Taxation II SmartBook

(Ch 16) Match the ownership percentage in the distributing corporation with the DRD percentage allowed.

15% ownership::50% DRD 33% ownership::65% DRD 86% ownership::100% DRD

(Ch 15) Generally, under state law, which of the following is NOT considered an entity separate from its owner(s)?

A sole proprietorship

(Ch 15) Which owner is responsible for the liabilities of the business?

General partners

(Ch 9) Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses?

Ordinary

(Ch 16) Schedules M-1 and M-3:

Small corporations (under $250,000 of total receipts and assets) are NOT required to file Schedules L, M-1 or M-2. In addition, the M-3 schedule is only required for corporations with total assets of $10 million or more. Beginning with 2014, corporations with total assets of at least $10 million but less than $50 million may file M-1 in place of M-3 Parts II & III, the corp must still file M-3 part 1. M-1 and M-3 are both schedules for reporting differences between book and taxable income. The M-1 and M-3 are both schedules filed with Form 1120.

(Ch 9) True or false: In order to deduct travel expenses (as opposed to transportation expenses), the taxpayer must be away from home on a trip of sufficient duration to require sleep or rest.

True

(Ch 9) Which of the following statements are correct regarding inventory capitalization rules?

Under UNICAP, businesses generally capitalize the inventory costs in one period and deduct them in a subsequent period. Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to employees in production supporting departments. UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than they do for financial reporting.

(Ch 9) What two events must have occurred to meet the all-events test?

When all events have occurred that determine or fix the business's right to receive the income. When the amount of the income can be determined with reasonable accuracy.

(Ch 9) In the year that a business changes its accounting method, it must make an adjustment to taxable income that represents the _____________ difference for the amount that would have been taxed or deducted in prior years. If the adjustment increases taxable income, the taxpayer includes _______% of the addition in the current year. If the adjustment decreases taxable income, the taxpayer includes _______% of the deduction in the current year.

cumulative, 25, 100

(Ch 9) In order to deduct the business portion of mixed motive expenses, taxpayers must have sufficient __________________ to prove the business use of the asset.

documentation

(Ch 18) Because a corporation pays tax at the entity level and corporate dividends are NOT deductible, corporate income suffers __________________ taxation.

double

(Ch 18) A measure of a corporation's economic profits is known as __________________ and __________________.

earnings, profits

(Ch 18) The amount of a corporate distribution to a shareholder of property, other than cash, is determined by its:

fair market value

(Ch 15) Unlike separate taxpaying entities, _____________ entities do NOT pay taxes. Rather, owners of these entities pay taxes on income generated by the entities.

flow-through

(Ch 16) Charitable contributions in excess of the 10% limit are carried __________________ for __________________ years.

forward, 5

(Ch 9) An accrual-method business electing the __________________ will immediately recognize an advance payment as income, but a business electing the __________________ will recognize the income for tax purposes either when it would have recorded it without the advance payment or when it recognizes the income for financial accounting purposes.

full-inclusion method; deferral method

(Ch 9) When an accrual-method business receives an advance payment for goods it will provide to customers in the future, the business may account for the prepayment under the __________________-__________________ method or the __________________ method.

full-inclusion, deferral

(Ch 18) When a corporation distributes property to a shareholder in a redemption, it is required to recognize __________________, but may NOT recognize __________________.

gain, loss

(Ch 16) Permanent book-tax differences:

include items of income for book purposes that will never be items of income for tax purposes

(Ch 9) In reporting financial statement income, businesses have incentives to select accounting methods that accelerate __________________ and defer __________________. In reporting taxable income, businesses have incentives to select accounting methods that accelerate __________________ and defer __________________.

income, deductions; deductions, income

(Ch 9) The amount of casualty loss of an asset is the amount of ____________ proceeds minus the adjusted ____________ basis of the asset.

insurance, tax

(Ch 9) The term ___________ is used to describe an expense that is normal or appropriate for the business under the circumstances.

ordinary

(Ch 9) All ____________ and ____________ expenses that are reasonable in amount and incurred in carrying on a trade or business are deductible for tax purposes.

ordinary, necessary

(Ch 9) The objective of business activities is to make a(n) __________________. When a taxpayer's activity is pursued for personal pleasure, that activity is treated as a(n) __________________ when revenues and expenses are incurred.

profit, hobby

(Ch 9) Despite the use of the accrual method, prepaid __________________ and prepaid __________________ are taxed immediately upon receipt.

rent, interest

(Ch 18) A stock redemption could result in:

sale treatment; a gain or loss is recognized by the shareholder dividend treatment; taxable at preferential rates only if it fails the definition of a redemption under tax law NOT like-kind exchange treatment; no gain or loss is recognized because it involves a stock for property exchange which is NOT like-kind

(Ch 18) Ellenbogen Inc. gave each shareholder two shares of Ellenbogen stock for each one share already owned. This is known as a:

stock split, stock dividend

(Ch 9) Leonard's Lofts rents townhouses to tenants. When a tenant moves in, they are required to pay the first month's rent of $525 and prepay the last month's rent of $525. In addition, the tenant must pay a refundable security deposit of $600. Leonard's Lofts uses the accrual method for tax reporting. Upon receipt of the $1,650, Leonard's initial Lofts must recognize $_________ in rental revenue.

$1,050 Since the security deposit is refundable, it is not considered taxable revenue.

(Ch 9) Montgomery & Company are accounting for their bad debts. The company uses the accrual method of accounting. During the current year, M&C has $42,000 in accounts receivable. The estimated bad debts for the period $2,000 using the allowance method of accounting for uncollectible accounts. The amount of accounts actually written off during the period is $1,700. What is the amount of bad debt expense that can be deducted for tax purposes?

$1,700 - M&C must use the direct write-off method for tax purposes.

(Ch 16) Fast Rocket, Inc. generated a net loss of $5,000 in its first year (2018) and taxable income of $15,000 in its second (2019). Assuming a tax rate of 21%, what is Fast Rocket's total tax for both years?

$2,100 (A corporation can carry forward its NOL to offset income in a future period ($15,000 - $5,000 = $10,000 x 21% = $2,100))

(Ch 16) Corporation ABC had taxable income of $10,000,000 for its tax year ended December 31, 2018. Corporation ABC owes $__________________ tax liability.

$2,100,000

(Ch 9) On December 1 of the current year, Jonathon pays $2,400 for a 12-month advertising contract that begins immediately. Jonathon uses the cash method of accounting for his business. How much will he be able to deduct in the current year?

$2,400

(Ch 9) Alex purchased a personal lawn mower to use for mowing his lawn and the lawns at his rental properties. The depreciation expense for the mower was $300. At the end of the season, he documents that he used the mower 70% for his rental properties and 30% for personal purposes. How much can he deduct as a business expense?

$210

(Ch 18) Macadamia Corp. redeems 60 shares of common stock from Patty in exchange for $50,000. Patty held 100 shares of the 150 total outstanding shares in Macadamia for the past 5 years. Patty's basis in the 60 redeemed shares was $10,000. Assuming Patty has a 15% tax rate on both dividends and long-term capital gains, what is Patty's tax liability from this redemption?

$6,000 After the exchange Patty owns 40/90 shares (44%) which is less than 50% and also less than 80% of her ownership percentage before the redemption. As a result, her redemption qualifies as an exchange. $50,000 less $10,000 basis = $40,000 x 15% = 6,000.

(Ch 9) A business is deemed to have adopted a permissible accounting method if it has used the method for __________________ year(s). It is deemed to have adopted an impermissible accounting method if it has used the method for __________________ consecutive years.

1, 2

(Ch 18) Current E&P and accumulated E&P are both positive. The order in which a distribution is deemed to come from E&P is:

1. Current, 2. Accumulated

(Ch 18) Corporate distributions to shareholders are treated in the following order.

1. Dividend to the extent of E&P included in gross income. 2. Non-taxable return of capital that reduces the shareholders basis 3. Gain from sale or exchange of stock

(Ch 16) A corporation's charitable contribution is limited to _________% of modified taxable income.

10

(Ch 16) Net operating losses incurred for tax years beginning before December 31, 2017, can be carried back __________________ years and carried forward __________________ years.

2, 20

(Ch 15) In general, a taxpayer can deduct ___________ percent of the amount of qualified business income allocated to her from a flow-through entity subject to certain limitations.

20%

(Ch 16) Test Pilot, Inc. reported a net operating loss for its tax year ended December 31, 2016 of $25,000. Test Pilot reported income of $20,000, $10,000 and $8,000 in 2013, 2014, and 2015, respectively. What is Test Pilot's 2015 income after NOL carry back and the amount of NOL carry forward available for 2017?

2015 income of $0 and carry forward of $7,000 to 2017 (The carryback is for two years thus 2013 is not eligible. $10,000 is offset in 2014 leaving $8,000 to offset in 2015 ($8,000 - $8,000 = 0). As a result, $7,000 NOL remains to be carried forward to 2017.)

(Ch 9) Lesa drives her car approximately 18,000 miles per year. During the most recent year, she drove 7,000 miles commuting to and from work, 4,500 miles for business-related conferences and client visits, and 6,500 miles for personal trips. How many miles are considered business miles and can be used to determine the tax deduction for transportation expenses?

4,500

(Ch 16) Corporate estimated tax payments are due on the 15th of which of the following months of the tax year?

4th, 6th, 9th, 12th

(Ch 9) Due to the personal enjoyment element involved with meals, taxpayers may only deduct __________% of the actual cost.

50%

(Ch 16) Which of the following rules applies to recognition of losses?

A capital loss from a previous year can be offset against current year capital gains.

(Ch 9) Andrews and Co.'s tax reporting year end is on March 31 every year. This year end schedule is known as which of the following?

A fiscal year end

(Ch 9) Which of the following choices are tests that need to be met in order to deduct an expense under the accrual method?

All-events test. Economic performance test.

(Ch 16) A C corporation with a calendar year-end has an income tax return due on:

April 15th

(Ch 9) What are the rules concerning reporting periods for tax purposes?

Businesses must report their income and deductions for a full 12 month year, unless special circumstances apply.

(Ch 15) On their December 31, 2018 tax return, Ecogreen, Inc., a C corporation, suffered a difficult year and generated a loss. What are Ecogreen's options for dealing with the loss for tax purposes?

Carry the loss forward to reduce income in future years

(Ch 16) Match the type of corporate charitable donation with the allowed deduction amount.

Cash: Amount of cash distributed Capital gain property: Fair market value Inventory: Adjusted basis (Ordinary income property donations are valued at tax basis.)

(Ch 9) Which of the following statements are correct regarding the requirements to meet the economic performance test under the various ways a liability can arise?

Certain liabilities, such as rebates, refunds, and workers compensation payments, must be deducted when paid regardless of when the liability arises. When a business agrees to pay another party for services, the deduction is taken as the other party provides the services.

(Ch 9) Which of the following methods are the primary inventory cost-flow methods used for tax purposes?

FIFO, LIFO, Specific identification

(Ch 16) True or false: A Net Operating Loss arising in tax years beginning after December 31, 2017 cannot be carried forward.

False

(Ch 16) True or false: The corporate tax formula is identical to the individual tax formula.

False (Individuals report AGI)

(Ch 9) True or false: Businesses are generally not allowed to deduct losses incurred with the sale or disposal of business assets. These losses must be used to offset any gains produced by the sale of other business assets or carried forward to offset future gains.

False. Losses on the sale or disposal of business assets are generally deductible.

(Ch 16) True or false: The United States taxes C corporations on their income using a progressive tax system.

False. The US taxes on a flat or proportional system.

(Ch 16) Which of the following concerning the amortization of goodwill for tax purposes is correct?

Goodwill acquired by a corporation in a taxable asset acquisition (NOT a stock purchase transaction) is recovered over 180 months for tax purposes. Amortized goodwill generated in an asset purchase can create either a favorable or unfavorable temporary difference for tax purposes. The goodwill impaired over the amortized goodwill for tax purposes is an unfavorable book-tax difference.

(Ch 9) which of the following choices constitutes gross income from a business?

Gross profit from inventory sales. Income from services provided. Income from renting property.

(Ch 9) Which of the following statements is correct regarding the recognition of the cumulative difference in taxable income due to a change in accounting method?

If the adjustment increases taxable income, it is recognized over 4 years by adding 25% of the increase each year. If the adjustment decreases taxable income, it is recognized in its entirety in the year of the change.

Match the type of employee stock option with its tax treatment.

Incentive stock option: Employer receives no tax deduction. Nonqualified stock option: Employer receives a deduction at exercise for the fair market value less the option price.

(Ch 9) When a business wants to change an accounting method for tax reporting, such as the cost-flow method used for inventory, what body must give permission for the change?

Internal Revenue Service

(Ch 9) Under what circumstances may a cash-method business be allowed to use the cash method to account for gross profit?

It is primarily a retail or service business and average gross receipts for the past three years have NOT exceeded $25 million annually.

(Ch 9) Which of the following business expenses are disallowed or limited for tax purposes?

Lobbying expenses, bribes and kickbacks, political contributions, interest expense paid on loans to purchase tax-exempt securities

(Ch 18) Cashews Corp. redeems 30 shares of Linus' common stock in exchange for land worth $50,000. Linus' ownership in the common voting stock went from 180 shares to 150 shares as a result. Cashews had 200 outstanding shares prior to the redemption. Is Linus' redemption substantially disproportionate?

No; Linus owns more than 50% of Cashews after the redemption and fails the stock ownership test.

(Ch 16) Corporations receiving dividends from other corporations account for such dividends for GAAP purposes the following ways at the various ownership percentages.

Owns less than 20%: Includes the dividend in income (same as tax; no book-tax differences) Owns 20% < 50%: Includes a pro-rata portion of the distributing corporation's earnings in its book income under the "equity method of accounting" Owns more than 50%: Consolidates their financial reporting books and the intercompany dividend is eliminated

(Ch 16) Ripley, Inc. has a life insurance policy on one of its officers for which Ripley is the beneficiary of the policy. The premium that Ripley pays is what kind of book-tax difference?

Permanent (deductible for book but not deductible for tax)

(Ch 9) If a company uses a cash method of accounting, which of the following statements will be true?

Prepaying expenses other than interest can result in an immediate tax deduction of the prepayment will be used up within 12 months. Revenue is recognized when cash is received no matter when the sale actually took place. Payments received in noncash form (such as property or services) are included in gross income.

(Ch 9) Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete a construction project. At the end of the year, Josh owed Michael $700 on January 2. When will Josh be able to deduct the wage expense and when will Michael have to include the $700 in gross income?

Since Josh and Michael are related parties, Josh must wait to deduct the expense until Michael includes the revenue in gross income. Michael will include the $700 in the year he receives it.

(Ch 15) Which entity types can generally use either the cash or accrual method of accounting for tax purposes?

Sole proprietorship, Partnership, S corporation

(Ch 18) Which of the following items is an adjustment to taxable income to calculate current E&P?

Tax-exempt income, such as municipal bond interest. Federal income taxes paid (deduction). Penalties and fines (reduce).

(Ch 18) Match the result of a corporate noncash property distribution with its result.

Taxable gain to the corporation: Fair market value of distributed property exceeds its adjusted basis (Gains from the distribution of appreciated property by a corporation are taxable.) Loss not recognized: Fair market value of distributed property is less than its adjusted basis (Losses from the distribution of depreciated property by a corporation are NOT deductible.)

(Ch 9) Which of the following statements are correct when requesting permission to change accounting methods?

The IRS automatically approves certain types of accounting method changes. The business may have to pay a fee and provide a good business reason for making the change.

(Ch 9) Evan incurred education-related expenditures related to his self-employment job. Under which of the following circumstances will Evan NOT be allowed to deduct these expenditures as a BUSINESS expense?

The course(s) qualify Evan for a new trade or business.

(Ch 9) Allison purchased equipment that cost $100,000 for use in her business. She expects the equipment to be useful for the business for the next 8 years. Which of the following choices correctly describes the tax treatment of the cost of the equipment?

The equipment should be capitalized and depreciated according to the tax code.

(Ch 9) When a business asset is completely destroyed due to a casualty, what is the amount of the deductible loss?

The insurance proceeds minus the adjusted basis (if the basis exceeds the proceeds)

(Ch 9) How does the accrual method for tax reporting differ from the accrual method for financial reporting?

The reporting rules tend to be structured to recognize income earlier for tax purposes than financial accounting. Tax reporting rules are structured to recognize less accrued expenses than in financial reporting.

(Ch 9) Which of the following choices is correct regarding deductible transportation expenses for a taxpayer using his personal vehicle for business purposes?

The taxpayer can deduct the business portion of the actual costs of operating the vehicle plus depreciation. The taxpayer can NOT deduct the costs of commuting from his home to his regular place of business. The taxpayer can deduct a standard mileage rate based on business miles driven. The taxpayer can NOT deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles.

(Ch 9) Which of the following criteria is required for a meal to be considered a tax-deductible business meal?

The taxpayer or an employee of the taxpayer must be present for the meal. The meal must be directly associated with the active conduct of the business. The amount must be reasonable under the circumstances.

(Ch 9) Which of the following choices are advantages to the taxpayer of choosing the cash-method of tax reporting rather than the accrual-method?

There is more flexibility to time the recognition of income and deductions. Bookkeeping is easier.

(Ch 9) The all-events tests generally requires businesses receiving advance payments for services to recognize the income when they receive the payment, rather than when they perform the service. Which of the following statements is correct regarding this rule?

This rule holds for prepayment of interest or rent. The IRS provides an exception that allows the recognition of the advance payment of services to be deferred to the tax year following the prepayment. For financial accounting, the prepayment is recorded as a liability and not recognized as income until the service is performed. The tax authorities do NOT give the business the option to report the income in the current year or defer it to the period in which the revenue is earned.

(Ch 9) In order to defer deductions for manufacturing costs until the finished products are sold, Congress enacted rules specifying that the cost of raw materials, shipping costs, and any other indirect costs of manufacturing must be added to the cost of inventory. What are these rules called?

Uniform cost capitalization rules

(Ch 9) Larger businesses that generate a material portion of their income by selling products they acquire for resale or products they manufacture generally must account for gross profit using the __________ method, regardless of the method used for tax reporting.

accrual

(Ch 9) The tax laws do not allow a(n) __________________-method business to deduct accrued expenses for a liability owed to a related party using the __________________-method until the related party recognizes the related income from the transaction.

accrual, cash

(Ch 9) The accounting methods that can be chosen for tax reporting include the _________ method, the _________ method, and the _________ method.

accrual, cash, hybrid

(Ch 9) Business bad debts can only be deducted when the business uses the __________________ method of accounting for tax purposes. Only debts determined to be uncollectible under the __________________ __________________-__________________ method are able to be deducted for tax purposes.

accrual, direct write-off

(Ch 9) Businesses using the accrual method of accounting generally recognize income when they meet the ___-______ test.

all-events

(Ch 9) For accrual-method businesses, bad debt expense is recognized using the ___________ method for financial accounting and is deducted using the ___________ method for tax purposes.

allowance; direct write-off

(Ch 16) A corporate taxpayer can carry __________________ a capital loss for three years and carry a capital loss __________________ for five years.

back, forward

(Ch 16) In order to use the cash method of accounting for tax, a corporation must:

be a qualified personal service corporation. have average gross receipts of $25 million or less over the prior three years.

(Ch 9) Although there are exceptions, a taxpayer or business using the cash method of accounting recognizes revenue when property or services are actually or ____________ received and recognizes deductions when the expense is ____________.

constructively, paid

(Ch 16) A favorable book-tax difference:

decreases taxable income relative to book income. is an adjustment to book income that decreases current tax liability.

(Ch 9) The __________________ __________________ test specifies that businesses may NOT recognize a deduction for an expense until the underlying activity generating the associated liability has occurred.

economic performance

(Ch 18) A complete redemption of all stock of the corporation owned by a shareholder is treated as a(n):

exchange

(Ch 16) Goodwill recovery differs between GAAP and tax rules in that GAAP requires corporations to __________________ (amortize/impair) goodwill whereas tax law requires corporations to __________________ (amortize/impair) goodwill.

impair, amortize

(Ch 9) For financial reporting purposes, an advance payment for services is NOT recorded as a revenue, but rather recorded as a debit for cash and credit to a(n) __________________ account. It will be recognized as a revenue when it is earned. For tax reporting purposes, an advance payment is taxed immediately because the payment meets the __________________-__________________ test. However, there is an exception which allows the prepaid income to be recognized in the __________________ following the receipt if certain conditions are met.

liability, all-events, year

(Ch 18) In order for a stock distribution to be non-taxable, it must be:

made pro-rata with respect to all shareholders. made with respect to the corporation's common stock.

(Ch 16) The income base used to calculate the dividends received deduction limitation is the:

modified taxable income calculated as taxable income before the DRD, capital loss carrybacks, and any NOL carryforward

(Ch 9) The term ______________ is used to describe an expense that is helpful or conducive to a business activity.

necessary

(Ch 16) The advantage of filing a consolidated tax return is:

the losses of one group company can be offset against the income of another. income from intercompany transactions can be deferred until sold to an outside party.