Exam 2 Advanced Corporate Taxation

Besides Charitable Contributions, what other items need to be excluded from taxable income before calculating the Charitable Contribution Limitation?

Dividend Received Deductions, Manufacturing Deduction under §199, NOL Carrybacks, and Capital Loss Carrybacks.

At the beginning of the calendar year 2013, Chaser Corp. had an operating deficit of $200,000 and the earnings and profits for the year amounted to $100,000. Beginning on March 16, 2013, the corporation made quarterly distributions of $25,000 during the taxable year to its shareholders. How much of each distribution is treated as a taxable dividend?

Each distribution is a taxable dividend in full, irrespective of the actual or the pro rata amount of the earnings and profits on hand at any of the dates of distribution, since the total distributions made during the year ($100,000) did not exceed the total earnings and profits of the year ($100,000).

The alternative minimum tax (AMT) is computed as the: > Excess of the regular tax over the tentative AMT. > Excess of the Tentative AMT over the regular tax. > The tentative AMT plus the regular tax. > Lesser of the tentative AMT or the regular tax.

Excess of the tentative AMT over the regular tax.

For Kaylee Corp's tax year that will end on June 30, 2017, when will Kaylee Corp's Form 1120 be due?

October 15, 2017

The accumulated earnings tax can be imposed: > On regular corporations not classified as personal holding companies > On both partnerships and corporations > On companies that make distributions in excess of accumulated earnings > Only on parent-subsidiary affiliated groups

On regular corporations not classified as personal holding companies.

Which of the following items should be included on Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of for 1120, U.S. Corporation Income Tax Return, to reconcile book income to taxable income? > Cash distributions to shareholders > Premiums paid on key-person life insurance policy > Corporate bond interest > Ending balance of retained earnings

Premiums paid on key-person life insurance

Kaylee Corps had the following taxable income during each quarter during 2014. What are the required ES payments using the annualization method. Months Taxable Income January - March $50,000,000 April - June $85,000,000 July - September $150,000,000 October - December $100,000,000 Total $385,500

Q1 = $50,000/3*12*.25=$50,000*.35 =$17,500 Q2 = $50,000/3*12*.5)=$100,000*.35=$35,000; $35,000-$17,500=$17,500 Q3 = $135,000/6*12*.75)=$202,500*.35=$70,875; $70,875-$17,500-$17,500=$35,875 Q4 = $285,000/9*12*1.0)=$380,000*.35=$133,000; $133,000-$35,875-$17,500-$17,500=$62,125 Total ES payments: $17,500 + $17,500 + $35,875 + $62,125 = $133,000 Total Tax Due: $385,500 * .35 = $134,750

For Kaylee Corp's tax year that ended on June 30, 2014, when was Kaylee Corp's Form 1120 due?

September 15, 2014

For Kaylee Corp's tax year that will end on June 30, 2016, when will Kaylee Corp's Form 1120 be due?

September 15, 2016

Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related transactions with customers. With regard to capital assets and Section 1231 Assets, how should these assets be classified? Land and shed capital assets or Section 1231

They are both Section 1231 properties. Because the parking lot and the shed constitute real estate and depreciable assets used in a trade or business, they are not capital assests per the definition below. Capital assets are defined as all property held by the taxpayer, except: 1. Property normally included in inventory or held for sale to customers in the ordinary course of business. 2. Depreciable property and real estate used in business. 3. Accounts and notes receivable arising from sales or services in the taxpayer's business. 4. Copyrights, literary, musical or artistic compositions. 5. Treasury stock

Kaylee Corp. purchase a building in 1/1/1978 for $5,000,000. The building was depreciated using a 40 year useful life. On December 31, 2015, Kaylee Corp sold the building for $10,000,000. At the time the building was sold, it had an adjusted basis of $170,000. What amount and character of gain must Kaylee Corp report?

Total Gain = $9,830,000 Straight line depreciation = $4,750,000 (5,000,000/40*38=4,750,000) Depreciation taken = $4,830,000 §1250 gain = 80,000 (4,830,000-4,750,000) §291 = amount that would have been §1245 $4,830,000 - §1250 gain 80,000 = $4,750,000*.2 = $950,000 Total §1250 gain = $1,030,000 §1231 gain = $8,800,000

Kaylee Corp., a calendar year taxpayer, was organized and began active operations in July 1, 2014. Kaylee Corp. started active business operations on November 1, 2014. Kaylee Corp. incurred the following costs: Legal fees to obtain a corporate charter $40,000 Commissions paid to underwriter $10,000 Advertising the grand opening of Kaylee Corp.'s store $30,000 Employee training before grand opening $5,000 What amount of organizational costs will Kaylee Corp. deduct during 2014? What amount of start-up costs will Kaylee Corp. deduct during 2014?

What amount of organizational costs will Kaylee Corp. deduct during 2014? $6,167 ($5,000 + (40,000-5,000)/180*6)= $6,167) What amount of start-up costs will Kaylee Corp. deduct during 2014? $5,333 ($5,000 + (35,000-5,000)/180*2)= $5,333) What is the timeline for making the election the amortize startup and organizational costs? How is the election made? Election must be made by due date of return (including extensions) for year active trade or business begins (start up) or year business begins (org costs). Election is made by deducting amortization on Form 4562.

If a corporation qualifies as a personal holding company, a personal holding company tax is assessed and must be paid along with the regular income tax. Which of the following statements is not true about personal holding companies and this tax? a) A company must omit the benefit of its charitable contributions in determining whether a tax is due. b) To qualify as a personal holding company, more than half of the value of the outstanding stock must be owned by five or fewer individuals at some point during the last half of the year. c) To qualify as a personal holding company, at least 60 percent of its ordinary income must be generated by dividends, interest, rents, royalties, and other passive income. d) This tax can be reduced or eliminated through the payment of dividends to the owners.

a) A company must omit the benefit of its charitable contributions in determining whether a tax is due.

A large corporation exchanged a manufacturing equipment with Halo Corp. Halo received like kind manufacturing equipment with a fair value of $95,000. In exchange, Halo gave up like kind manufacturing equipment which also had a fair value of $95,000. This equipment had originally cost Halo $220,000 and now has a tax basis of $45,000. What is the tax impact for Halo Corporation? a) Halo will record no gain or loss because this is like-kind property and no boot is received. b) Halo will report a gain of $50,000, the difference between $95,000 and $45,000. c) The basis in the new asset is $95,00o for Halo. d) Halo will record a taxable loss of $175,000 because of the decline in value of its original asset.

a) Halo will record no gain or loss because this is like-kind property and no boot is received.

Kaylee Corporation made an initial public offering of stock on January 1, 2015 of 100,000 shares of stock with an issuance price of $20 per share although the par value was $15 per share. In June, 10,000 of these shares were reacquired for $25 per share. In August, 6,000 of these shares were resold to the public for $27 per share. Then, in December, the remaining 4,000 shares were resold to the public for $22 per share. What is the taxable gain or loss to be recognized by this company related to these transactions? a) Zero b) Gain of $74 c) Gain of $10,094 d) Gain of $20,069

a) Zero

Cisko Corp purchased a building six years go for $275,000. The building was depreciated using the straight line method. The building was sold for $300,000 when the asset basis net of accumulated depreciation was $215,000. what should be reported on Cisko Corp's tax return? a) A Section 1231 gain of $73,000 and ordinary income of $12,000 b) Ordinary income of $85,000 c) Section 1231 gain of $60,000 and ordinary income of $25,000 d) Section 1231 gain of $25,000 and ordinary income of $60,000

a. A Section 1231 gain of $73,000 and ordinary income of $12,000 supposed to be this same exact question on the test

Gain on the disposition of §1245 property is treated as ordinary income to the extent of: a) Depreciation allowed or allowable b) Excess of the accelerated depreciation allowed or allowable over the depreciation figured for the same period using the straight line method. c) Excess of the appreciated value over depreciation allowed or allowable using the straight line method. d) The difference between the amount realized over the cost of the property.

a. Depreciation allowed or allowable

During the tax year the following assets were placed in service: Which conventions are used to figure out the depreciation of the business for the current year? a) Mid-quarter for all assets except the office building which uses mid month b) Half year for all the assets except the office building which uses mid month. c) mid quarter for all the assets d) half year for all the assets January Cars $40,000 February Office Building $190,000 July Computer Equipment $60,000 September Trucks $30,000 December Machinery $110,000 = $430,000

a. Mid-quarter for all assets except the office building which uses mid month $110,000/(40,000+60,000+30,000+110,000) =110,000/240,000=45.8% Mid ‐ quarter applies when more than 40% of the aggregate bases of property is placed in service during the last three months of the taxable year, not taking into account nonresidential real property, residential real property, railroad grading, tunnel bore, or any other property placed in service and disposed of during the same taxable year.

Hamlet Corp is created in 2016 and organization costs to get started amount to $35,000. For income tax purposes, which of the following statements is true with respect to the handling of these costs? a) Organizational costs can be immediately deducted up to $5,000 with the remainder amortized to expense over 180 months. b) All organizational costs are expensed when incurred because they are ordinary and necessary business expenses. c) Organizational costs are not deductible for a corporation. d) Organization costs must be amortized over a period of up to 60 months

a. a) Organizational costs can be immediately deducted up to $5,000 with the remainder amortized to expense over 180 months.

Alternative Minimum Taxable Income is a) taxable income increased by tax preferences and increased or decreased by adjustments and other statutory modifications. b) the sum of all tax preferences c) computed the same for individuals and corporations d) taxable income adjusted by tax preferences and reduced by an exemption amount.

a. taxable income increased by tax preferences and increased or decreased by adjustments and other statutory modifications.

In 2012, the Grand Corporation had taxable income of $45,000. In 2013, Grand had taxable income of $60,000. In 2014, Grand had taxable income of $35,000. However, in 2015, Grand had a net operating loss of $260,000. Grand needed cash and sought any available carryback refund immediately. How much of the net operating loss will Grand carry forward to 2016? a) $120,000 b) $165,000 c) $225,000 d) $260,000

b) $165,000

The Hondo Corporation reported net income on its financial statements for 2015 of $560,000. That included $75,000 in interest earned on the City of San Antonio bonds and $35,000 in interest earned on Valero Corporation bonds. It also included federal income tax expense of $175,000. In completing its Schedule M-1 reconciliation, what amount should the Hondo Corporation report as its taxable income? a) $625,000 b) $660,000 c) $450,000 d) $735,000

b) $660,000

Kaylee Corporation had a beginning Allowance for Doubtful Accounts of $50,000 in 2015. During 2015, Kaylee Corporation wrote off $78,000 in accounts because they were judged to be totally worthless. The company used the percentage of sales method and recognized bad debt expense for the year of $86,000 so that the ending allowance was $58,000. On its tax return for the year, what amount of deduction is allowed for these accounts? a) $50,000 b) $78,000 c) $86,000 d) $58,000

b) $78,000

For tax purposes, depreciation is determined using the Modified Accelerated Cost Recovery System (MACRS). Which of the following statements is not true concerning MACRS? a) Equipment which put in a classification having a life of ten years or less is depreciated using the double-declining balance method. b) All depreciable assets are automatically assumed to have a residual value equal to ten percent of cost. c) Residential rental property is depreciated over a life of 27 1/2 years. d) Used equipment follows the same rules as new equipment.

b) All depreciable assets are automatically assumed to have a residual value equal to ten percent of cost.

Kaylee Corporation exchanged like-kind equipment with another corporation. Kaylee Corporation received equipment with a fair market value of $105,000 and cash of $40,000 in exchange for equipment which cost Kaylee Corporation $250,000 but had a current tax basis of only $125,000. What is the tax impact for Kaylee Corporation? a) Kaylee Corporation has a taxable gain of $40,000. b) Kaylee Corporation has a taxable gain of $20,000. c) Kaylee Corporation has carryover basis less the cash received but records no taxable gain or loss. d) Kaylee Corporation has a taxable gain of $145,000.

b) Kaylee Corporation has a taxable gain of $20,000. Kaylee Corporation received $145,000 (equipment with a fair value of $105,000 plus $40,000 cash) and gave up equipment with a tax basis of $125,000. This results in a gain of $20,000. In like-kind exchanges, gains are not normally taxable. However, Kaylee Corporation received cash as boot. Gain must be recognized to the extent of the lesser of the gain ($20,000) or boot received ($40,000).

Kaylee Corp sold a business with the following assets in 2014. All allowable depreciation was deducted on Kaylee Corp's returns. Machine Sale Price $100,000 Original cost $80,000 Adjusted Tax Basis $40,000 Computers Sale Price $30,000 Original cost $60,000 Adjusted Tax Basis $25,000 Kaylee Corp had a next Sec. 1231 loss of $18,000 in 2013. What is the amount and character of Kaylee Corp's gain? a) $65,000 §1231 gain. b) $2,000 §1231 gain and $63,000 ordinary. c) $20,000 §1231 gain and $45,000 ordinary. d) $65,000 ordinary gain.

b. $2,000 §1231 gain and $63,000 ordinary.

The dividends-received deduction for a corporation allows a(n) a) 80% deduction for all dividends received from non-affiliated corporations. b) 70% deduction for all dividends received from non-affiliated corporations. c) 70% deduction for dividends received from a corporation when ownership is less than 20%, an 80% deduction for dividends received from non-affiliated corporations when ownership is 20% or more, but less than 80%, and a 100% deduction for dividends received from affiliated corporations when ownership is 80% or more. d) 70% deduction for dividends received from a corporation when ownership is less than 20% and an 80% deduction for dividends received from non-affiliated corporations when ownership is 20% or more

c. 70% deduction for dividends received from a corporation when ownership is less than 20%, an 80% deduction for dividends received from non-affiliated corporations when ownership is 20% or more, but less than 80%, and a 100% deduction for dividends received from affiliated corporations when ownership is 80% or more.

Which of the following is not considered a dividend? a) A distribution of common stock in lieu of property b) A distribution where some shareholders receive money and some shareholders receive common stock c) A proportionate distribution of common stock d) A distribution where some common shareholders receive common stock and some receive preferred stock

c. A proportionate distribution of common stock

On December 31, 2013, Kaylee Corp bought computer equipment for $5,000. In 2013, Kaylee Corp deducted depreciation of $1,000 using MACRs. On August 1, 2014, a fire destroyed the computer equipment. Kaylee Corp was reimbursed $4,500 by insurance. a) Kaylee Corp has a $1,000 ordinary gain. b) Kaylee Corp has a $1,000 §1231 gain. c) Kaylee Corp has a $500 ordinary gain. d) Kaylee Corp has a $500 §1231 gain. e)Kaylee Corp does not recognize the gain because this is an involuntary conversion.

c. Kaylee Corp has a $500 ordinary gain.

Kaylee Corp is a corporation that is 100% owned by 4 shareholders. Kaylee Corp derives all of its income from dividends and interest. In 2014, Kaylee Corp distributed 60% of its after tax income as a dividend to its shareholders. a) Kaylee Corp only pays federal income tax on the 40% of its income that is not distributed to shareholders. b) Kaylee Corp must pay personal holding company tax on 100% of its personal holding company income. c) Kaylee Corp must pay personal holding company tax on 40% of its personal holding company income. d) Kaylee Corp is subject to the accumulated earnings tax

c. Kaylee Corp must pay personal holding company tax on 40% of its personal holding company income. you pay 20% 5 or fewer shareholders

Kaylee Corp has revenues of $150,000, expenses of $95,000, and charitable contributions of $10,000. Which of the following is true? a. Taxable income is $55,000 and $10,000 in contributions can be carried over for five years. b. Taxable income is $50,500 and $5,500 in contributions can be carried over for three years. c. Taxable income is $49,500 and $4,500 in contributions can be carried over for five years. d. Taxable income is $45,000 and there are no amounts to be carried over.

c. c. Taxable income is $49,500 and $4,500 in contributions can be carried over for five years. Kaylee Corp first computes its net income without the contributions taken into consideration of $55,000 ($150,000-$95,000). Charitable contributions of up to 10 percent of that figure ($5,500 in this case) can then be deducted reducing taxable income to $49,500. The remainder of the contributions ($4,500) can be carried forward for up to five years.

Chaser and Marley exchanged trucks. Chaser exchanged a large delivery truck with Marley for two smaller trucks. The fair value of the assets exchanged is equal: $25,000. Chaser's basis in the large truck is $33,000 and Marley's basis in the small truck A is $10,000 and small truck B is $12,000. What is the tax effect of this transactions? a) Chaser's basis in the two new trucks is $25,000 b) Marley's basis in the new truck is $33,000 c) Chaser recognizes a loss of $8,000 d) Chaser's basis in the two new trucks is $33,000

d) Chaser's basis in the two new trucks is $33,000

Which of the following would not be an adjustment reported on Schedule M-1 of a corporation's federal income tax return? NOTE: We did not go over life insurance proceeds in class, but they are generally not taxable. a) Life insurance proceeds b) Municipal bond interest income c) Fines and penalties d) Interest paid on corporate bonds issued at face value

d) Interest paid on corporate bonds issued at face value

Kaylee Corp sold depreciable property to a shareholder who owns 65% of the company for $14,000 in cash. This property had cost the company $165,000 but now has an adjusted tax basis of $54,000. What is the income tax effect to be reported by Kaylee Corp? a) $40,000 ordinary loss b) $40,000 long term capital loss. c) $151,000 long-term capital loss d) None

d) None

A corporation has paid several amounts this year and is now trying to determine which costs can be deducted for income tax purposes. Which of the following is necessary for an expense to be deducible? a) The expense must be ordinary and necessary. b) The expense must be necessary and reasonable. c) The expense must be ordinary as well as reasonable in amount. d) The expense must be ordinary, necessary and reasonable in amount.

d) The expense must be ordinary, necessary and reasonable in amount.

Hondo Corporation bought a piece of equipment for $75,000. After depreciation of $45,000 had been taken on this equipment, it had a tax basis of $30,000. In the current tax year, the equipment was sold for $65,000. What should the company report as ordinary income from the sale of this equipment? a) There is no ordinary income derived from the sale of this equipment. b) There is $55,000 of ordinary income derived from the sale of this equipment. c) There is $45,000 of ordinary income derived from the sale of this equipment d) There is $35,000 of ordinary income derived from the sale of this equipment.

d) There is $35,000 of ordinary income derived from the sale of this equipment. Lesser of the gain or depreciation

For 2014, Kaylee Corp. had losses of $20,000 from operations. It received $200,000 in dividends from a 25% owned domestic corporation. Kaylee Corp.'s taxable income is $150,000 before the dividends-received deduction. What is the amount of Kaylee Corp's dividend received deduction? a) $0 b) $160,000 c) $126,000 d) $120,000

d. $120,000

Kaylee is the CEO of Kaylee Corp. a publicly traded corporation. For 2014, Kaylee's salaries consisted of the following: Base Salary $1,900,000 Bonus (performance based) $300,000 Stock Options (performance based) $1,000,000 What amount can Kaylee Corp. deduct on the 2014 return for Kaylee's compensation? a) $3,200,000 b) $2,900,000 c) $2,200,000 d) $2,300,000

d. $2,300,000 $900,000 of the base salaries is not deductible due to §162(m)

If Aero Aviation, Inc. gives their employee, Josh, a gift certificate of $30, how much can Aero Aviation deduct of the $30? a) $0 b) $15 c) $25 d) $30

d. $30

Chaser Co. has domestic production gross receipts (DPGR) of $200,000. Its total expenses include $100,000 of cost of goods sold and $40,000 of other expenses. The portion of cost of goods sold and other expenses that are allocable to domestic production is 50%. Chaser Co.'s taxable income is $100,000 and the W-2 wages for 2015 are equal to $210,000. What is Chaser Co's deduction for income attributable to domestic activities? a)$18,900 b) $12,600 c) $11,700 d) $9,000

d. $9,000 (DPGR $200,000 - Allocated expenses $70,000 = $130,000 * 9% = $11,700) Taxable income $100,000 * 9% = $9,000

Which of the following assets used in a trade or business is a §1231 asset if sold on 1/1/2015? a) Inventory acquired during 2013 b) A building acquired on 1/31/2014 c) Land acquired on 1/31/2014 d) An automobile acquired on 1/1/2013

d. An automobile acquired on 1/1/2013 1245 & 1250 are a subset of 1231. You need to look at them 1st.

Which of the following qualifies for the DRD? a) Dividends received from a foreign corporation that earned all of its income from sources outside the United States. b) Dividends on deposits in a mutual savings bank. c) Dividends paid from a real estate investment trust ordinary income. d) Dividends from a taxable domestic corporation

d. Dividends from a taxable domestic corporation

Hamlet Corp is created in 2016 and organization costs to get started amount to $60,000. For income tax purposes, which of the following statements is true with respect to the handling of these costs? a. Organizational costs can be immediately deducted up to $5,000 with the remainder amortized to expense over 180 months. b. All organizational costs are expensed when incurred because they are ordinary and necessary business expenses. c. Organizational costs are not deductible for a corporation. d. Organization costs can be amortized over a period of up to 180 months

d. Organization costs can be amortized over a period of up to 180 months

Which of the following is not an adjustment from taxable income to E&P? a) interest on municipal bonds b) Federal income tax c) capital loss carryforward d) Original issue discount e) Dividend received deduction

d. Original issue discount

Kaylee moved into a new home in October 2015. During the same month, she began renting out her old home.What is the applicable depreciation method, applicable recovery period, and convention?

depreciation method - straight line, applicable recovery period - 27.5 years, applicable convention - mid-month

During 2014, Kaylee Corp made the following distribution to Kaylee, the 100% individual shareholder: Cash $45,000 Truck FMV $25,000 Basis $15,000 Truck loan ($15,000) Kaylee assumed the truck loan of $15,000. Kaylee Corp had earnings and profits of $70,000 before the distribution. Assuming a 35% tax rate, what is the net reduction that will be made to the E&P of Kaylee Corp due to this distribution? a) $45,000 b) $70,000 c) $55,000 d) $45,000 e) $48,500

e. $48,500 70,000 E&P before distribution 10,000 §311(b) gain (3,500) tax on §311(b) gain (25,000) Distribution (45,000) Distribution 15,000 Distribution 21,500 Ending E&P $70,000-21,500=$48,500

The accumulated earnings tax a) Can be avoided by sufficient dividend distributions b) Is 20% of the accumulated taxable income c) Applies to corporations if at any time during the last half of the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. d) All the above e) a and b only

e. a and b only

Personal holding company income does not include: a) Royalties b) Rents c) Capital gains d) Personal services income e) c and d

e. c and d

For year 2, Quest Corp., an accrual-basis calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from year 1. Quest's year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, year 2, Quest's board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, year 3. What is the maximum allowable deduction that Quest may take as a charitable deduction on its year 2 income tax return? $23,000 $20,000 $15,000 $8,000

$20,000 C corporations are allowed a maximum charitable contribution deduction of 10% of taxable income computed before the following deductions Any charitable contribution The dividend received deduction Any net operating loss carryback The U.S. production activities deduction

Lobster, Inc. purchased the following assets during Year 1: Computers $35,000 Computer desks $22,000 Office furniture $4,000 Delivery trucks $25,000 Building $425,000 What should be reported as the cost basis for a MACRS seven-year Property? $26,000 $86,000 $451,000 $511,000

$26,000 MACRS seven year property includes assets such as office furniture, fixtures, and equipment

Rock Crab, Inc. purchases the following assets during the year: Computer $3,000 Computer Desk $1,000 Office Furniture $4,000 Delivery Van $25,000 What should be reported as the cost basis for MACRS five-year property? $3,000 $25,000 $28,000 $33,000

$28,000 MACRS five-year property includes light trucks, automobiles, typewriters, computers, copiers, duplicating equipment, and other such items.

A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new auto. What is the gain or loss recognized by the taxpayer on this transaction. $3,500 gain $3,000 gain $0 $3,500 loss

$3,000 gain FMV of new auto + FMV of trailer - Adjusted basis of old auto (cost - accumulated depreciation) 16,500+3,500-(35,000-18,000)=3,000

A taxpayer is trading an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $17,500. The taxpayer agrees to assume a liability secured by the new auto of $1,000. The other party also agrees to assume a liability secured by the taxpayer's ols auto of $3,500. What is the gain or loss realized by the taxpayer on this transaction? $3,000 gain $2,500 gain $500 gain $2,000 loss

$3,000 gain Amount realized: 18,000-17,500-1,000+3,500=3,000 Gain realized: $2,500 The lesser of realized gain $3,000 or the boot received $2,500 Basis of new property: $17,000 17,000+2,500-3,500+1,000

Tan Corp. calculated the following taxes for the current year: Regular tax liability $210,000 Tentative minimum tax $240,000 Personal holding company tax $65,000 What is Tan's total tax liability for the year? $210,000 $240,000 $275,000 $305,000

$305,000 Tan's regular tax liability $210,000 Plus: Tan's AMT (240,000-210,000) $30,000 Plus: Tan's PHC tax $65,000 Tan will pay AMT to the extent that AMT exceeds regular tax Tan will pay personal holding company tax in addition to its regular and alternative minimum taxes.

A C corporation had a federal income tax liability of $40,000 for each of the ast 5 years, each covering a 12 month period. The tax for the current year is $48,000. What is the lowest amount that must have been paid as estimated taxes fr the current year so that no penalty for underpayment is applicable? $40,000 $44,000 $48,000 $52,800

$40,000 The required annual estimated tax payment for a C corporation is the least of: 1. 100% of the tax liability of the prior years return, assuming a positive tax liability 2. 100% of the current year tax liability 3. 100% of the estimated current year tax liability according to the annualized income method. Because the corporation's prior year tax liability is the least of these amounts, $40,000 is the minimum amount of estimated tax payments required to avoid an underpayment penalty

Nare, an accrual-basis, calendar-year taxpayer, owns a building that was rented to Mott under a 10-year lease expiring August 31, Year 3. On January 2, Year 1, Mott paid $30,000 as consideration for canceling the lease. On November 1, Year 1, Nare leased the building to Pine under a five-year lease. Pine paid Nare $5,000 rent for each of the two months of November and December, and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 1 income tax return? $10,000 $15,000 $40,000 $45,000

$45,000 Payments for canceling a lease are rental income

Chaser Co. manufactures dog leashes. For 2013, Chaser Co. had taxable income, all from qualifying manufacturing activities, of $1 million and paid $100,000 in W-2 wages. 1. What is Chaser Co.'s manufacturing deduction for 2013? 2. What kind of deduction is the manufacturing deduction? Permanent or timing?

1. What is Chaser Co.'s manufacturing deduction for 2013? Manufacturing deduction is $1,000,000 * 9% = $90,000 Limitation calculated based on wages is $100,000 * 50% = $50,000 Allowable Deduction is $50,000. 2. What kind of deduction is the manufacturing deduction? Permanent or timing? Permanent

Aviary Corp. sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method? $180,000 $120,000 $54,000 $36,000

36,000 Gain on sale $180,000/600,000=.30 Gain recognized in year of sale $120,000 (cash received)*.30=36,000 Rule: under the installment method, revenue is reported over the period in which the cash payments are received. The amount of cash received is multiplied by the gross profit percentage on the sale to determine the revenue (which retains its character as capital gain or ordinary income, depending on the transaction).

At the beginning of the calendar year 2013, Yogi Corp. had a deficit of $150,000. During 2013, Yogi Corp has earnings and profits of $50,000. During the year, Yogi Corp made distributions of $100,000. How much of the distributions is treated as a taxable dividend?

$50,000 of the distributions are treated as taxable dividends. Pursuant to §316(a), distributions come first out of a corporation's earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of and distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.

Azure, a C corporation, reports the following: Pretax book income of $543,000. Depreciation on the tax return is $20,000 greater than depreciation on the financial statements. Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements. Fines for pollution appear as a $10,000 expense in the financial statements. Interest earned on municipal bonds is $25,000. $528,000 $543,000 $544,000 $559,000

$544,000 Municipal bond interest is not taxable for tax purposes

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: Customer list $100,000 Trade name: $50,000 Goodwill $90,000. What is the amortization deduction for the current year? $3,000 $6,000 $8,000 $16,000

$8,000 Customer lists, trade names, and goodwill are purchased intangible assets, which taxpayers amortize over 180 months using the full-month convention [(100,000+50,000+90,000)/180]*6=8,000

Parent company X and subsidiary company Y file a calendar year consolidated federal income tax return. Company X reported a @120,000 tax loss, which included a $10,000 dividend from Y. Company Y reported $140,000 of taxable income, which included $30,000 of dividends received from less than 20% owned stock investments. Neither company took into account any applicable dividends received deduction. What is the group's consolidation tax loss for the year? ($7,000) ($4,000) ($11,000) ($20,000)

($11,000) X should not include the $10,000 dividend from Y in its income. 30,000*.7=21,000-10,000

Same facts as previous question, what if beginning E&P was only $40,000. What would the reduction be?

40,000, a distribution cannot reduce E&P below zero.

The personal holding company income test requires the company's income for a given taxable year to be at least: > 30% of undistributed personal holding company income > 50% of taxable income > 60% of adjusted ordinary gross income > 80% of ordinary gross income

60% of adjusted ordinary gross income Stock ownership test is 50% and the income test is 60% There are two criteria in determining whether a company is a personal holding company: a) more than 50% of the stock must be owned by 5 or fewer individuals and b) at least 60% of the adjusted ordinary gross income must consist of certain investment income

Kaylee Corp had taxable income of $480,000 and had a $50,000 accumulated deficit in E&P. Kaylee Corp had the following transactions during the year: 1. Kaylee Corp deduced depreciation on its return of $75,000 using MACRs. If Kaylee Corp had used ADS, depreciation expense would have been $60,000. 2. Kaylee Corp had Meals and Entertainment expense of $25,000. 3. Kaylee Corp received municipal interest of $20,000. 4. Kaylee Corp had a dividends received deduction of $10,000. 5. Kaylee Corp had an NOL carryforward of $12,000. What is Kaylee Corp's current E&P on December 31, 2014? a) $537,000 b) $524,500 c) $512,500 d) $502,500 e) $474,500

b. $524,500 480,000 taxable income 15,000 depreciation adjustment (12,500) non-deductible M&E 20,000 non-taxable interest income 10,000 dividends received deduction 12,000 NOL Carryforward = 524,500 Note: on a question like this for the test, pay attention to whether or not I am asking for accumulated E&P or current E&P. Pay attention to whether or not there are distributions and whether or not I am asking for E&P pre or post distribution.

In 2014, Kaylee Corp received $70,000 for the sale of stock that had been purchased 2 years earlier for $80,000. Also during the year, Kaylee Corp recognized a capital gain of $7,000 and received qualified dividends of $3,000. How much loss is deductible in 2014 from the sale of the stock? a) $10,000 b) $7,000 c) $3,000 d) $0

b. $7,000 you can only deduct capital losses up to your capital gains

For 2014, Kaylee Corp had a tax liability of $250,000 consisting of $160,000 of regular tax and $90,000 of alternative minimum tax. For 2013, Kaylee Corp's tax liability was $280,000. What amount of tax must Kaylee Corp have paid assuming equal installments? a) $70,000 b) $62,500 c) $40,000 d) $22,500

b. $70,000

Kaylee Corp., a calendar year taxpayer, had accumulated earnings and profits as of January 1, 2014 of $75,000. For the first six months, Kaylee Corp had a taxable operating loss of $65,000, and finished the year with an NOL of $100,000. Kaylee Corp distributed $30,000 on July 1, 2014 to its shareholders. Which of the following is true? a) The entire $30,000 is treated as a dividend distribution. b) $25,000 is treated as a dividend distribution. The remaining $5,000 is a return of basis or capital gain to the extent basis is exceeded. c) $10,000 is treated as a dividend distribution. The remaining $20,000 is a return of basis or capital gain to the extent basis is exceeded. d) Since there is a deficit in E&P at year end, the entire distribution of $30,000 is treated as a return of basis or capital gain to the extent the basis is exceeded

b. 25,000 is treated as a dividend distribution. The remaining $5,000 is a return of basis or capital gain to the extent basis is exceeded.

Kaylee Corp. is an accrual basis calendar year corporation. On December 31, 2014, The Board of Directors declared a bonus equal to 5% of each employee's salary for services rendered during 2014. None of the employees own stock in Kaylee Corp. The amount represents reasonable compensation for services rendered and was paid on February 28, 2015. Kaylee Corp.'s bonus expense may: a) Not be deducted on Kaylee Corp.'s 2014 return because the amount of the bonus cannot be determined with reasonable accuracy at the time of the declaration of the bonus. b) Be deducted on Kaylee Corp.'s 2014 tax return. c) Be deducted on Kaylee Corp.'s 2015 tax return. d) Not be deducted on Kaylee Corp.'s return because the payment is a disguised dividend

b. Be deducted on Kaylee Corp.'s 2014 tax return.

Kaylee Corp. considers it necessary to the business to pay kickbacks to a foreign country official in order to gain contracts to do business in that country. Kaylee Corp. may deduct the kickbacks as a business expense. a) T b) F

b. False

One of the requirements that must be met for meals and entertainment expenses to meet the directly related test is that the taxpayer must show that business income or business benefit actually resulted from each meal or entertainment expense. a) True b) False

b. False

The accumulated earnings tax is a self assessed tax that is reported on an originally filed Form 1120. a) True b) False

b. False

Kaylee Corp hires Stephanie, the 100% shareholder's mother, clean Kaylee Corp's 3,000 square foot office building each week. For the year 2014, Kaylee Corp paid Stephanie $250,000 for these services. Kaylee Corp should be allowed a deduction for the full amount paid to Stephanie. a) True b) False

b. False A substantial portion of the payment to Stephanie will most likely be considered a dividend to the 100% shareholder and then a gift to the mother. The payment of the salary is very excessive and does not equate to FMV.

Which of the following is not depreciable under MACRs? a) Goodwill b) Land Improvements c) Computer equipment d) Office Furniture

b. Goodwill

On January 1, 2015, the Woodlands Corporation acquires all of the outstanding stock of Happy Corporation and appropriately allocates $360,000 to an identifiable intangible asset. This asset does qualify according to the tax rules as Section 197 property. For financial reporting purposes, the company has decided to amortize this cost over the expected 40-year life of the asset and reports its net income for 2015 as $680,000. What should the company report as its taxable income for 2015 if the only tax difference relates to this property? a) $671,000 b) $656,000 c) $665,000 d) $680,000

c) $665,000

Kaylee owns 75 percent of Kaylee Corporation. Kaylee Corporation sold Kaylee a piece of equipment that it originally purchased for $100,000. The equipment has a tax basis of $62,000 and a fair value of $68,000. Kaylee buys the equipment from Kaylee Corporation for its fair value. What tax effect should Kaylee Corporation record on this sale? a) Kaylee is a related party so there is no tax effect on the transaction. b) Kaylee Corporation recognizes a $6,000 capital gain. c) Kaylee Corporation recognizes a $6,000 gain. d) Kaylee recognizes a dividend of $6,000.

c) Kaylee Corporation recognizes a $6,000 gain.

Kaylee Corporation had revenues of $860,000 this year and operating expenses of $480,000. On the last day of the tax year, the Board of Directors pledged to contribute $65,000 to a public charity that provides dentistry for underprivileged children. The contribution is paid on January 15th of the next year. Which of the following statements is true? a) The $65,000 is deductible for tax purposes in Year Two when paid to the charity. b) Kaylee Corporation should report taxable income in Year One of $380,000. c) Kaylee Corporation should report taxable income in Year One of $342,000. d) Kaylee Corporation should report taxable income in Year One of $315,000.

c) Kaylee Corporation should report taxable income in Year One of $342,000.

The Killinger Corporation is in the process of liquidating and going out of business. Killinger owns shares of a major American company that it bought several years ago for $40,000. These shares are given to Kaylee Crandall (one of the owners) as part of the liquidation when they are valued at $65,000. What is the tax effect of this distribution for Killinger Corporation? a) As a liquidating distribution, there is no tax effect. b) Killinger Corporation recognizes a loss of $40,000 since the shares were given away. c) Killinger Corporation recognizes a capital gain of $25,000 on the distribution. d) Killinger Corporation recognizes a Section 1231 gain of $25,000.

c) Killinger Corporation recognizes a capital gain of $25,000 on the distribution

Kaylee Corporation paid $389,000 this year for manufacturing equipment. For income tax purposes, how is this equipment classified? a) Capital asset b) Ordinary income producing asset c) Section 1245 property d) Section 1250 property

c) Section 1245 property

Hondo Corporation bought a piece of equipment for $75,000. After depreciation of $45,000 had been taken on this equipment, it had a tax basis of $30,000. In the current tax year, the equipment was sold for $85,000. What should the company report as ordinary income from the sale of this equipment? a) There is no ordinary income derived from the sale of this equipment. b) There is $55,000 of ordinary income derived from the sale of this equipment. c) There is $45,000 of ordinary income derived from the sale of this equipment. d) There is $30,000 of ordinary income derived from the sale of this equipment.

c) There is $45,000 of ordinary income derived from the sale of this equipment. Lesser of the gain or depreciation

The Atlantis Corporation is a domestic US company and owns shares in three different companies. Each investment paid a $10,000 dividend to Mendenhall during the current tax year (for a total of $30,000). Mendenhall owned 8 percent of the first company which was not a domestic US corporation. Mendenhall owned 19 percent of the second company which was a domestic US corporation. Mendenhall owned 30 percent of the third company which was also a domestic US corporation. By how much did these dividends cause Mendenhall's taxable income to go up? a. $30,000 b. $20,000 c. $15,000 d. $16,000 e. $14,000

c. $15,000

Kaylee Corp had sales in Year One of $650,000 plus dividend income from other domestic corporations of $150,000. The company had ordinary and necessary business expenses of $480,000. All dividends came from companies in which Kaylee Corp held 15 percent ownership. The company also made charitable contributions of $65,000 during the year. What is its taxable income? a) $288,000 b) $193,500 c) $183,000 d) $ 150,000

c. $183,000 Sales-expenses+dividend income-charitable contribution-DRD 650,000-480,000+150,000-32,000-105,000=183,000

Kaylee Corp.'s current year AMTI was $200,000. What amount exemption is Kaylee Corp allowed? a) $0 b) $12,500 c) $27,500 d) $52,500

c. $27,500 (200,000-150,000=50,000; 50,000*.25 = $12,500; $40,000-$12,500=$27,500)

Chaser Corp distributed a parcel of real estate to a shareholder that had an adjusted basis to the corporation of $25,000 and a fair market value of $50,000. The property was subject to a mortgage of $60,000, which was assumed by the shareholder. What is Chaser Corp's recognized gain (or loss) on the distribution to the shareholder? a) $0 b) $25,000 c) $35,000 d) $60,000

c. $35,000

Josh works for Aero Aviation, Inc. Josh went on a business trip to make sales of his company's new jet. Josh incurred the following expenses on his trip: Plane fares $4,000 Hotels $1,000 Meals $800 Entertainment $500 Total $6,300 What portion, if any, of the $6,300 will be deductible by Aero Aviation? a) $6,300 b) $6,050 c) $5,650 d) $5,000

c. $5,650

In 2014, Kaylee Corp. an accrual basis calendar year corporation reported book income of $380,000. Included in that amount was $50,000 of municipal bond interest income, $170,000 for Federal Income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bond. What amount should Starke's taxable income be on its Form 1120? a) $330,000 b) $500,000 c) $502,000 d) $550,000

c. $502,000 $380,000 - nontaxable interest $50,000 + non-deductible income tax $170,000 + non ‐ deductible interest expense $2,000

In 2014, Kaylee Corp. an accrual basis calendar year corporation reported book income of $500,000. Included in that amount was $50,000 of expenses paid to a political action committee for lobbying, $100,000 for Federal Income tax expense, $30,000 for state and local income tax expense and $10,000 fine paid to the IRS for failure to timely file a tax return. What amount should Starke's taxable income be on its Form 1120? a) $550,000 b) $500,000 c) $660,000 d) $650,000

c. $660,000 $500,000 + non ‐ deductible lobbying $50,000 + non ‐ deductible Federal Income Tax Expense $100,000 + non ‐ deductible fines $10,000

What is the alternative minimum tax for a corporation whose tax return reflects the following? Taxable Income $110,000 Depletion Preference $6,800 Regular tax $7500 a) $5,235 b) $6,610 c) $7,860 d) $13,500

c. $7,860 Taxable Income 110,000 Preferences 6,800 AMTI 116,800 less Exemption (40,000) Subtotal 76,800 Tentative Minimum Tax 15,360 @20% Regular Tax 7,500 AMT 7,860 We will have to calculate something like this on the test

A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $22,000. The tax payer has agreed to pay $2,000 cash in addition to the trade-in. What is the taxpayer's basis in the new automobile received? $17,000 $19,000 $20,000 $22,000

$19,000

Corporation X, a calendar year taxpayer, incurred $54,500 of organizational expenses and began business on July 1 of Year 1. Corporation X is deemed to have elected to amortize organizational expenses under Code Sec. 248(a) in Year 1. How much organizational expenses can Corporation X deduct during Year 1

$2,300 ($5,000 - 4,500 = $500, ($54,500 - $500) / 180 * 6 = $1,800, $500 + $1,800 = $2,300)

During the year, Portal Corp. received $100,000 in dividends from Sal Corp., its 80% owned subsidiary. What net amount of dividend income should Portal include in its current year consolidated tax return? $100,000 $80,000 $70,000 $0

$0 If a corporation owns 80% or more of another corporation , the dividends received deduction is 100% as the dividend income is eliminated in consolidation. Therefore, the net amount of dividend income is $0.

What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year? $0 $3,000 $5,000 $10,000

$0 Unlike individuals, corporations may not deduct any capital losses in excess of capital gains in a year.

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 decrease in taxable income > $10,000 increase in taxable income > $5,000 decrease in taxable income > $5,000 increase in taxable income

$10,000 increase in taxable income For tax purposes, Filler-Up may only deduct the amount of uncollectable receivables actually written off during the year, which in this case was $5,000. For financial accounting purposes, Filler-Up recorded $15,000 of expenses for accounts estimated to be uncollectible. So, the amount recorded as an expense for financial accounting purposes was $10,000 more than that allowed to be deducted for tax purposes. On the Schedule M-1 reconciliation, that $10,000 difference must be added back in reconciling financial accounting income to taxable income

A taxpayer purchased 5 acres of land for $20,000 and placed in service other tangible business assets that cost $100,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $108,000, what maximum amount of cost recovery can the taxpayer claim this year? $102,000 $108,000 $100,000 $20,000

$100,000 Under the election to expense certain depreciable assets (sec. 179), the taxpayer may expense the cost of the depreciable asset to the limitation $108,000. Therefore, only the cost of the depreciable tangible business assets can be expensed ($100,000).

A sole proprietor wants to incorporate and has requested a projection of the first-year tax results as a C corporation and as an S corporation. Taxable income from ordinary operations is projected to be $100,000. The company expects to make a $20,000 charitable contribution and projects a long-term capital loss on stock of $7,000. Which of the following projections is correct. > C corporation, $73,000 taxable income; S corporation, $80,000 ordinary business income; long-term capital loss is separately stated. > C corporation, $90,000 taxable income; S income, $80,000 ordinary business income; long term capital loss is separately stated. > C corporation, $90,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated. > C corporation, $80,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated

C corporation, $90,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated C corp is 100,000-10,000 (the charitable contribution that they can claim). They have no capital gain so they can claim no capital loss. S corp has the $100,000 as ordinary business income, and the charitable contributions and capital loss will be stated separately

Dreamscape, Inc., a widget retailer, had a taxable income of $150,000 from operations during its taxable year. In addition, Dreamscape incurred a $35,000 loss from the sale of investment land, a capital asset. No other gains or losses were generated during the taxable year, nor had been in the past years. In Dreamscape's tax return for that, what is the proper treatment of the $35,000 loss? > The $35,000 capital loss can be used in the current year to reduce taxable income to $115,000 > Carry the $35,00 capital loss forward for five years > Use $3,000 of the loss to reduce the taxable income of $147,000 carry the remaining $32,000 forward for the 3 years > Use $3,000 of the loss to reduce the taxable income to $147,000 and carry the remaining $32,000 forward for 5 years

Carry the $35,000 capital loss forward for five years Capital losses can only be used to offset capital gains. any amount left over can be carried back for 3 years to offset prior capital gains and carried forward for 5 years

Which of the following items qualifies for treatment under Section 1231 (Property used in a trade or business and involuntary conversions)? > Copyright used in business, held for 10 years > Building used in the business, held for 6 months > Machinery used in the business, held for 11 months > Computer used in the business, held for 4 years

Computer used in the business, held for 4 years 1231assets are all depreciable assets and all real property used in a trade or business and held over 12 months

The selection of an accounting method for tax purposes by a newly incorporated C corporation: > Is made on the initial tax return by using the chosen method. > Is made by filling a request for a private letter ruing from the IRS. > Must first be approved by the company's board of directors. > Must be disclosed in the company's organizing documents.

Is made on the initial tax return by using the chosen method.

Which of the following assets are not depreciable or amortizable for federal income tax purposes? Land A taxpayer's personal residence Rental property Inventory Goodwill Machinery and Equipment

Land A taxpayers personal residence Inventory

Celebration Corp. had the following tax items during 2014: Gross income $700,000 DRD $60,000 Other deductions $800,000 Net Short-term cap loss $5,000 Net long-term capital loss $10,000 Which of the following statements is true? a) Net operating loss equals $100,000. The DRD and the capital losses are separately carried back and forward. b) Net operating loss equals $100,000. Only the capital losses are separate carryback and carryover items. c) Net operating loss equals $115,000. d) Net operating loss equals $160,000. The capital losses are separate carryback and carryover items.

Net operating loss equals $160,000. The capital losses are separate carryback and carryover items. DRD is limited to the net operating loss 700,000-800,000