Chapter 16-17 (Tax) Flashcards
The corporate tax formula differs from the individual tax formula because the corporate tax formula ____.
Does not separate deductions into those before AGI and those after AGI like the individual formula does (The individual tax formula includes adjusted gross income (AGI); whereas the corporate tax formula does not)
A difference between book income and tax income that increases/decreases taxable income in the current year but will reduce/increase taxable income in a future year is a(n) ___ book-tax difference
Temporary
The federal income tax deduction that a corporation takes under ASC 740 is ___ book-tax difference
Permanent (Federal income taxes are NOT deductible for tax purposes, making them a permanent book-tax difference)
For GAAP purposes, if a dividend receiving corporation owns less than ___ percent of the stock of the distributing corporation, the receiving corporation includes the dividend in income (same as tax; no book-tax differences)
20%
Which of the following concerning the amortization of goodwill for tax purposes is incorrect?
Goodwill acquired by a corporation in a stock purchase transaction is recovered over 180 months for tax purposes
Like individuals, corporations can claim a deduction for qualified business income.
False (Corporations do not itemize deductions, receive a standard deduction or claim a deduction for qualified business income)
The excess of the fair market value of the stock when a stock option is exercised over the exercise price of the option is the ___ ___.
Bargain
Element
Permanent book-tax differences:
include items of income for book purposes that will never be items of income for tax purposes (Permanent book-tax differences are income or deductions for either book or tax, but NOT both.
A corporation can carry back a net capital loss to a previous year to offset previous net capital gains UNLESS:
by carrying back the loss, a net operating loss is created or increased
Permanent book-tax differences include ____.
$50,000 of interest expense associated with the generation of tax-exempt income (This is deductible for book, not for tax)
Fast Rocket, Inc. generated a net loss of $5,000 in its first year (20x1) and taxable income of $15,000 in its second year of operations (20x2). Assuming a tax rate of 21%, what is Fast Rocket’s total tax for both years?
$2,100 (A corporation can carry forward its net operating losses to offset 80% of income in a future period. Since 80% x 15,000 > the NOL of $5,000, Fast Rocket can use the whole NOL carryforward. ($15,000 - $5,000 = $10,000 x 21% = $2,100)
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 percent - Includes the dividend in income (same as tax; no book-tax differences)
Owns at least 20 percent but not more than 50 percent - 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 percent - Consolidates their financial reporting books and the intercompany dividend is eliminated
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
A book-tax difference at the time of vesting of non qualified employee stock options (post ASC 718) but before they are exercised can be:
Temporary and Favorable (Vesting of employee stock options before exercise always result in an unfavorable adjustment)
Newt, Inc. incurs capital losses of $500 and capital gains of $100 in the current year. For tax purposes, Newt will recognize a net capital gain or loss of ____.
$0 (Corporations can only offset capital losses against capital gains in the year of a net capital loss ($100 losses offset against $100 gains))
Test Pilot, Inc. reported a net operating loss of $25,000 for its tax year ended December 31, 20x1 and net income of $20,000 in 20x2. After considering the NOL carryforward, Test Pilot will report 20x2 taxable income of ___.
$4,000 and carryforward $9,000 indefinitely (Test Pilot may reduce taxable income in 20x2 by $16,000 (80% x $20,000) for taxable income of $4,000, leaving $9,000 available to apply in 20x3 and beyond)
A Net Operating Loss arising in tax years beginning after December 31, 2017 can only be carried forward 20 years.
False (NOLs arising in tax years beginning after 12/31/17 can be carried forward indefinitely)
Which of the following concerning the amortization of goodwill for tax purposes is incorrect?
Goodwill acquired by a corporation in a stock purchase transaction is recovered over 180 months for tax purposes.
Corporations may deduct charitable contributions to ___ charitable organizations
Qualified
In 2023, a electing corporation’s charitable contribution is limited to ___ % of its charitable contribution limit modified taxable income
10%
Which of the following dividends is NOT eligible for a dividends received deduction (DRD), if received by a US corporation?
A dividend from a wholly owned subsidiary corporation established under the Russian corporations laws (Dividends from domestic corporations are eligible for DRD)
Net operating losses arising in tax years beginning after December 31, 2021 can offset only ___ % of taxable income in future years.
80%
When does the DRD modified taxable income limitation NOT apply?
When, after deducting the DRD, the corporation would report a net operating loss (If after the DRD, the corporation reports taxable income, the DRD is limited)
Match the type of corporate charitable donation with the allowed deduction amount.
Cash - Amount of cash contributed
Capital Gain Property - Fair Market Value
Inventory - Adjusted Basis
Aruba, Inc. has a properly calculated charitable contribution limit of $12,000 for the current year. Aruba deducted a DRD of $6,000 and is also including a capital loss carryforward from the prior year of $13,000. If Aruba’s actual charitable contributions for the year are $4,000, the company’s taxable income is ____.
$110,000 (A charitable contribution limit of $12,000 ÷ 10% = $120,000 of modified taxable income - $6,000 DRD -$4,000 CCD = $110,000. The capital loss carryforward from the prior year is permitted, and thus already in modified taxable income)
Joshua, Inc. has taxable income of $1,000,000 in the current year. Using the corporate tax tables, Joshua Inc.’s federal tax liability is ____.
$210,000 (1,000,000 x 21%)
The dividends received deduction ______ the tax paid on dividends by corporations
Decrease (By reducing the amount of dividends that are taxed, the DRD serves to reduce the tax paid)
Which of the following book-tax differences is not reported on Schedule M-1?
The dividends received deduction
DRD modified taxable income is ______
taxable income before the DRD, capital loss carrybacks, and any NOL carryforward
Pear, Inc. generates a $100,000 net operating loss in 2023. Plum, Inc. generates $500,000 of taxable income. Compute the 2023 tax if Pear and Plum do/do not file a consolidated return.
84,000 if consolidated; $105,000 if not consolidated. (If consolidated, taxable income is $400,000: ($500,000 - $100,000) x 21% = $84,000. If not consolidated, Plum pays $500,000 x 21% = $105,000, and Pear will carryback or carryforward the loss if possible)
A C-corporation with a calendar year-end has an income tax return due on ___ 15th
April
Corporation ABC had taxable income of $50,000 for its tax year ended December 31, 2023. Corporation ABC owes $____ in corporate income taxes for 2023.
$10,500
The two primary objectives of ASC 740 are to:
recognize the amount of deferred taxes payable or refundable in a future period due to timing differences.
recognize the amount of current taxes payable or refundable.
A reconciliation of the corporation’s beginning and ending balance in its unappropriated retained earnings account is reported on Schedule ____.
M-2
Advantages of filing a consolidated tax return include ______
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
A calendar year corporate tax return extension will extend the due date:
for six months after the original due date
FASB determined that the best method to report income taxes on financial statements is:
The asset and liability approach
Corporations are taxed on dividends received at the ___.
ordinary corporate tax rate
Corporate taxpayers reconcile ___ income with ___ income on Form 1120 Schedule M-1 or M-3.
Book
Taxable
Select the permanent differences
Business entertainment expenses
Tax-exempt income
Dividends received deduction
Fines, illegal kickbacks, and bribes
The current income tax expense can differ from the actual tax expense paid on the current Form 1120 due to:
carryback of a capital loss.
IRS audit adjustments.
changes in uncertain tax positions.
Corporate estimated tax payments are due on the 15th of which of the following months of the tax year?
9th (September)
6th (June)
4th (April)
12th (December)
Corporate shareholders are entitled to a ___ received ___ to offset additional layers of tax and distributions.
Dividends
Deductions
Deferred tax assets and liabilities are calculated using the ______ tax rate that is expected to apply when the temporary difference is received or settled.
Enacted
Topham, Inc. has pretax income of $100,000 for the current year. Included in that amount is $3,000 of tax-exempt income, $8,000 of meals expenses (not provided by a restaurant), and $10,000 of depreciation expense (depreciation is $15,000 under tax rules). Topham also paid $21,000 in estimated income tax payments during the year. After adjusting for permanent items (only), Topham’s taxable income is:
$101,000 (Pretax income $100,000 - $3,000 (tax-exempt income included for book) + $4,000 (50% add-back of non-deductible meals) = $101,000.
The application of enacted tax law against the taxable income for the year is the:
Current income tax expense
The tax provision:
includes the current year taxes payable and the changes to future income taxes payable as a result of differences between book and tax accounting.
is the income tax expense associated with pretax income reported on the income statement.
Accelerated, Inc. recorded depreciation of $40,000 for each year in years 1, 2 and 3. However, for tax purposes, Accelerated deducted $60,000, $70,000 and $30,000 for years 1, 2 and 3, respectively. Describe the cumulative and current year 3 temporary differences on this item.
$40,000 cumulative favorable and $10,000 unfavorable for year 3 (Total depreciation for books is $40,000 x 3 = $120,000. Accumulated tax depreciation is $60,000 + $70,000 + $30,000 or $160,000, creating a cumulative difference of $40,000. Book depreciation in current year 3 of $40,000 exceeds tax depreciation of $30,000, creating a $10,000 unfavorable difference)
A company ______ consider permanent differences when computing balance sheet deferred tax accounts.
Should not
Select the definition of a temporary difference.
A difference between the tax basis and book basis of an asset or liability that will result in taxable or deductible amounts in a future year
Sundancer created a cumulative temporary favorable difference of $40,000 in the current year when the enacted rate is 30%. Sundancer anticipates the difference will reverse about 10 years from now when the rate (per current law) is decreased to 25%. Using Sundancer’s discount rate of 7% for 10 years, the present value of $40,000, $12,000 and $10,000 is $20,334, $6,100 and $5,083, respectively. Select the correct journal entry.
DR Deferred income tax expense $10,000, CR Deferred tax liability $10,000
Which of the following items is a permanent difference?
Dividends received deduction
ASC 740 requires a ___ -step process for evaluating uncertain tax positions.
Two
Joshuantic, Inc. has cumulative unfavorable temporary differences of $80,000 and, thus, records a $16,800 deferred tax asset. However, Joshuantic believes that it may NOT be able to realize that asset. As a result, Joshuantic will
record a gross deferred tax asset and a valuation allowance as a contra account
In order to recognize the benefit of a tax position, the probability of the position being sustained on its technical merits must be:
more likely than not
Once the more-likely-than-not recognition threshold has been met, ASC 740 requires that the tax position benefit be measured as the:
amount of tax benefit greater than 50% likely to be realized
ASC requires a two-step process to evaluate tax positions. Select the first of those two steps.
Determine if it is more likely than not as to whether the position will be sustained
ASC 740 applies to which of the following tax positions?
A tax position taken with regards to the deductibility of 50% of meals
A position taken on a current tax return
A position taken on a previous tax return
Flip Flop, Inc. treated interest on uncertain tax liabilities as interest expense and penalties as part of selling, general and administrative expenses in the prior year. How should Flip Flop treat interest and penalties this year?
Interest must be treated as interest expense and penalties as S,G and A.
The income tax provision is reported on the:
income statement
Before measurement of the recognizable tax benefit occurs, ASC 740 requires that the:
more-likely-than-not recognition threshold has been met.
When determining whether a tax position will be sustained upon examination, a company ______ consider the likelihood that the taxing jurisdiction will examine the position.
Can not
Which of the following are acceptable methods of classifying interest and penalties on uncertain tax liabilities?
Include interest and penalties as income tax expense
Classify interest and penalties separately from income tax expense
Lower Texas, Inc. (LTI) took a tax position to treat $100,000 of income as tax-exempt. However, LTI is not certain that the treatment will be sustained. After analyzing the position, LTI determines that the there is a 40% chance that $80,000 will be treated as tax-exempt and a 75% chance that $40,000 will be treated as tax-exempt. Assuming a 21% tax rate, and if the more likely than not threshold is met, what is the uncertain tax liability associated with this position?
$12,600
A corporation will be required to file Schedule UTP if assets exceed
$10 million.
Which of the following items is not a significant component of an income tax provision?
Three year statutory rate reconciliation
ASC 740 requires ____ _ (private/public) traded companies to disclose the significant components of their income tax provision attributable to continuing operations in either the financial statements or a note thereto.
Public
