Tax II DSM Ch 3

Keelty Corporation incorporates on March 1 of the current year and begins business on July 1. Keelty elects a October 31 year end. During the period from March through the end of the fiscal year, Keelty incurs organizational expenditures of $72,000. What is their maximum deduction for organizational expenditures for the current year? Round your answer to the nearest dollar.

$1,600 Under Section 248, a corporation may elect to immediately deduct the first $5,000 in organizational expenditures. However, this is reduced by the amount to which organizational expenditures exceed $50,000, with the initial deduction completely phased out at $55,000. As a result, $72,000 is amortized over 180 months. Since the business was in operation for 4 months (July, August, September, October) during the current year, amortization of organizational expenditures is $72,000/180 * 4 = $1,600.

Keelty Corporation incorporates on March 1 of the current year and begins business on May 11. Keelty elects a October 31 year end. During the period from March through the end of the fiscal year, Keelty incurs organizational expenditures of $60,000. What is their maximum deduction for organizational expenditures for the current year? Round your answer to the nearest dollar.

$2,000 Under Section 248, a corporation may elect to immediately deduct the first $5,000 in organizational expenditures. However, this is reduced by the amount to which organizational expenditures exceed $50,000, with the initial deduction completely phased out at $55,000. As a result, $60,000 is amortized over 180 months. Since the business was in operation for 6 months (May, June, July, August, September, October) during the current year, amortization of organizational expenditures is $60,000/180 * 6 = $2,000.

Bahama Corporation expects that their end-of-year tax liability will be $675,000. In the prior year, they had taxable income of $2,000,000 and a tax liability of $600,000. Bahama Corporation's first quarterly estimated tax payment must be at least _____.

$150,000 Every corporation that expects to owe more than $500 in tax for the current year must pay four installments of estimated tax, each equal to 25% of the required annual payment. Bahama Corporation is a large corporation, defined as a corporation whose taxable income was $1 million or more in any of the three preceding tax years. As a result, the required annual payment is 100% of the tax for the current year. However, the first installment may be either 25% of the prior or current year's tax liability. As a result, the minimum amount that must be paid in the first estimated tax payment is 25% x $600,000 = $150,000. However, the shortfall between this amount and 25% of the current year's tax liability ((25% x $675,000 = $168,750) - $150,000 = $18,750) must be recaptured in the second installment.

Jocelyn is an engineer. In 2018, she forms a personal service corporation and is the sole shareholder of the corporation. If the corporation has taxable income of $1,000,000, what is its tax liability

$210,000 The income of a personal service corporation is taxed at a flat rate of 21%, making the tax liability $1,000,000 x 21% = $210,000. In prior tax years, different rates applied to personal service corporations.

Melis Corporation has the following results in Years 1 and 2: Year 1 Year 2 Adjusted taxable income $300,000 $250,000 Charitable contributions $40,000 $25,000 What is their charitable contribution deduction in Year 2?

$25,000 deduction from Year 2 A corporation's deduction for charitable contributions is limited to 10% of its adjusted taxable income. In Year 1, Melis' deduction is limited to 10% of $300,000 = $30,000, so $10,000 is carried forward to Year 2. In this year, the deduction is limited to 10% of $250,000 = $25,000. The corporation may deduct excess contributions in the carryover year only after it deducts any contributions made in that year. As such, the entire deduction for Year 2 is the Year 2 charitable contributions, with the $10,000 from Year 1 being carried forward. Any excess contributions not deducted within five years will expire.

Beta Corporation has taxable income of $1,250,000 for 2017. What is Beta's tax liability?

$262,500 Beta Corporation's regular tax liability is computed as follows: $1,250,000 x 21% = $262,500.

Bloomberg Corporation incorporates on April 12 of the current year and begins business on May 1. Bloomberg elects a December 31 year end. During the period from April 12 through the end of the year, Bloomberg incurs organizational expenditures of $54,000. What is their maximum deduction for organizational expenditures for the current year? Round your answer to the nearest dollar.

$3,356 Under Section 248, a corporation may elect to immediately deduct the first $5,000 in organizational expenditures. However, this is reduced by the amount to which organizational expenditures exceed $50,000. Therefore, the company may immediately expense $5,000 - ($54,000 - 50,000) = $1,000. The remaining amount, $54,000 - $1,000 = $53,000 is amortized over 180 months. Since the business was in operation for 8 months during the current year, amortization of organizational expenditures is $53,000/180 * 8 = $2,356. Total amortization is $1,000 + 2,356 = $3,356.

Melis Corporation has the following results in Years 1 and 2: Year 1 Year 2 Adjusted taxable income $700,000 $350,000 Charitable contributions $100,000 $30,000 What is their charitable contribution deduction in Year 2?

$30,000 deduction from Year 2; $5,000 deduction from Year 1 A corporation's deduction for charitable contributions is limited to 10% of its adjusted taxable income. In Year 1, Melis' deduction is limited to 10% of $700,000 = $70,000, so $30,000 is carried forward to Year 2. In this year, the deduction is limited to 10% of $350,000 = $35,000. The corporation may deduct excess contributions in the carryover year only after it deducts any contributions made in that year. As such, the deduction for Year 2 is the Year 2 charitable contributions plus $5,000 from Year 1, with $25,000 from Year 1 being carried forward. Any excess contributions not deducted within five years will expire.

Bloomberg Corporation incorporates on February 9 of the current year and begins business on April 1. Bloomberg elects a December 31 year end. During the period from February 9 through the end of the year, Bloomberg incurs organizational expenditures of $53,000. What is their maximum deduction for organizational expenditures for the current year? Round your answer to the nearest dollar.

$4,550 Under Section 248, a corporation may elect to immediately deduct the first $5,000 in organizational expenditures. However, this is reduced by the amount to which organizational expenditures exceed $50,000. Therefore, the company may immediately expense $5,000 - ($53,000 - 50,000) = $2,000. The remaining amount, $53,000 - $2,000 = $51,000 is amortized over 180 months. Since the business was in operation for 9 months during the current year, amortization of organizational expenditures is $51,000/180 * 9 = $2,550. Total amortization is $2,000 + 2,550 = $4,550.

Ultra Corporation, a calendar year taxpayer, has taxable income of $40,000 per month for the first three months of the year; in April, May, and June, it reports monthly taxable income of $50,000; and it has taxable income of $60,000 per month in the last six months of the year. What is Ultra's annualized taxable income for the first three months of the year?

$480,000 Annualized income is calculated by multiplying the cumulative taxable income by the annualization factor. The annualization factor for three months is 12/3. Multiplying this by the cumulative income of $120,000 ($40,000 x 3 months), we have annualized income of $480,000. This is the amount on which the first estimated tax payment must be based.

Alpha Corporation has taxable income of $250,000 for 2018. What is their tax liability?

$52,500 Alpha Corporation's regular tax liability is computed as follows: $250,000 x 21% = $52,500.

Deer Corporation is a calendar year taxpayer. The company's taxable income has exceeded $5 million in each of the last three years. Taxable income for 2016 was $6.25 million (tax liability $2.125 million) and the company expects to have taxable income of $13 million in 2018, with a tax liability of $2.72 million. What is the minimum amount of estimated tax that Deer must pay in the first installment?

$531,250 A large corporation must make a first estimated tax payment equal to 25% of the prior year's tax liability. 25% x $2,125,000 = $531,250. However, if taxable income is higher in the current year, the shortfall must be recaptured in the second installment.

Deer Corporation is a calendar year taxpayer. The company's taxable income has exceeded $5 million in each of the last three years. Taxable income for 2017 was $7.5 million (tax liability $2.55 million) and the company expects to have taxable income of $13.8 million in 2018, with a tax liability of $2.89 million. What is the minimum amount of estimated tax that Deer must pay in the first installment?

$637,500 A large corporation must make a first estimated tax payment equal to 25% of the prior year's tax liability. 25% x $2,550,000 = $637,500. However, if taxable income is higher in the current year, the shortfall must be recaptured in the second installment.

Section 291 requires that corporations recapture ______ of the difference between the amount that would have been recaptured under Section 1245 and the actual recapture under Section 1250.

20% Section 291 requires that corporations recapture 20% of the difference between the amount that would have been recaptured under Section 1245 and the actual recapture under Section 1250. This recapture is in addition to the normal recapture rules under Section 1250.

Which of the following is NOT an acceptable fiscal year?

A 12-month period ending on October 15 of each year A fiscal year is a 12-month or 52- to 53-week period that ends on the last day of any month other than December or that ends on the same day of the week at the end of the same month every year.

Which of the following is NOT an acceptable accounting method for tax purposes?

Consolidation The three possible accounting methods for tax purposes are cash, accrual, and hybrid.

Which of the following statements concerning capital gains losses is TRUE?

Corporate net capital gains are taxed at the same rate as ordinary income. The rules for corporate capital gains and losses differ from those for individuals. If a corporation has a net capital gain, the entire amount must be carried back or forward and there is no allowance of $3,000 to offset ordinary income. Corporations do not have preferential rates on capital gains, as well.

Which of the following statements concerning capital gains losses is NOT true?

Corporations are limited to deducting $3,000 in net capital losses in a year. The rules for corporate capital gains and losses differ from those for individuals. If a corporation has a net capital gain, the entire amount must be carried back or forward and there is no allowance of $3,000 to offset ordinary income. Corporations do not have preferential rates on capital gains, as well.

Deer Corporation is a calendar year taxpayer. The company's taxable income has exceeded $5 million in each of the last three years. On what date is its final estimated tax payment for the calendar year 2018 due?

December 15, 2018 A calendar year corporation must deposit estimated tax payments in a Federal Reserve bank or authorized commercial bank on or before April 15, June 15, September 15, and December 15. Note that this differs from the schedule for individual taxpayers; for a corporation, the last payment is due on the fifteenth day of the last month of the tax year, while individual taxpayers may make their last payment by the fifteenth day of the first month of the following tax year.

A corporation with a fiscal year ending July 31, 2018 must file a tax return no later than ________ unless they file for an extension.

November 15, 2018 Corporate tax returns are due on the fifteenth day of the fourth month following the close of the tax year. For a July 31 year end, the tax return is due on November 15 of the same year.

Top and Dog Corporations have only one class of stock outstanding which is owned by the following individuals: Top Corporation Dog Corporation Margo 30% 85% Anne 70% 15% Which of the following statements is TRUE?

Top Corporation and Dog Corporation will each be taxed on their own income without regard to the earnings of the other. Top Corporation and Dog Corporation are not a controlled group. To test to see if they meet the requirements for a brother-sister controlled group, the common ownership for each must be measured and must be more than 50%. Top Corporation Dog Corporation Common Ownership Margo 30% 85% 30% Anne 70% 15% 15% TOTAL 45%

Permanent book/tax differences exist from all of the following EXCEPT ________.

charitable contributions Permanent differences arise from expenses that are never deductible for tax purposes, such as: -expenses associated with tax-free interest -premiums paid for life insurance carried by the corporation on the lives of key officers and employees -fines and expenses resulting from a violation of the law -disallowed travel and entertainment costs -political contributions -federal income taxes per books Permanent differences may also arise from tax deductions not allowed for book purposes, such as: -the dividends-received deduction -the U.S. production activities deduction -percentage depletion of natural resources in excess of their cost Temporary differences arise from issues of timing, including prepaid rent, interest revenue, installment sales, bad debt, and charitable contributions.

Which of the following fringe benefits is excluded from income and is not taxed in future years?

employer-provided health insurance Group term life insurance, accident and health insurance, and disability insurance provide exclusions from taxation - they are never taxed. Qualified pension, profit-sharing, and stock bonus plans provide a tax deferral.

Which of the following is NOT an organizational expense?

expenditures associated with the transfer of assets to the corporation Organizational expenditures include: -legal fees incident to the corporation's organization -accounting services necessary to create the corporation -expenses paid to temporary directors and of organizational meeting of directors and stockholders -fees paid to the incorporators. However, organizational expenditures do not include expenditures associated with issuing or selling the corporation's stock or other securities and expenditures related to the transfer of assets to the corporation.

Which of the following situations would NOT require a valuation allowance for a deferred tax asset?

future reversals of temporary differences

Which of the following situations would NOT require a valuation allowance for a deferred tax asset?

future reversals of temporary differences OR built-in gains sufficient to realize the deferred tax asset ASC 740 requires that a deferred tax asset must be reduced by a valuation allowance if the firm more likely than not will fail to realize the full benefit of the deferred tax asset. Negative evidence that requires a valuation allowance includes: -cumulative losses in recent years -a history of expiring loss or credit carryforwards -expected losses in the near future -unfavorable contingencies with future adverse effects -short carryback or carryover periods that could limit realization of the deferred tax assets Positive evidence, such as built-in gains sufficient to realize the deferred tax asset, help to avoid a valuation allowance.

Which of the following is NOT a start-up expense?

legal fees associated with incorporating the entity Start-up expenditures are ordinary and necessary business expenses paid or incurred by an individual or corporation to investigate the creation or acquisition of an active trade or business; to create an active trade or business; and to conduct an activity engaged in for profit or the production of income before the time the activity becomes an active trade or business. However, legal fees associated with incorporating the entity are organizational costs.

Which of the following is a purpose of rules concerning controlled groups?

prevent corporations under common control from circumventing limitations related to Sec. 179 expense One of the purposes of the rules around controlled groups is to prevent corporations under common control from circumventing limitations related to Sec. 179 expense, as well as the minimum accumulated earnings credit and the general business credit. In tax years prior to 2018, these rules also prevented controlled groups for taking advantage of graduated rates on corporate income by filing as separate entities.

If a tax position has a 40% chance of being sustained upon examination, which one of the following events would NOT allow for recognition?

the board of directors positively affirm its recognition If a tax position has a 50% or less probability of being sustained by the IRS, it cannot be recognized until one of the following three events occur: - the position subsequently has a greater than 50% probability of being sustained by the IRS - the firm favorably settles the tax issue with the IRS or in court - the statute of limitations on the transaction expires

IRS approval of a change in accounting period is not required if the corporation meets all of the following conditions EXCEPT ________.

the corporation may not have a NOL in the short-period or subsequent full taxable year A corporation may have a NOL during the short-period, but it must be carried forward and cannot be carried back unless the loss is $50,000 or less.