Tax Chapter 16
54. Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income as of the end of the third quarter? A. $300,000 B. $320,000 C. $400,000 D. $480,000
A. $300,000 The annual estimated taxable income for the third quarter is determined by annualizing cumulative taxable income for the first half of the year. $300,000 = 2 × ($100,000 first quarter income + $50,000 second quarter income).
38. Over what time period do corporations amortize purchased goodwill for tax purposes? A. 180 months B. 150 months C. 60 months D. None of these
A. 180 months Goodwill is amortized over 15 years (180 months).
56. Which of the following statements regarding the alternative minimum tax is false? A. Corporations compute the AMT by multiplying their AMT base by 35% and subtracting their regular tax liability. B. Small corporations are exempt from the AMT. C. All first-year corporations are exempt from the AMT. D. None of these is false (choose if you believe All of these are true).
A. Corporations compute the AMT by multiplying their AMT base by 35% and subtracting their regular tax liability. The AMT is calculated by multiplying the AMT base by 20%.
32. Which of the following does NOT create a permanent book-tax difference? A. Organizational and start-up expenses B. Key employee death benefit income C. Fines and penalties expenses D. Municipal bond interest income
A. Organizational and start-up expenses Organizational and start-up expenses are capitalized and amortized for tax purposes, so these create a temporary book-tax difference.
48. TireShop, Inc. owns 85% of Rubber Supply Co.'s voting stock throughout the tax year. TireShop and Rubber Supply would be considered as what kind of controlled group? A. Parent-subsidiary B. Brother-sister C. Combined D. None of these
A. Parent-subsidiary Related TireShop and Rubber form a Parent-subsidiary controlled group because TireShop owns at least 80% of Rubbers Supply Co.'s stock.
40. Tatoo Inc. reported a net capital loss of $13,000 in 2015. It had a net capital gain of $4,300 in 2013 and $3,000 in 2012. In 2014, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of the Tatoo's capital loss carryover remaining after it applies the carryback? A. $4,700 B. $5,700 C. $8,700 D. $13,000
B. $5,700 The net capital loss is first carried back to 2012 as $3,000 is deducted against net capital gain. The $4,300 net capital gain in 2013 is offset next. Because Tatoo reported a net operating loss in 2014, it is not allowed to apply the carryback to that year. The remaining carryover is $5,700 ($13,000 - $3,000 - $4,300).
41. Which of the following statements regarding net operating losses generated in 2015 is true? A. Corporations can carry net operating losses back two years and forward up to 15 years. B. A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future years. C. When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover. D. Marginal tax rates are irrelevant in determining the tax benefit of applying a net operating loss carryback or carryover. E. None of these is a true statement.
B. A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future years. A corporation may elect to forgo the net operating loss carryback and only carry the loss forward.
43. Which of the following is unnecessary to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity? A. Approval of the payment from the board of directors. B. Approval from the IRS prior to making the contribution. C. Payment made within two and one-half months of the tax year end. D. All of these are necessary.
B. Approval from the IRS prior to making the contribution. Prior IRS approval is not required.
49. Together, Kurt and Esmeralda own 60% of three corporations: RAZ, DVA, and TRE. The three corporations would be considered as what kind of controlled group for tax purposes? A. Parent-subsidiary B. Brother-sister C. Combined D. The three corporations would not be considered to be a controlled group for tax purposes.
B. Brother-sister Because the three owners control all three corporations, the group of corporations forms a brother-sister controlled group.
53. Which of the following statements is false regarding corporate estimated tax payments? A. The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. B. Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000 (including the alternative minimum tax). C. Even though a corporation extends its tax return it still must pay its tax liability for the year by two and one half months after year end. D. Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.
B. Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000 (including the alternative minimum tax). Corporations are required to make quarterly estimated payments if their federal income tax liability (including alternative minimum tax) is $500 or more.
33. Which of the following statements regarding book-tax differences is true? A. Corporations are not required to report book-tax differences on their income tax returns. B. Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences. C. Income excludable for tax purposes usually creates a temporary book-tax difference. D. None of these is true.
B. Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences. Temporary book-tax differences will eventually reverse; if a difference is favorable one year, it will be unfavorable in another.
39. Which of the following statements regarding capital gains and losses is false? A. In terms of tax treatment, corporations generally prefer capital gains to ordinary income. B. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year. C. C corporations can carry back net capital losses three years and they can carry them forward for five years. D. Corporations must apply capital loss carrybacks and carryovers in a particular order.
B. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year. Corporations cannot deduct capital losses against ordinary income.
51. What is the unextended due date of the tax return of a calendar-year corporation? A. February 15. B. March 15. C. April 15. D. September 15.
B. March 15. The unextended tax return due date is 2 ½ months after year end.
36. iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable
B. Permanent; unfavorable Interest expense on loans to acquire investments that produce tax-exempt income is not deductible under section 265.
35. TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the nature of the book-tax difference created by this expense? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable
B. Permanent; unfavorable Life insurance premiums for key employees are not deductible for tax purposes.
44. Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $5,000 in cash. Second, it could give stock it initially purchased two years ago for $4,000 but is now worth $6,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes? A. Cash > Stock > Inventory B. Stock > Cash > Inventory C. Inventory > Stock > Cash D. Inventory > Cash > Stock
B. Stock > Cash > Inventory Canny Foods can deduct $6,000 of the stock contribution (the fair market value of long-term capital gain property), $5,000 of the cash, and $3,000 of the inventory contribution (the adjusted basis of ordinary property).
55. Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true? A. Rapidpro may use the prior year tax liability to determine its first and second quarter estimated tax payments only since it is a large corporation. B. To avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment). C. To avoid penalty, the third quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its third quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment). D. None of these is true.
B. To avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment). Rapidpro can use its prior-year tax liability to determine only the first quarter payment. After that, it must use the current year's liability or the annualized income method to determine payments. The second quarter payment is based on the annualized tax liability from the first quarter taxable income.
50. Which of the following statements is false regarding consolidated tax returns? A. An affiliated group can file a consolidated tax return only if it elects to do so. B. To file a consolidated tax return, one corporation must own at least 50% of the stock of another corporation. C. For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member. D. For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.
B. To file a consolidated tax return, one corporation must own at least 50% of the stock of another corporation. To file a consolidated tax return, one corporation must own at least 80% of the stock of another corporation.
57. XPO Corporation has a minimum tax credit of $51,000 from 2013. If its 2014 tentative minimum tax is $211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2015? A. $51,000 B. $39,000 C. $12,000 D. $0
C. $12,000 The minimum tax credit can be used to offset regular tax liability to the level of AMT. In this case, $39,000 of minimum tax credit offsets the excess of AMT over regular tax liability, leaving $12,000 of minimum credit carryover.
46. Jazz Corporation owns 50% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0 B. $7,000 C. $8,000 D. $10,000
C. $8,000 Because Jazz owns more than 20% and less than 80% of the Williams stock it is entitled to an 80% dividends received deduction ($10,000 × 80%).
34. It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons? A. Temporary book-tax differences will reverse in future years whereas permanent differences will not. B. Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns. C. Both temporary book-tax differences will reverse in future years whereas permanent differences will not and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns. D. Neither temporary book-tax differences will reverse in future years whereas permanent differences will not nor certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C. Both temporary book-tax differences will reverse in future years whereas permanent differences will not and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns. Temporary book-tax differences will reverse in future years whereas permanent differences will not and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns are valid reasons why a corporation should distinguish between temporary and permanent book-tax differences.
45. Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true? A. Corporations may not carry over or carry back excess charitable contributions. B. Corporations can carry excess charitable contributions over to a future year or back to a prior year. C. Corporations can carry excess charitable contributions over to a future year but not back to a prior year. D. Corporations can carry excess charitable contributions back to a prior year but not over to a future year.
C. Corporations can carry excess charitable contributions over to a future year but not back to a prior year. Corporations may carry excess charitable contributions over for up to five years but they may not carry them back.
52. Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations? A. 100 percent of the prior year's tax liability (with a few exceptions) B. 100 percent of the current year's tax liability C. 100 percent of the estimated current year tax liability using the annualized income method D. All of these are acceptable methods of determining the required annual payment of federal income tax for corporations
D. All of these are acceptable methods of determining the required annual payment of federal income tax for corporations All methods are acceptable.
47. Which of the following is not a type of controlled group as defined in the Internal Revenue Code? A. Parent-subsidiary B. Brother-sister C. Combined D. All of these are types of controlled groups.
D. All of these are types of controlled groups. Parent-subsidiary; brother-sister; and combined are all types of controlled groups.
58. Which of the following statements regarding AMT is true? A. Only very profitable companies (AMTI greater than $1 million) have their AMT exemption phased out. B. The AMT exemption is phased out dollar for dollar as AMTI increases. C. Minimum tax credits are generated whenever regular tax liability exceeds tentative minimum tax. D. Minimum tax credits can be carried forward indefinitely.
D. Minimum tax credits can be carried forward indefinitely. The AMT exemption is phased out for moderately profitable companies. The AMT exemption is phased out $0.25 for every dollar increase in AMTI through the phase-out range. Minimum tax credits are generated when tentative minimum tax exceeds regular tax liability.
37. AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable
D. Temporary; unfavorable The gain recognized by AmStore is higher 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.
42. Which of the following statements regarding charitable contributions is false? A. Only contributions made to qualified charitable organizations are deductible. B. Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions). C. Corporations can qualify to deduct a contribution before actually paying the contribution to the charity. D. The amount deductible for non-cash contributions is always the adjusted basis of the property donated.
D. The amount deductible for non-cash contributions is always the adjusted basis of the property donated. Depending on the nature of the property, the amount deductible for a contribution can be the fair market value of the contributed property.
31. WFO Corporation has gross receipts according to the following schedule: If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method? A. Year 3 B. Year 4 C. Year 5 D. Year 6 E. None of these.
D. Year 6 Corporations with less than $5 million 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 $5.17 million.
2. Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence. T/F
FALSE - A corporation may not use the cash method of accounting in the second year if it reported more than $5 million in gross receipts in the first year.
4. An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income. T/F
FALSE - Any book-tax difference that requires an add-back to book income to compute taxable income is an unfavorable book-tax difference because it requires an adjustment that increases taxable income relative to book income.
20. Three brothers each own 20% of the stock in three corporations. Because no single brother owns more than 50% of a corporation, the tax law would not treat the corporations as a controlled group. T/F
FALSE - Collectively, the brothers will own more than 50% of the stock of each corporation.
24. Volos Company (a calendar-year corporation) began operations in March of 2013 and was not profitable through December of 2014. Volos has been profitable for the first quarter of 2015 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2015 because it had no tax liability for the 2014 tax year and has been in business for at least 12 months. T/F
FALSE - Estimated taxes are due if the corporation expects to incur a tax liability of $500 or more for the year. A corporation can base its estimated payments on the prior year's tax liability only if it is positive, which is not the case here.
6. Federal income tax expense reported on a corporation's books generates a temporary book-tax difference. T/F
FALSE - Federal income tax expense generates a permanent book-tax difference.
21. A C corporation reports its taxable income or loss on Form 1065. T/F
FALSE - Form 1120
1. In general, a corporation can choose to use either the accrual or cash method of accounting no matter how large the corporation. T/F
FALSE - Large corporations (average gross receipts exceeding $5 million over the prior three years) are required to use the accrual method.
26. Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year. T/F
FALSE - Large corporations can use the prior year liability to determine the first quarter estimated tax payment only.
11. Bingo Corporation incurred a net operating loss in 2015. If it carries the loss back, it must first carry the loss back to offset its 2014 taxable income and then it carries any remaining loss back to offset its 2013 taxable income. T/F
FALSE - The NOL offsets the income in the second previous year (2013) before it offsets income in the first previous year (2014).
28. The tax rate for the corporate alternative minimum tax is a flat 26%. T/F
FALSE - The corporate AMT rate is a flat 20%.
13. Accrual-method corporations are never allowed to deduct charitable contributions until they actually make payment to the charity. T/F
FALSE - The deduction is allowed in the year authorized provided the payment is made within 2 ½ months after year-end.
18. Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation's stock. T/F
FALSE - The percentages are 70%, 80%, and 100%, depending on the stock ownership level.
22. By default, an affiliated group must file a consolidated tax return. T/F
FALSE -Filing a consolidated tax return is an election in the first year, after which it is mandatory on a going forward basis.
10. Corporations can carry net operating losses (in years other than 2008 and 2009) back two years and forward 20 years. T/F
TRUE
12. Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year. T/F
TRUE
14. GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2014. GenerUs made payment to FoodBank on February 2, 2015. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2014 tax return. T/F
TRUE
15. Corporations may carry excess charitable contributions forward five years, but they may not carry them back. T/F
TRUE
16. Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions). T/F
TRUE
17. The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation. T/F
TRUE
19. Taxable income of the most profitable corporations is subject to a flat 35% tax rate. T/F
TRUE
23. Calendar-year corporations that request an extension for filing their tax returns will have a tax return due date of September 15. T/F
TRUE
25. Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments. T/F
TRUE
27. Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax. T/F
TRUE
29. The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax. T/F
TRUE
3. Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes. T/F
TRUE
30. Minimum tax credits generated by the AMT can be carried forward indefinitely. T/F
TRUE
5. Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference. T/F
TRUE
7. For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences. T/F
TRUE
8. For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised. T/F
TRUE
9. A corporation may carry a net capital loss back three years and forward five years. T/F
TRUE