Gleim 9
Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up's federal income tax return?
$10,000 increase in taxable income. This answer is correct. The deductibility of bad debts is limited to the direct write-off method. Under the allowance method for bad debts, Filler-Up recorded $15,000 in bad debt expenses for accounts estimated to be uncollectible. For income tax purpose, Filler-Up is allowed to deduct a $5,000 write-off as bad debt expenses. Thus, Filler-Up must add $10,000 back to the taxable income, which results in an increase of $10,000 in taxable income.
Federal income tax owing or overpayment, if federal income tax before credits was $20,000
$10,000. The $30,000 in payments of estimated tax are treated as a refundable credit against tax.
2. During Year 3, Tennis Corporation had gross income of $70,000 and operating expenses of $95,000. Tennis Co. also received dividend income of $60,000 from a domestic corporation in which Tennis is a 25% shareholder. What is Tennis Co.'s net operating loss for Year 3?
$13,000. When calculating an NOL, the dividends-received deduction (DRD) is computed without regard to the 80% of taxable income limitation (i.e., $35,000 × 80% = $28,000 deduction limit). Thus, Tennis will have a DRD of $48,000 ($60,000 × 80%). Therefore, Tennis will have an NOL of $13,000 ($70,000 gross income + $60,000 dividend income - $95,000 operating expenses - $48,000 DRD).
Media Corp. is an accrual-basis, calendar-year C corporation. Its current year reported book income included $6,000 in municipal bond interest income. Its expenses included $1,500 of interest incurred on indebtedness used to carry municipal bonds and $8,000 in advertising expense. What is Media's net M-1 adjustment on its current year Form 1120, U.S. Corporation Income Tax Return, to reconcile to its current year taxable income?
-4500
4. For Year 3, Association Corporation had taxable income of $60,000 before using any of its net operating loss from Year 2. Association's books and records reflect the following income (losses): Year 1 -- $15,000 Year 2 -- $(40,000) If Association does not elect to forgo the carryback period, what amount of taxable income must Association report on its Year 3 tax return?
35,000. An NOL can be carried back 2 years and forward 20 years. The NOL must be carried back to the earliest year to which such a loss may be carried. The Year 2 NOL of $40,000 must first be carried back to offset the $15,000 of income from Year 1. This leaves a $25,000 NOL carryover, which is carried forward to reduce Year 3's $60,000 taxable income to $35,000.
$10,000 of dividends received from a 10%-owned domestic corporation
83,000. Since Action owns less than 20% of the domestic corporation, 70% of its dividend is deductible. The DRD is limited by the recipient corporation's adjusted taxable income. In order to compute the limit, use TI before any NOL deductions but after adding the dividend received. Therefore, TI used to calculate the limit is equal to $90,000 ($80,000 preliminary taxable income + $10,000 dividend). Since Action's taxable income of $90,000 is greater than the dividend received of $10,000, the DRD is not limited. Action's DRD is equal to $7,000 ($10,000 dividend × 70%). Taxable income after the DRD is $83,000 ($90,000 - $7,000 DRD).
All of the following businesses are automatically classified as corporations except
A partnership that possesses at least three of the following characteristics: limited liability, centralized management, free transferability of interest, and continuity of life.
Ida is engaged in a not-for-profit activity. The income and expenses of the activity are as follows: Gross income $3,200 Less expenses: Real estate tax $ 700 Home mortgage interest 900 Insurance 400 Utilities 700 Maintenance 200 Depreciation on an automobile 600 Depreciation on a machine 200 Total expenses $3,700 Loss $ (500) The amount of allowable depreciation for the automobile i
Allowable depreciation is the amount that a taxpayer is entitled to deduct under any proper method. The amount of allowable depreciation may not create or increase a net operating loss. Total expenses excluding depreciation are $2,900, so Ida's total allowable depreciation is $300 ($3,200 - $2,900). The $300 is allocated to the automobile and the machine. Therefore, the amount of allowable depreciation for the automobile is $225 [$300 × ($600 ÷ 800)].
An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been more than $10 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year end. Which of the following statements is correct if it changes to a C corporation?
C corporations that are not personal service corporations, S corporations, or small C corporations (less than an average of $5 million in revenues per year over the past 3 years) must use the accrual basis of accounting. A corporation can use a fiscal year end; June 30 is therefore allowed.
Calvin and Gloria were divorced in a prior year. As part of the final divorce decree of the court, Calvin was ordered to pay $500 a month toward the support of his two children, Robert and Myra. During 2017, Calvin got 6 months behind in his child support payments. As a result of his delinquency, two things happened in 2017 to allow Calvin to catch up in his payments. Gloria had Calvin's wages garnished for $1,000 to pay 2 delinquent months' child support. Calvin, a cash-basis taxpayer, was due $2,000 for past work he had done for the XYZ Corp. He told the XYZ Corp. to pay the $2,000 directly to Gloria to make up 4 months' child support. The XYZ Corp. paid the money directly to Gloria. Which of the following statements is true?
Calvin constructively received both the $1,000 wages and the $2,000 income in 2017. Income, although not actually in a taxpayer's possession, is constructively received in the taxable year during which it is credited to his or her account, set apart for him or her, or otherwise made available so that (s)he may draw upon it at any time, or so that (s)he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. Calvin earned the wages in 2017, and they were used to fulfill an obligation. In this case, it does not matter that he did not have access to the funds. They were still constructively received in 2017.
Robin, a C corporation, had revenues of $200,000 and operating expenses of $75,000. Robin also received a $20,000 dividend from a domestic corporation and is entitled to a $14,000 dividend-received deduction. Robin donated $15,000 to a qualified charitable organization in the current year. What is Robin's contribution deduction?
Deductions for charitable contributions are limited to 10% of taxable income before any charitable contributions and any dividends-received deduction. The charitable contribution deduction is computed as follows: Revenues $200,000 Dividend revenue 20,000 Less: Operating expenses (75,000) Income before dividend-received deduction and charitable contribution $145,000 × 10% Maximum allowed charitable deduction $ 14,500 The excess charitable contribution over the taxable income limit is deductible during the succeeding 5 tax years.
One of the elections a new corporation must make is its choice of an accounting period. Which of the following entities has the most flexibility in choosing an accounting period?
Generally, C corporations may elect either a calendar or fiscal tax year, S corporations and personal service corporations are required to use a calendar year, and partnerships must use a "required" tax year.
On January 2, Year 1, Tek Corp., an accrual-basis, calendar-year C corporation, purchased all the assets of a sole proprietorship, including $60,000 in goodwill. Tek's reported book income before federal income taxes was $400,000. A $1,500 deduction for annual amortization of goodwill was taken based on a 40-year amortization period. What should be the amount of Tek's taxable income, as reconciled on Tek's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
Intangible assets, such as acquired goodwill, are amortized for tax purposes over a 15-year period. Therefore, the deduction for tax purposes would be $4,000 ($60,000 ÷ 15), resulting in a $2,500 ($4,000 - $1,500) Schedule M-1 adjustment.
Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?
Interest Incurred Provision for on Loan to Carry State Corporation U.S. Obligations Income Tax No No
Which of the following entities must include in gross income 100% of dividends received from unrelated taxable domestic corporations in computing regular taxable income?
Personal Service Personal Holding both yes
Which one of the following statements about the taxation of personal service corporations is false for tax years beginning after December 31, 1993?
Personal service corporations are subject to the "flat" 35% tax rate only if more than 75% of their gross income is earned income. There is no requirement that more than 75% of the gross income be earned income for the flat 35% tax rate.
For the tax year, Ace Corporation had net income per books of $40,000, tax-exempt interest of $2,000, excess contributions of $1,000, meals in excess of the 50% limitation of $4,000, and federal income tax of $6,000. Using this information, determine Ace Corporation's taxable income as it would be shown on Schedule M-1 of the corporate tax return.
Schedule M-1 reconciles income or loss per books with income or loss per tax return. Net income per books $40,000 Add back: Federal income taxes 6,000 Excess contributions 1,000 Excess meals 4,000 $51,000 Subtract: Tax-exempt interest (2,000) Taxable income $49,000
Which of the following items should be included on the Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return to reconcile book income to taxable income?
Premiums paid on key-person life insurance policy. Net income (loss) per books + Federal income tax + Excess of capital losses over capital gains + Income subject to tax not recorded on books + Expenses recorded on books not deducted on the tax return [including contributions in excess of 10% taxable income limitation, book depreciation expense in excess of allowable tax depreciation, disallowed travel and entertainment costs (50% of meals and entertainment expenses are nondeductible), life insurance premiums on key personnel when the corporation is the beneficiary, and political contributions] - Income recorded on books not subject to tax (including prepaid rent or interest previously received and recorded for tax purposes but not earned until the current year, life insurance proceeds received on the death of key personnel, and tax-exempt interest) - Deductions on this return not charged against book income (e.g., depreciation) = Taxable income
For the current tax year, Sting Corporation had net income per books of $65,000, tax-exempt interest of $1,500, excess contributions of $3,000, excess tax depreciation over book depreciation of $4,500, premiums paid on term life insurance on corporate officers of $10,000 (Sting is the beneficiary), and accrued federal income tax of $9,700. Based on this information, what is Sting Corporation's taxable income as would be shown on Schedule M-1 of its current year corporate tax return?
Schedule M-1 reconciles income or loss per books with income or loss per tax return. Net income per books $65,000 Add back: Federal income taxes 9,700 Excess contributions 3,000 Life insurance premiums 10,000 $87,700 Subtract: Tax-exempt interest (1,500) Excess depreciation (4,500) Taxable income $81,700
Agress Corporation, a calendar-year taxpayer reporting on the accrual basis, showed the following balances on its books for 2017: Sales $130,000 Cost of sales 70,000 Operating expenses 40,000 Contributions 2,500 Net life insurance premiums on officer with Agress as the beneficiary 4,000 Accrued federal income tax 3,230 Book income $ 10,270 What is the amount of Agress Corporation's taxable income as it would be shown on Schedule M-1 of its 2017 corporate income tax return?
Schedule M-1 reconciles income or loss per books with income or loss per tax return. Taxable income before the charitable contribution is $20,000 ($130,000 - $70,000 - $40,000). The charitable contribution is limited to $2,000 ($20,000 × 10%). Net income per books $10,270 Add back: Federal income taxes 3,230 Excess contributions 500 Life insurance premiums 4,000 Taxable income $18,000
For the tax year ended December 31, 2017, Orange Corporation had gross income of $600,000 and operating expenses of $900,000. Contributions of $5,000 to qualified charities were included in expenses. In addition to the expenses, Orange Corporation had a net operating loss carryover of $8,000. What is Orange Corporation's net operating loss for 2017?
Section 172(c) defines a net operating loss as the excess of deductions over gross income, with certain modifications. One of the modifications is that a deduction for a net operating loss carryover is not allowed in computing a current NOL. Furthermore, a deduction for charitable contributions is not allowed because it is limited to 10% of taxable income (and Orange has a loss). Thus, Orange's NOL for 2017 is $295,000 ($600,000 gross income - $895,000 business expenses).
Gero Corporation had operating income of $160,000 after deducting $10,000 for contributions to State University, but not including dividends of $2,000 received from nonaffiliated taxable domestic corporations (not from debt-financed portfolio stock). In computing the maximum allowable deduction for contributions, Gero should apply the percentage limitation to a base amount of
The charitable contribution deduction is limited to 10% of a corporation's taxable income (TI) computed before the charitable contribution deduction, dividends-received deduction (not dividends income), net operating loss carryback, and capital loss carryback. Gero's base amount is $172,000 ($160,000 operating income + $10,000 contributions + $2,000 dividends).
Corporation R incurred a net operating loss of $96,000 in 2017 and carried it back to 2015. In 2015, R had gross income of $470,000 and business expenses of $390,000, including charitable contributions of $1,000. A net operating loss of $70,000 from 2016 had also been carried back to 2015. How much of R's 2017 net operating loss can be deducted against 2015 income?
The charitable contribution is still deductible in 2015 because the limitation is on taxable income before a net operating loss carryback [Sec. 170(b)(2)(C)]. For 2015, Corporation R had gross income of $470,000 and business expenses of $390,000, producing taxable income of $80,000. Since a $70,000 NOL from 2016 was carried back to 2015, $10,000 of income remains for that year to which the 2017 NOL may be applied.
Div Deduction
The deduction for dividends received is disallowed for dividends on stock held by the taxpayer for 45 days or less.
Sal used a building in his business that cost $200,000. In September Year 1, Sal sold the building to Benno for $100,000 cash. Benno also agreed to assume Sal's $150,000 mortgage and pay Sal's $5,000 accrued real estate taxes. The total depreciation claimed on the building (including Year 1 depreciation) was $30,000. Sal paid $10,000 selling expenses on the sale. What was Sal's realized gain or loss on the sale of the building?
The gain from a sale or exchange of property is the excess of the amount realized from the sale or exchange over the property's adjusted basis. The adjusted basis of an asset is generally its original cost plus the cost of any capital improvements to the property and less any depreciation or depletion. The amount realized on a sale or exchange is the total services received. The amount realized also includes any liabilities that are assumed by the buyer and liabilities to which the property traded is subject. The amount realized is the sales price less any selling expenses. Sal's gain is calculated as follows: Sales price $255,000 Less selling expenses (10,000) Amount realized $245,000 Less adjusted basis ($200,000 - $30,000) (170,000) Realized gain $ 75,000
Collander Corporation is preparing Schedule M-1 of its Form 1120, U.S. Corporation Income Tax Return. Which of the following statements is false with regard to the preparation of Collander's Schedule M-1?
The premiums paid on the key employee life insurance policy are a negative adjustment to book income to arrive at taxable income.
Tapper Corp., an accrual-basis, calendar-year corporation, was organized on January 2, 2017. During 2017, revenue was exclusively from sales proceeds and interest income. The following information pertains to Tapper: Taxable income before charitable contributions for the year ended December 31, 2017 $500,000 Tapper's matching contribution to employee-designated qualified universities made during 2017 10,000 Board of directors' authorized contribution to a qualified charity (authorized December 1, 2017; made February 1, 2018) 30,000 What is the maximum allowable deduction that Tapper may take as a charitable contribution on its tax return for the year ended December 31, 2017?
The total amount of charitable contributions is limited to 10% of a corporation's adjusted taxable income. Tapper is limited to a $50,000 ($500,000 × 10%) deduction. Contributions to qualifying charities are deductible in the year paid. In addition, an accrual-method corporation may deduct a contribution authorized by the board of directors during the current tax year and paid no later than 2 1/2 months after the close of the tax year. Tapper has qualifying contributions totaling $40,000, which is under the 10% limit of $50,000, so Tapper may fully deduct its qualifying contributions in 2018.
Geyer, Inc., a calendar-year corporation, had net income per books of $80,000 for 2017. For each of the years 2013-2016, Geyer's net income (loss) per books was as follows: 2013 $ 5,000 2014 15,000 2015 10,000 2016 (60,000) Included in Geyer's gross revenues for 2016 were taxable dividends of $20,000 received from an unrelated 20%-owned domestic corporation. When filing its tax return for 2016 on March 10, 2017, Geyer elected to give up the 2-year carryback of the loss for 2016. Geyer should report a net operating loss carryforward on its tax return for 2017 of
Under Sec. 172(b)(1), a net operating loss incurred in a tax year beginning after August 5, 1997, may be carried back to each of the 2 preceding taxable years and forward to the 20 succeeding taxable years. The net operating loss must be carried to the earliest possible year, unless an election is made to give up the carryback [Sec. 172(b)(3)]. Since Geyer made this election, the 2016 net operating loss is a carryforward to 2017. In computing the net operating loss, the dividends-received deduction that is claimed is computed without regard to the 80% of taxable income limitation. Geyer's net operating loss carryforward from 2016 to 2017 is Net loss per books $(60,000) Dividends-received deduction ($20,000 × 80%) (16,000) Net operating loss carryforward $(76,000)
What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year?
Unlike individuals, a corporation is not permitted to offset ordinary income with net short-term capital losses. Instead, they are suspended and carried forward.
1. $87,000 of straight-line depreciation on a corporation's books. Depreciation reported on their tax return was $74,000. 2. Interest income from Treasury and commercial bonds. 3. A corporation had $56,000 of capital losses and $63,000 of capital gains. 4. Charitable contributions equal to $33,000. Taxable income without regard to the contributions was $299,000. 5. Federal income tax paid. 6. Life insurance proceeds received upon the death of key personnel. The amount received was less than the premiums paid on the insurance policy.
Yes and Increase. Book depreciation expense in excess of the amount allowable for tax purposes is an expense that is recorded in net income per books but is not deducted on the tax return. The excess should be added back to book income. No and N/A. Tax-exempt interest earned will lead to a decrease in book income during reconciliation. However, interest from U.S. Treasury and commercial bonds is not tax-exempt. No and N/A. Capital losses in excess of capital gains require an increase in net income per books. When capital gains exceed capital losses, no adjustment is necessary. Yes and Increase. Corporations are only allowed to deduct charitable contributions to the extent they exceed 10% of taxable income before charitable contributions are considered. The excess is an expense that is recorded in net income per books but is not deducted on the tax return. The excess amount should be added back to book income during reconciliation. Yes and Increase. Federal income tax paid is not allowed as a deduction when computing taxable income. Amounts paid for Federal income taxes should be added back to book income during reconciliation. Yes and Decrease. Income that is not subject to tax causes an adjustment to net income per books during reconciliation. Life insurance proceeds are excluded from gross income as long as they do not exceed premiums and other amounts paid by the policyholder. The proceeds should be subtracted from book income during reconciliation.
