Income Tax Accounting

T or F: In the current year Juanita and Joseph from a two member LLC and do not file form 8832. State whether it is T or F: as a result, the LLC will be treated as a partnership for federal tax purposes

true

Why did the TCJA for 2017 include a deduction of QBI?

to provide a tax cut for owners of a pass through entities

Fins, Inc. expects that its tax returns will reflect total income tax expense of $1,000,000 for the year. In making that determination, Fins included a $200,000 deduction for which they believe there is a 45% chance of being upheld if challenged by the taxing authority. If Fins' deduction were challenged, they believe they would receive no deduction at all. Assuming Fins' tax rate is 25 percent, what will it report as its current tax expense in its financial statements?

$1,050,000 As the tax positon does not meet the recognition requirement of FIN 48, the $50,000 ($200,000 x .25) tax savings/benefit reflected on the tax return cannot be recognized. This increases current tax expense by $50,000 Tax expense $50,000 FIN 48 liability $50,000 As per IAS 37 AND US GAAP When an event is more likely than not ,we create a provision for it. The exp of 20000 may be allowed 45% that means disallowed chance is 55% . So it will create a deferred tax liability on $200000 @25% = $50000 Total Current Tax expense = $1,000,000 + 50000 = $1,050,000 ( Option B is correct)

Van Dyke, Inc., expects its tax returns for the year to show a total liability of $200,000. It also expects to report an NOL of $50,000 related to a state in which it operates. The NOL may be carried forward only. The company is considering closing operations in the state and expects it will only be able to use $30,000 of the NOL before it discontinues operations in the state entirely. Assuming there are no other book-tax differences, what is Van Dyke's total book tax expense?

$170,000 The company will reort a deferred tax asset of $50,000 for the NOL but must also record a 20,000 valuation allowance, reducing its net DTA to $30,000. Current tax expense $200,000 Deferred tax expense (30,000) Book tax expense $170,000

Prance, Inc., earns pretax book net income of $800,000 in 2019. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation by $80,000. Prance reported no other temporary or permanent book-tax differences. The pertinent U.S. Federal corporate income tax rate is 21% and Prance earns an after-tax rate of return on capital of 8%.

151,200 ( 800,000 - 80,000) *.21 = 151,200

In 2020, Meghann Carlson, a single taxpayer, has QBI of $110,000 and modified taxable income of $78,000 (this is also her taxable income before the QBI deduction). Given this information, what is Meghann's QBI deduction?

15600

in general the deduction for qualified business income Isi lesser of

20% of QBO or 20% of modified taxable income

Rubio, Inc., an accrual basis C corporation, reports the following amounts for the tax year. The applicable income tax rate is 30% (combined Federal, state, and global). Book income, including the items below$80,000 Interest income from City of Westerville bonds10,000 Bribes paid to Federal inspectors17,000 Liability for anticipated warranty costs (beginning of year)20,000 Liability for anticipated warranty costs (end of year)25,000

80,000 (10,000) 17,000 5,000 = 92,000 *.30 27600

Ellie and Linda are equal owners in Otter Enterprises, a calendar year business. During the current year, Otter Enterprises has $320,000 of gross income and $210,000 of operating expenses. In addition, Otter has a long-term capital gain of $15,000 and makes distributions to Ellie and Linda of $25,000 each. What is the impact of this information on the taxable income of Otter, Ellie, and Linda if Otter is (a) a partnership, (b) an S corporation, and (c) a C corporation?

A Partnership: 1065 form Net Ordinary Business Income: 110,000 ( 320-210) Ellie and Linda will receive a K-1 Each will report net profit: 55,000 (110/2) Each will report a Capital gain of : 7500 (15/2) The partners distributions do not affect otters taxable income B S Corp: 1120S form Net Ordinary Business Income: 110,000 ( 320-210) Ellie and Linda will receive a K-1 Each will report net profit: 55,000 (110/2) Each will report a Capital gain of : 7500 (15/2) The partners distributions do not affect otters taxable income C. Corp: 1120: Net Ordinary Business Income: 125,000 (110+15) Ellie and Linda will receive no schedule from the. C Corp Each will repot a net profit of: 0 Separately state long term capital gain: 0 and dividend income: 25,000

In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition, Azure has interest on municipal bonds of $25,000. Sasha has significant income from other sources and is in the 37% marginal tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations. (Ignore the deduction for qualified business income and the 3.8% Medicare surtax on net investment income.) The rates on qualified dividends are 0%, 15% and 20%. A. C corp and pays no dividends B. C corp and pays 75K of dividends C. C corp and pays 75K in salary

A. Taxable Income: 350,000 Corp Tax: 73500 Sasha has a 0 taxable income from Azure B. Taxable income: 350,000 Corp tax 73500 Sashas incurs a tax of 15,000 with respect to dividends ( 75,000*.20) C. Azure has taxable inc: 275,000 Corp tax: 57750 Sasha has tax: 27750

Purple Company has $200,000 in net income for 2020 before deducting any compensation or other payment to its sole owner, Kirsten. Kirsten is single and she claims the $12,400 standard deduction for 2020. Purple Company is Kirsten's only source of income. Ignoring any employment tax considerations, compute Kirsten's after-tax income for each of the following situations. Assume the corporate tax rate is 21%. When required, carryout intermediate tax computations to the nearest cent and then round your final tax liability to the nearest dollar. A: proprietorship: and Kirsten withdraws $50,000 from the business during the year; Kirsten claims a $37,520 deduction for qualified business income B: c corp and the corporation pays out all of its after-tax income as a dividend to Kirsten. C: Purple Company is a C corporation and the corporation pays Kirsten a salary of $158,000.

A: Taxable Income = Net Income - Standard deduction - QBI: 200,000 - 12,400 - 37,500 = 150,080 After Tax Income = Net Income - Tax 200,000 - (14605.50+(24%*(150080-85525) = 169,901 B: Corps After Tax Income: 200,000 *21% = 158,000 Kristens Taxable Income: 158,000 - 12400 = 145,600 after Tax: (40,000*0%)+(145600-40000)*15%= 15840 158000-15840= 142160 C: 3). Purple's Corporation After-tax Income= $200,000-$158,000* (1-21%) Purple's Corporation After-tax Income =$33,180 Kristen After Taxable Income:

Mini, Inc., earns pretax book net income of $750,000 in 2019. Mini deducted $20,000 in bad debt expense for book purposes. This expense is not yet deductible for tax purposes. Mini reports $800,000 of pretax book net income in 2020. Mini did not recognize any bad debt expense for book purposes in 2020 but did deduct $15,000 in bad debt expense for tax purposes. Mini reports no other temporary or permanent differences. The applicable U.S. Federal corporate income tax rate is 21%, and Mini earns an after-tax rate of return on capital of 8%. Enter below the 2020 end-of-year balance in Mini's deferred tax asset and deferred tax liability balance sheet accounts.

Deferred Tax Asset: (20-15) = 5 5*.21 1050 JE --> 15k*.21 Deferred Tax Expense 3150 DTA 3150

Mini, Inc., earns pretax book net income of $750,000 in 2019. Mini deducted $20,000 in bad debt expense for book purposes. This expense is not yet deductible for tax purposes. Mini reports no other temporary or permanent differences. The U.S. Federal corporate income tax rate is 21%, and Mini earns an after-tax rate of return on capital of 8%. Enter below the 2019 deferred tax expense, total tax expense, and deferred tax assets and liabilities.

Deferred Tax Asset: 4200 (20K*.21)

Prance, Inc., earns pretax book net income of $800,000 in 2019. Prance acquires a depreciable asset in 2019, and first-year tax depreciation exceeds book depreciation by $80,000. In 2020, Prance reports $600,000 of pretax book net income, and the book depreciation exceeds tax depreciation that year by $20,000. Prance reports no other temporary or permanent book-tax differences. The pertinent U.S. Federal corporate income tax rate is 21%, and Prance earns an after-tax rate of return on capital of 8%. Enter below the 2020 Prance's deferred tax expense and any deferred tax asset or liability.

Deferred Tax Liability: 80-20 = 60 60,000*.21= 12600 JE: DTL 4200 Deferred Tax Benefit 4200 (16800 - 12600) --> 16800 = ( 80*.21)

Prance, Inc., earns pretax book net income of $800,000 in 2019. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation by $80,000. Prance reported no other temporary or permanent book-tax differences. The pertinent U.S. Federal corporate income tax rate is 21%, and Prance earns an after-tax rate of return on capital of 8%. Enter below the Prance's 2019 deferred tax expense and any deferred tax asset or liability.

Deferred Tax Liability: (80,000*.21) = 16800

T or F: When a parent acquires 51% of a subsidiary U.S. corporation, the subsidiary can join the consolidated financial statements and the consolidated tax return of the parent.

False: For tax purposes, the ownership requirement usually is met at 80% or more of the subsidiary's stock.

T or F: Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

False: Quail Corporation must pay tax on the $125,000 of corporate net income. Dividends paid are not deductible by the corporation. Shareholders must pay tax on the $25,000 of dividends received from the corporation. This is commonly referred to as double taxation.

T or F: Ed, an individual, incorporates two separate businesses that he owns by establishing two new C corporations. Each corporation will be entitled to a separate IRC Sec 179 allowance.

False: Since the corporations would be members of a controlled group, they must share most of the benefits normally available to each taxpayer, including the IRC Sec. 179 allowance

T or F: The tax expense reported on the GAAP financial statements generally represents the taxes actually shown on the corporation's tax returns and payable to domestic or foreign governmental authorities.

False: Tax expense reported in the financial statements generally represents all the tax related to the income reported in those same financial statements regardless of when it is legally due

T or F: Under the "check-the-box" Regulations, a two-owner LLC that fails to make any relevant elections will be taxed as a corporation.

Fasle: Partnership is the default classification for a two-owner LLC that does not elect to be treated as a corporation under the "check-the-box" Regulations.

The QBI deduction is available to ______ taxpayers.It applies to the QBI generated through

Non corporate a sole proprietorship, a partnership, and an S corp

is directly subject to the IIT if has high income and NII

None

Pre Tax book Income to Current Tax Expense

Pretax Book Income Less: Tax exempt income Add: nondeductible business meals Less: Excess depreciation Less: Excess Depreciation Add: Accrued Litigation expenses = Taxable Income * Tax rate = tax expenses

Has Limited Liability

S corp and C corp

Which of the following items are not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?

Tax effect of temporary differences Precisely because ASC 740 requires the recognition of deferred tax expense, temporary book-tax differences do not cause the reported effective tax rate to differ from the expected rate. Conversely, permanent differences do cause a difference between the expected effective tax rate and a company's actual effective tax rate, all of which appear in the rate reconciliation

T or F: Giant Ltd. owns 100% of the stock of Middle Corporation. BottomCorp is owned 60% by Giant and 40% by Middle. Giant's Federal consolidated income tax return may include both Middle and Bottom if Giant so chooses.

True: The required ownership is 80% for tax purposes, counting multiple tiers of ownership among the group members.

For most business entities book income differs from taxable income because income is meant to capture different contracts for book and tax purposes

True

Can a Sole Proprietorship form a single member limited liability company (LLC)

Yes. Most states allow for single member LLCs. Under the default rules of the Check The Box Regulations a single member LLC is taxed as a sole proprietorship and by filing form 8832 a single member LLC is taxed as a corporations.

distributions of earning are taxed as dividend income to the owners

c corp

greatest ability to raise capital

c corp

sale of the business can be subject to double taxation

c corp

subject to double taxation

c corp

What is the basic deduction calculation for the qualifying business income deduction?

c.20% × Qualifying business income (QBI).

The QBI deduction is a deduction ______AGI. Further, the deduction is available ____

from whether a taxpayer uses the standard deduction or itemizes deductions

profits and losses affect the basis for an ownership interest

parternship and s corp

entity liabilities affect the basis for an ownership interest

partnership

bribes paid to federal inspectors

perm

interest income from city of Westerville bonds

perm

limit on types and numbers of shareholders

s corp

has unlimited liability

sole and partnership

Increase in book allowance for anticipated warranty cost

temp

Who can claim the QBI deduction

the QBI deduction is available to any non corporate taxpayer