Chapter 7 Exam Notes

Question 1

Schedule M-1 Reconciles income & loss per books by

Answer 1

Add Back:
\+ Federal Income tax
\+ Excess Net Capital Losses
\+ Excess Entertainment & Travel
\+ Income Subject to Tax not Rec. on Books
\+ Excess book depreciation
\+ Life Insurance Key Personnel
\+ Political Contributions
\+ Interest expense for tax-exempt instrument

Subtract:

• Tax-exempt Interest
• Tax-exempt Income
• Life insurance proceeds on key personnel
• Deductions not charged to book income

Question 2

Personal Service Corporations that derive 95% of their gross receipts from personal service activities are:

Answer 2

1. Health
2. Law
3. Engineering
4. Accounting
5. Actuarial Science
6. Consulting
7. Performing Arts

Question 3

Can publicly traded partnerships use the check-the-box regulation to be taxed as a corporation or partnership

Answer 3

No. the must be taxed as corporations. Also trusts are not allowed the check-the-box regulation

Question 4

Tax shelters may use the accrual or cash basis of accounting

Answer 4

False. They may only use the accrual basis

Question 5

Life Insurance proceeds received under a police transferred for consideration are

Answer 5

income to the recipient to the extent that proceeds exceed the consideration

Question 6

Life insurance proceeds received due to death of the insured are

Answer 6

excluded from gross income

Question 7

(PAL) Passive Loss Limitations do not apply to

Answer 7

1. Trusts
2. Partnerships
3. S Corporations
4. But they do apply to the owners of these entities

Question 8

Allowable depreciation may not create or increase a

Answer 8

Net operating loss

Question 9

Charitable contribution deduction is limited to 10% of TI before

Answer 9

1. Dividends received deduction

2. NOL carryback

Question 10

Dividends received deduction is equal to

Answer 10

1. The lesser of 70% of the dividend

2. or 70% of TI excluding NOL carryback

Question 11

The TI limit does not apply if

Answer 11

1. an NOL results from a DRD

2. If a current NOL exists

Question 12

NOL Carryover should be deducted

Answer 12

from income prior to determining tax liability

Question 13

Stock repurchase or reorganization costs

Answer 13

are capitalized

Question 14

Interest Expense incurred on business borrowings is

Answer 14

deductible in the period in which it is paid, such as interest on borrowings used to repurchase stock

Question 15

On corporate income tax returns income before special deductions include

Answer 15

Sales + dividends received - COGS = Income