Summers Tax II Chapters 16 & 17
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?
$1,120,000
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?
$1,120,000 deduct $1,000,000 for compensation + $120,000 of nontaxable fringe benefits = $1,120,000
Demi, an accrual basis taxpayer, sold goods in October 2018 for $10,000. The customer was unable to pay cash. So the customer gave Demi a note for $10,000 that was payable in April 2019. The note bore interest at the Federal rate. The fair market value of the note at the end of 2018 was $9,000. Demi collected $10,000 from the customer in April 2019. Under the accrual method, Demi must recognize:
$10,000 of income in 2018
Dogwood, Inc., earns book net income before tax of $600,000. Dogwood puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Dogwood has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21%, what is Dogwood's total income tax expense reported on its GAAP financial statements?
$126,000 120,000 × 21%, =$25,200. Taxable income is $480,000 ($600,000 - $120,000) =$100,800 $100,800 + $25,200 = $126,000
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?
$131,000
False
A taxpayer who is required to use the percentage of completion method can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 20% of the estimated contract costs
False
ASC 740 adopts an income statement approach to measuring deferred taxes
True
Accumulated costs are deducted when the revenue from the contract is recognized for long-term contract purposes
False
An accounting error will not affect the taxpayer's total lifetime income
False
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
True
Apple Corporation and Orange Corporation are equal partners in the A & O Partnership. Apple Corporation's tax year ends September 30, and Orange Corporation is a calendar year taxpayer. A & O Partnership must use September 30 as its tax year, unless it has a business purpose for using a different tax year.
True
As to when economic performance is met, that depends on the nature of the liability.
True
Bandu, a cash basis taxpayer, sold investment land in 2018. He received $35,000 in the year of sale and $105,000 in 2019. The cost of the land was $100,000. Under the installment method, Bandu would report a $10,000 gain in 2018
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.
Cash
False
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.
Daisy Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2018, the company entered into a contract to construct a building for $960,000. Daisy estimated that the cost of constructing the building would be $720,000. In 2018, the company incurred $240,000 in costs under the contract. In 2019, the company incurred an additional $450,000 in costs to complete the contract. The company's marginal tax rate in all years was 35%. Which of the following statements is true?
Daisy must report $80,000 gross profit on the contract in 2018, but must pay interest in 2018 under the lookback rules.
True
Finch, Inc., has consistently included some factory overhead as a current expense, rather than as a cost of producing goods. As a result, the beginning inventory for 2018 is understated by $30,000. If Finch voluntarily changes accounting methods effective January 1, 2018, the adjustment to the inventory is a § 481 adjustment and $7,500 must be added to taxable income for each year 2018, 2019, 2020, and 2021
False
For 2019, if a corporation owns less than 20% of the stock of another domestic corporation, the dividends received deduction is 65%
False
For 2019, the individual marginal tax rates range from 10% to 37%, while the corporate marginal tax rates range from 10% to 39.6%. - Corporate is 21%
True
For related-party installment sales, related parties include the first seller's brothers, sisters, ancestors, lineal descendants, controlled corporations, and partnerships, trusts, and estates in which the seller has an interest.
Gaffey Corporation obtained permission to change from a calendar year to a fiscal year ending May 31, beginning in 2019. For the short period January 1 through May 31, 2019, the corporation's taxable income was $140,000. For computing the tax, assume a tax rate of 21%.
Gaffey Corporation's annualized short period income is ($336,000) and the converted tax on the annualized income to a short period tax is ($29,400) 1. Annualize the short-period income. $140,000 x (12 months/5 months) = $336,000. 2. Compute the tax on the annualized income. $336,000 x 21% = $70,560. 3. Convert the tax on the annualized income to a short-period tax. $70,560 x (5 months/12 months) =$29,400.
True
Generally payment is the only means of satisfying economic performance for rebates and refunds.
True
Generally, a corporation that keeps adequate books and records may be permitted to elect a fiscal year, a 12-month period ending on the last day of a month other than December, for the accounting period.
True
Generally, a taxable year may not exceed 12 calendar months.
True
Generally, the taxpayer must accumulate all of the direct and indirect costs incurred under a contract.
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?
If Cliff Company is an S corporation, Herman will report none of the $25,000 long-term capital gain on his personal tax return
False
If a taxpayer is employing an incorrect method of accounting, permission is not needed from the IRS to change to a correct method
False
If interest paid is attributed to the taxpayer's building, which is under construction, the taxpayer need not add the interest to the cost of the building
True
If the principal partners do not all have the same tax year and no majority of partners have the same tax year, the partnership must use a year that results in the least aggregate deferral of income
False
If the taxpayer is obligated to provide property or services, economic performance occurs in the year the taxpayer contracts for the property or services.
True
In 2018, Kiwi Construction Company entered into a contract to build a beach cottage for Ophelia and James for a total price of $500,000. Kiwi estimated the total cost to complete the cottage to be $400,000. In 2018, Kiwi incurred $300,000 of costs on the contract, and in 2019 the contract was completed at a total cost of $425,000. Kiwi is not required to recognize any income from the contract until 2019
Which of the following creates a deferred tax asset?
Income is includible in taxable income currently but is not includible in book income until a future period
False
Individuals usually use a fiscal year for tax purposes.
Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a long-term contract. The gross contract price was $2,300,000. Jebali finished construction in 2019 at a cost of $2,100,000. However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $80,000. In 2020, the dispute is settled and Jebali fixed the doorway at a cost of $65,000.
Jebali must include ($2,220,000) in gross income and is allowed deductions of ($2,100,000) for 2019. In 2020, Jebali must include ($80,000) gross income and may deduct ($65,000) as expenses in that year. $2,300,000 - $80,000 = 2,220,000
The cash method of accounting can be used by all of the following, except:
Large farming corporations
False
No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.
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?
Oliver must report a $20,000 long-term capital gain on his 2019 tax return
True
On December 31, 2019, Topaz, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 70% shareholder. Topaz pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2020. Topaz deducts the bonus in 2020, the year in which it is included in Barry's gross income.
In 2019, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. The clients signed notes receivable to Chaya that have a fair market value of $22,000 at year-end. In addition, Chaya sold a 36-month service contract on June 1, 2019, and received payment in full of $12,000. How much income does Chaya report from these transactions in 2019?
$27,333 25,000 rather than the fair market value of the notes of $22,000. $12,000 x 7/36 = 2,333 9$25,000 + $2,3330 = 27,333
Brown, Inc., an S corporation, timely elected a fiscal year ending September 30. Bob is the only shareholder and is a calendar year taxpayer. The "required" tax year ends on December 31, 2019, the major shareholder's year-end, and the deferral period is the maximum of three months. For the fiscal year ending September 30, 2019, Brown, Inc., earned $100,000. The required tax payment for the previous year was $5,000. The maximum individual tax rate is 38%. How much must the corporation pay by May 15, 2020?
$4,500
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?
$6,300 $420,000 - $190,000 - $200,000 = 30,000 $30,000 × 21% = 6,300
Magnet Corporation owns stock in Iron Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In 2019, Iron Corporation pays Magnet a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Magnet claim if it owns 25% of Iron's stock?
$65,000
For 2019, Essence Company, a calendar year taxpayer, will change from using the cash method for tax purposes to the accrual method. At the end of 2018, Essence had the following items: Accounts receivable $200,000 Accounts payable 135,000 Bank loan 100,000 What is the total § 481(a) adjustment for this change in accounting method? Indicate whether the adjustment is positive or negative.
$65,000, Positive ($200,000 - $135,000)
True
A doctor's incorporated medical practice, generally, must have a business purpose for using a tax year that does not end on December 31
In 2019, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $78,500. The clients signed notes receivable to Chaya that have a fair market value of $66,725 at year-end. In addition, Chaya sold a 36-month service contract on April 1, 2019, and received payment in full of $37,680. How much gross income does Chaya report from these transactions in 2019?
$87,920 $37,680 x 9/36 = 9,420 $78,500 + $9,420 = 87,920
Delaine is a 90% shareholder in a personal service corporation (PSC). The corporation paid Delaine a salary of $265,000 during its fiscal year ending September 30, 2019. a. Assume that the corporation cannot satisfy the business purpose test for a fiscal year. The corporation can continue to use its fiscal year without any negative tax effects, provided Delaine receives at least ($66,250) as salary during the period October 1 through December 31, 2019. b. Assume that the corporation cannot satisfy the business purpose test or salary test for a fiscal year. The corporation pays Delaine a salary of $50,000 for October 1 through December 31, 2019, and salary of $300,000 from January 1, 2020, through September 30, 2020. The personal service corporation can retain the fiscal year if the corporation's deduction for salary for its fiscal year ending September 30, 2020, is limited to ($200,000)
(3 months/12 months) x $265,000 = 66,250 $50,000 + {$50,000 x [(12 - 3)/3]} = $50,000 + $150,000 = 200,000
Indicate whether the following taxpayers generally may use the cash method for tax purposes.
A "C" corporation - No An "S" corporation - Yes A partnership with a corporate partner - No An individual taxpayer - Yes A tax shelter - No
False
A C corporation has average annual gross receipts of $2,500,000. The corporation must use the accrual method of accounting (25 M)
True
A C corporation has average annual gross receipts of $2,800,000. The corporation must use the cash method of accounting
True
A CPA practice that is incorporated earns two-thirds of its annual revenues in the months of February, March, and April. Because the CPA practice is a professional services corporation (PSC), it can use a natural business year to report its income
True
A cash basis taxpayer can deduct expenditures for rights that do not extend beyond the earlier of (1) 12 months after the first date on which the taxpayer realizes the right or (2) the end of the tax year following the year of payment.
False
A change in the basis used in the valuation of inventories is an accounting error
True
A contract to perform services (e.g., auditing or legal services) is not considered a contract for the purpose of long-term contracts.
False
A contract to perform services is considered a contract and can qualify as a long-term contract as long as it meets the requirements of not being completed within the same tax year
True
Pear Company began business in 2016 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2016 through 2018. As a result of an audit by the IRS, Pear was required to change to the accrual method of accounting beginning with 2019. The accounts receivable and inventory on hand at the end of 2018 are treated as a positive adjustment to income, and the accounts payable for inventory at the end of 2018 are a negative adjustment to income. These adjustments result from changing accounting methods and must be included in the 2018 taxable income
Mason canceled a note issued by Emma (Mason's niece) that arose in connection with the sale of property. At the time of the cancellation, the note had a basis to Mason of $30,000, a face amount of $55,000, and a fair market value of $42,000.
Presuming that the initial sale by Mason qualified as an installment sale, the cancellation results in gain of ($25,000) to Mason. 55,000 - 30,000 = 25,000
True
Prior to the TCJA of 2017, the U.S. corporate income tax was the highest of all the OECD countries
Raven Construction Company began a long-term contract in 2018. The contract price was $600,000. The estimated cost of the contract at the time it was begun was $450,000. The actual cost incurred in 2018 was $300,000. The contract was completed in 2019, and the cost incurred that year was $180,000. Under the percentage of completion method:
Raven will receive interest (under the lookback method) on the overpayment of taxes in 2018
True
Tax planning to reduce corporate income taxes should occur before the end of the tax year.
True
Taxable dividend payments reduce both the accumulated earnings tax and the personal holding company (PHC) tax
True
The Code recognizes the cash receipts and disbursements method as a permissible accounting method
False
The LIFO method is beneficial to any business in which prices are increasing from year to year and inventory quantities are not increasing
False
The all events and economic performance tests allows the use of reserves for warranties.
False
The cash method of accounting gives the taxpayer zero control over the recognition of expenses or income
In 2019, Silver Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses. The total amount of the expense for 2018 was $200,000, but $50,000 of the item was included in the ending inventory that year. Which of the following statements is true?
The company should change its accounting method in 2019, and reduce its 2019 income by $50,000, the amount of the negative § 481 adjustment to income.
False
The corporate AMT only applies to corporations with taxable income of over $1 million
______ is only available to corporate taxpayers.
The dividends received deduction
False
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
Shumpert, Inc., entered into a contract that was to take two years to complete, with an estimated cost of $900,000. The contract price was $1,300,000. Costs of the contract for 2018, the first year, totaled $675,000.
The gross profit reported by the percentage of completion method for 2018 was ($300,000). After the contract was completed at the end of 2019 at a total cost of $950,000. The gross profit reported by the percentage of completion method for 2019 is ($50,000). ($675,000/$900,000) x $1,300,000- $675,000 = 300,000 $1,300,000 − $950,000 = $350,000 $350,000- $300,000 = $50,000.
False
The installment method can be used to report a gain on the sale of depreciable property to a controlled entity.
True
The installment method does not apply to losses from the sale of property by a taxpayer who will receive at least one payment after the year of sale
True
The installment method often results in an interest-free loan (of deferred taxes) from the government
The ABCD Partnership is owned by Apple Corporation, Bloom Corporation, Sally Holder and Biff Muller. The partners have the following ownership percentages and tax years: Partner Ownership % Tax Year Apple Corporation 55% March 31 Bloom Corporation 25% August 31 Sally Holder 15% December 31 Biff Muller 5% December 31
The partnership's tax year must end on March 31 tax year must end on March 31 because Apple Corporation (a majority interest partner) has a greater than 50% interest in the partnership.
True
The percentage of completion method formula for the revenue accrued each period is computed as (Contract costs incurred during the period/Estimated total cost of the contract) x Contract price.
False
The percentage of completion method may be used for home construction contracts (contracts in which at least 80 percent of the estimated costs are for dwelling units in buildings with four or fewer units).
True
The personal holding company tax rate is 20%
True
The proceeds from the subsequent sale (the second sale) by the purchasing family member are treated as though they were used to pay the installment note due the selling family member (the first sale)
True
The purpose of the dividends received deduction is to mitigate multiple taxation of corporate income.
False
The request for a change of accounting method must be filed the year before the desired change
True
The request for a change of accounting method must be filed within the taxable year of the desired change
The taxpayer voluntarily changed from the cash to the accrual method of accounting, because inventories were material to the taxpayer's business. The change resulted in a positive $60,000 adjustment to income. Which of the following statements is true?
The taxpayer may add $15,000 to the income for the year of the change and to the incomes for each of the three following years.
If a taxpayer seeking a change to a natural business year has a net operating loss (NOL) for the short period, the IRS may require that the loss only be carried forward:
To prevent abuse of the change in year tax rules
True
Toby owns 60% of the stock in an S corporation that earned $230,000 during the year. He also owned 10% of the stock in a C corporation that earned $100,000 during the year. Toby received no distributions from the C corporation. With respect to this information, Toby must report $138,000 of income on his individual income tax return for the year.
True
Under the accrual method, an item is generally included in gross income for the year in which it is earned, regardless of when the income is collected
False
Under the cash method, an item is generally included in gross income for the year in which it is earned, regardless of when the income is collected
True
Under the cash method, income is not recognized until the taxpayer actually receives, or constructively receives, cash or its equivalent.
False
Under the cash method, year-end accounts payable (but not accrued expenses) are deducted in the determination of taxable income.
On December 30, 2019, Whitney sold a piece of property for $85,000. Her basis in the property was $40,000, and she incurred $1,200 in selling expenses. The buyer paid $5,000 down with the balance payable in $10,000 installments over the next eight years. In addition, the buyer assumed a $15,000 mortgage on the property.
Under the installment sales method, the total contract price is ($85,000), the total gain on the sale is ($58,800) and the amount of gain reported in 2019 is ($3,459) Cash down payment $5,000 + seller's mortgage assumed $15,000 + installments payable to the seller $80,000 = 100,000 sales 100,000 - 15,000 = 85,000 $100,000 sales - $1,200 selling expenses - $40,000 basis = 58,000 ($58,800 gain/$85,000 contract price) x $5,000 cash collected in 2019 = .6918 x $5,000 = $3,459
False
Under the least aggregate deferral method, the different tax years of the majority partners are tested to determine which produces the least aggregate deferral
True
Under the least aggregate deferral method, the different tax years of the principal partners are tested to determine which produces the least aggregate deferral
True
When a partner's tax year and the partnership's tax year differ, the partner will enjoy a deferral of income
True
When it applies, the installment method is mandatory