [($500,000) + $200,000 dividend]. Because Wasatch is in a loss position before deducting the DRD, the taxable income limitation does not apply and Wasatch may deduct the full DRD of $100,000. f.The DRD creates a $100,000 permanent, favorable book-tax difference.
(ch.9) Michelle operates several food trucks. Indicate the amount (if any) that she can deduct as an ordinary and necessary business deduction in each of the following situations. a. Michelle moves her food truck between various locations on a daily rotation. Last week, Michelle was stopped for speeding. She paid a fine of $135 for speeding plus $90 for legal advice in connection with the ticket. b. Michelle paid $760 to reserve a parking place for her food truck for the fall football season outside the local football arena. Michelle also paid $105 for tickets to a game for her children. c. Michelle provided a candidate with free advertising painted on her truck during the candidate's campaign for city council. Michelle paid $540 to have the ad prepared and an additional $240 to have the ad removed from the truck after the candidate lost the election. d. Michelle realized a $1,210 loss when she sold one of her food trucks to her father, a related party.
a. $90 No deduction for the fine, but the legal advice is fully deductible. b.The cost of the reserve parking ($760) is deductible, but the cost of the tickets is likely personal and not deductible. c.No deduction for expenditures for political purposes (in cash or in kind). d. No current deduction for a business loss on a sale to a related party.
ELS Corporation reported gross receipts for 2017-2019 for scenarios A, B, and C as follows: YearScenario AScenario BScenario C 2017 $25,000,000$24,000,000$26,500,000 2018 26,000,000 26,000,000 26,000,000 2019 26,900,000 28,500,000 25,500,000 a. Is ELS allowed to use the cash method of accounting in 2020 under Scenario A? b. Is ELS allowed to use the cash method of accounting in 2020 under Scenario B? c. Is ELS allowed to use the cash method of accounting in 2020 under Scenario C? (ch.16)
a. Yes. For the 2020 tax year, corporations with average gross receipts for the prior three years of $26 million or less may use the cash method of accounting. In Scenario A, ELS Corporation's average gross receipts for 2017-2019 is $25,966,667 so ELS may use the cash method of accounting in 2020. b.No. For the 2020 tax year, corporations with average gross receipts for the prior three years of $26 million or less may use the cash method of accounting. In Scenario B, ELS Corporation's average gross receipts for 2017-2019 is $26,166,667 so ELS may not use the cash method of accounting in 2020 (must use accrual). c. Yes. For the 2020 tax year, corporations with average gross receipts for the prior three years of $26 million or less may use the cash method of accounting. In Scenario C, ELS Corporation's average gross receipts for 2017-2019 is exactly $26,000,000 so ELS may use the cash method of accounting in 2020.
(ch.15) Danni is a single 30 percent owner of Kolt (a business entity). In the current year, Kolt reported a $1,000,000 business loss. Answer the following questions associated with each of the following alternative scenarios: a. Kolt is organized as a C corporation and Danni works 20 hours a week as an employee for Kolt. Danni has a $200,000 basis in her Kolt stock. How much of Kolt's loss is Danni allowed to deduct this year against her other income?
a.$0. Losses of C corporations do not flow through to shareholders
(ch.9) Indicate the amount (if any) that Josh can deduct as an ordinary and necessary business deduction in each of the following situations. (Leave no answers blank. Enter zero if applicable.) a. Josh borrowed $55,500 from First State Bank using his business assets as collateral. He used the money to buy City of Blanksville bonds. Over the course of a year, Josh paid interest of $13,200 on the borrowed funds, but he received $11,400 of interest on the bonds. b. Josh purchased a piece of land for $81,000 in order to get a location to expand his business. He also paid $6,000 to construct a new driveway for access to the property. c. This year Josh paid $20,100 to employ the mayor's son in the business. Josh would typically pay an employee with these responsibilities about $18,300, but the mayor assured Josh that after his son was hired, some city business would be coming his way. d. Josh paid his brother, a mechanic, $5,850 to install a robotic machine for Josh's business. The amount he paid to his brother is comparable to what he would have paid to an unrelated person to do the same work. Once the installation was completed by his brother, Josh began calibrating the machine for operation. However, by the end of the year, he had not started using the machine in his business.
a.$0. The interest expense is not deductible (expense associated with tax-exempt income) b.$0. Capital expenditures are not deductible. c. Only $18,300 is deductible, and the remaining $1,800 is either unreasonable in amount or against public policy (as a bribe). d. $0. The amount paid to install a machine is capitalized because the cost benefits the useful life of the machine.
(ch.15) Rondo and his business associate, Larry, are considering forming a business entity called R&L, but they are unsure about whether to form it as a C corporation, an S corporation, or an LLC taxed as a partnership. Rondo and Larry would each invest $100,000 in the business. Thus, each owner would take an initial basis in his ownership interest of $100,000 no matter which entity type is formed. Shortly after the formation of the entity, the business borrowed $40,000 from the bank. If applicable, this debt will be shared equally between the two owners. a. After taking the loan into account, what is Rondo's tax basis in his R&L stock if R&L is formed as a C corporation?
a.$100,000. C corporation shareholders do not include entity debt in the tax basis of their stock in the corporation.
(ch.16) In year 1 (the current year), OCC Corp. made a charitable donation of $200,000 to the Jordan Spieth Family Foundation (a qualifying charity). For the year, OCC reported taxable income of $1,500,000 before deducting any charitable contributions, before deducting its $20,000 dividends-received deduction, and before deducting its $40,000 NOL carryover from last year. a. What amount of the $200,000 donation is OCC allowed to deduct for tax purposes in year 1? b. In year 2, OCC did not make any charitable contributions. It reported taxable income of $300,000 before any charitable contribution deductions and before a $15,000 dividends-received deduction. What book-tax difference associated with the charitable contributions will OCC report in year 2? Is the difference favorable or unfavorable? Is it permanent or temporary? c. In year 2, OCC did not make any charitable contributions. It reported taxable income of $300,000 before any charitable contribution deductions and before a $15,000 dividends-received deduction. In years 3, 4, and 5, OCC reported taxable losses of $50,000. Finally, in year 6 it reported $1,000,000 in taxable income before any charitable contribution deductions. It did not have any dividends-received deduction. OCC did not actually make any charitable donations in year 6. What book-tax difference associated with charitable contributions will OCC report in year 6? (ch.16)
a.$146,000. OCC may deduct up to 10% of taxable income before any charitable contributions, the dividends received deduction, NOL and capital loss carrybacks. Because net operating loss carryovers are deductible in determining the taxable income limitation, OCC taxable income for charitable contribution limitation purposes is $1,460,000 ($1,500,000 − $40,000 NOL carryover). The deductible limit on charitable contributions is $146,000 ($1,460,000 × 10%). OCC can carryover the remaining $54,000 for up to 5 years. b.OCC's taxable income limitation in year 2 is $30,000 ($300,000 × 10%). Although OCC did not make any current year contributions, it is allowed to deduct (subject to the 10% limitation) its charitable contribution carryover from year 1 in the amount of $54,000. Because the limitation on the deduction in year 2 is $30,000, it may deduct $30,000 and carry over the remaining $24,000 to year 3. In year 2, OCC will report a $30,000 favorable, temporary book-tax difference. c.OCC would be allowed to deduct its remaining $24,000 charitable contribution carryover because the taxable income is not limiting. Consequently, it would report a favorable temporary book-tax difference of $24,000. If OCC had not been able to deduct some of the carryover in year 6, the carryover would have expired unused.
(ch.16) Riverbend Inc. received a $332,500 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,260,000 before deducting the dividends-received deduction (DRD), a $81,000 NOL carryover, and a $128,000 charitable contribution. Use Exhibit 16-6. (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.) a. What is Riverbend's deductible DRD assuming it owns 10 percent of Hobble Corporation? c. What is Riverbend's DRD assuming it owns 50 percent of Hobble Corporation? e. What is Riverbend's DRD assuming it owns 93 percent of Hobble Corporation (and is part of the same affiliated group)?
a.Because Riverbend owns less than 20 percent of Hobble, its DRD percentage is 50%. Its full DRD is $166,250 (0.5 × $332,500). Riverbend's modified taxable income for the taxable income limitation is $2,132,000 ($2,260,000 minus $128,000 charitable contribution). Thus, the taxable income limit is $1,066,000 ($2,132,000 × 50%). Because the full $166,250 DRD is less than the taxable income limit, Riverbend may deduct the entire $166,250 DRD. c. Because Riverbend owns 20% or more but less than 80% of Hobble, its DRD percentage is 65%. So, its full DRD is $216,125 (0.65 × $332,500). Riverbend's modified taxable income for the taxable income limitation is $2,132,000 ($2,260,000 minus $128,000 charitable contribution). Thus, the taxable income limit is $1,385,800 ($2,132,000 × 65%). Because the full $216,125 DRD is less than the taxable income limit, Riverbend may deduct the entire $216,125 DRD. e. $332,500. Because it owns 80% or more of Hobble Corp., Riverbend is entitled to a 100% DRD.
(ch.16) Maple Corp. owns several pieces of highly valued paintings that are on display in the corporation's headquarters. This year, it donated one of the paintings valued at $100,000 (adjusted basis of $25,000) to a local museum for the museum to display. a. What is the amount of Maple Corp.'s charitable contribution deduction for the painting (assuming income limitations do not apply)? b. What would be Maple's deduction if the museum sold the painting one month after it received it from Maple?
a.If the taxpayer contributes tangible personal property to a tax-exempt organization, and the organization uses the property in a manner related to its tax-exempt purpose [see §170(e)(1)(B)(i)], the taxpayer is allowed to deduct the fair market value of the property if the property would have generated long-term capital gain if it were sold. In this case, the painting was long-term capital gain property to Maple Corp. and the museum displayed the painting, which is consistent with its tax-exempt purpose. Maple is allowed to deduct the $100,000 fair market value of the painting. b. If the museum sold the painting, it would be using the property in a manner unrelated to its tax exempt purpose. In this case, according to Reg. §1.170A-4(b)(3)(ii)(b), Maple's deduction would be limited to the $25,000 basis of the property unless at the time of the contribution, it is reasonable to anticipate that the property would not be put to an unrelated use by the donee. Further, the regulation explains that "in the case of a contribution of tangible personal property to or for the use of a museum, if the object donated is of a general type normally retained by such museum or other museums for museum purposes, it will be reasonable for the donor to anticipate, unless he has actual knowledge to the contrary, that the object will not be put to an unrelated use by the donee, whether or not the object is later sold or exchanged by the donee." Consequently, if Maple had prior knowledge that the museum would sell the property, it would be allowed to deduct only the $25,000 basis of the property.
(ch.16) Golf Corp. (GC), a calendar-year accrual-method corporation, held its directors' meeting on December 15 of year 1. During the meeting the board of directors authorized GC to pay a $75,000 charitable contribution to the World Golf Foundation, a qualifying charity. a. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on or before April 15 of year 2, what book-tax difference will it report associated with the contribution in year 1 (assume the 10 percent limitation does not apply)? Is it favorable or unfavorable? Is it permanent or temporary? b. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on or before April 15 of year 2, what book-tax difference will GC report in year 2 (assuming the 10 percent limitation does not apply)? Is it favorable or unfavorable? c. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on May 15 of year 2, what book-tax difference will it report associated with the contribution in year 1 (assume the 10 percent limitation does not apply)? Is it favorable or unfavorable? Is it permanent or temporary? d. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on May 15 of year 2, what book-tax difference will GC report in year 2 (assuming the 10 percent limitation does not apply)? Is it favorable or unfavorable? (ch.16)
a.No book-tax difference. The $75,000 contribution is deductible in year 1 for both book and tax purposes. It is deductible for tax purposes because it paid the accrued contribution within 3 ½ months after year end. b.No book-tax difference in year 2 because the entire contribution was deducted in year 1 for book and tax purposes. c.GC deducts $75,000 in year 1 for book purposes and $50,000 in year 1 for tax purposes. GC cannot deduct the remaining $25,000 in year 1 for tax purposes because it did not actually pay the contribution within 3 ½ months after year end. The $25,000 that was not deductible in year 1, is carried over to year 2. The year 1 book-tax difference is a $25,000 unfavorable temporary difference. d.In year 2, GC reports a favorable $25,000 book-tax difference when it is allowed to deduct the $25,000 for tax purposes that it paid on May 15, year 2.
(ch.15) SCC corporation (a C corporation) has a net operating loss (NOL) carryover to 2020 in the amount of $30,000. How much tax will SCC pay in 2020 if it reports taxable income from operations of $20,000 before considering loss carryovers under the following assumptions? a. The NOL originated in 2017.
a.None. SCCs' loss in 2017 of ($30,000) will be available to offset up to 100 percent of the income generated by SCC in 2020. Since SCC earned $20,000 of taxable income in 2020 before any loss carryovers, it can use ($20,000) of the loss carryover from 2017 to offset its entire taxable income and will pay no tax. SCC will have a ($10,000) loss carryover for another 17 years.
