Corporate CRFF MCQ

Question 1

Amortization period for intangibles for tax

Answer 1

Sec. 197 property

15 years (180 months)

Question 2

Organizational costs for tax

Answer 2

Incorporation fees, fees paid to temporary directors, and legal and accounting costs

The first $5,000 can be expensed immediately.

Deduction is eliminated gradually dollar -for-dollar if the total costs exceed $50,000.

Amount not deducted as incurred, amortized over 180 months (15 years) from the month in which business began.

Question 3

estimated expenses (bad debts and warranties)

Answer 3

must be incurred before a deduction is allowed

Question 4

charitable contributions (for a corporation)

Answer 4

deductible for the lesser of

10 percent of income earned prior to DRD

or the contribution itself

Any amount over that figure can be carried forward for up to five years.

As long as a formal pledge was made in the tax year, the deduction is still allowed if the actual gift is made in the first 2 1/2 months of the subsequent year.

Question 5

dividend received deduction

Answer 5

100 percent of dividends received (owns > = 80% of the other company)

80 percent of dividends received (owns > = 20 to

Question 6

dividend received deduction

Answer 6

80 percent of dividends received (owns > = 20 percent of the other company)

70 percent of dividends received (owns < 20 percent of the other company)

Question 7

MACRS

Answer 7

eight classifications

each classification has a specified life and method

maximizes deduction (to encourage growth)

residual values are ignored

Question 8

MACRS Equipment with life of ten years or less

Answer 8

depreciated using the double-declining balance method

Question 9

Residential rental property is depreciated per MACRS

Answer 9

over a life of 27 1/2 years

Question 10

Used equipment per MACRS

Answer 10

follows the same rules as new equipment

Question 11

Businesses have the ability to elect to take the cost of certain qualifying property as a Section 179 expense.

Answer 11

tangible personal property used in a business (including off-the-shelf computer software with life > 1 year)

Real property (such as land and buildings) does not qualify (except in very special circumstances).

amount of the expense is limited.

immediate expense deduction lost dollar for dollar after limit is reached

Question 12

capital losses by a corporation

Answer 12

cannot be deducted

Question 13

To be deductible, business expenses must be

Answer 13

ordinary
necessary
reasonable in amount

Question 14

When the IRS determines that there is unreasonable compensation

Answer 14

Amount deemed unreasonable is taxed as a dividend.

For owner receiving the payment, tax rate is likely to be lower for qualified dividends than the marginal tax rate for ordinary income.

Corporation has increase in taxable net income because dividend is not deductible like compensation.

Question 15

donated stock

Answer 15

The fair value of may be deducted since sale of stock would yield a long-term capital gain.

Question 16

donated inventory items

Answer 16

Inventory would create ordinary income if sold.

The lower of cost or fair value is deductible.

Question 17

Business gifts

Answer 17

up to $25 per person per year can be deducted.

Question 18

Penalties and political contributions

Answer 18

are not deductible

Question 19

business meals and entertainment

Answer 19

only half can be deducted

Question 20

MACRS half-year convention

Answer 20

half-year of depreciation for the year in which the property is placed in service or disposed of by the company

Question 21

Before they can be deducted as an expense, accounts receivable

Answer 21

must be completely worthless (not just a less than 100% likelihood of collectibility)

Question 22

Federal income taxes

Answer 22

are not deductible on a federal income tax return.

Question 23

Before they can be deducted as an expense, accounts receivable

Answer 23

must be completely worthless

Question 24

To qualify for a tax-free exchange

Answer 24

Transferor must own at least 80% of the corporation’s stock immediately after the exchange.

There should be no boot received by the shareholder as a result of the transaction.

Question 25

in a nonliquidating distribution of property, the company must:

Answer 25

report the transaction as if the property had been sold for its fair value with the money then distributed as a cash dividend

The company cannot avoid reporting a taxable gain by giving the shares away to its owners rather than making the sale and then distributing the money.

Question 26

When an owner transfers property to a corporation and winds up with 80 percent or more of the outstanding stock,

Answer 26

the transfer is handled like a partnership rather than a corporation.

The tax basis is retained by both parties and no income effect results.

Question 27

When corporate distributions exceed earnings and profits,

Answer 27

the earnings and profits are first allocated to the distribution made to the preferred shareholders with any remainder to the common shareholders.

Question 28

Distributions in excess of E&P

Answer 28

are a nontaxable return of basis

Question 29

With a nonliquidating distribution, property distributed by a corporation is recorded by the recipient

Answer 29

as income based on its fair value.

The taxpayer also records taxable dividend income.

Question 30

Calculating the deduction for a casualty loss

Answer 30

Total loss is calculated then reduced by three amounts:

1. insurance or other reimbursements received,
2. a $100 per event reduction, and
3. a 10%-of-AGI aggregate reduction

Question 31

A “shelf registration”

Answer 31

permits the issuer to make one registration for issuances which are to occur over time.

available to only the most established issuers;

in order for the registration to remain in effect, the original registration statement to be updated periodically

Question 32

In the case of an individual who is married, the earned income credit (EIC) only applies if

Answer 32

a joint return is filed.

Question 33

A qualifying child for purposes of the earned income credit must meet several tests:

Answer 33

• Relationship test: The child must be a child of the taxpayer or a descendent of such a child, or a brother, sister, stepbrother, or stepsister or descendant of any such relative.
• Residency test: the child must have the same principal place of abode as the taxpayer for more than one-half of the taxable year.
• Age test: The qualifying child must be younger than the taxpayer and have not obtained the age of 19 at the end of the year (unless the child is a student, and then the age is 19).
• Filing status: The qualifying child must not have filed a joint return (other than to claim a refund).

Question 34

MACRS is based on a number of rigid rules so that all businesses follow the same method of depreciation.

Answer 34

All depreciable assets are placed into one of eight classifications.

Each classification has a specified life and a specified method of depreciation

Residual values are ignored.

Equipment classified as having a life of ten years or less is depreciated using the double-declining balance method.

Residential rental property is depreciated over a life of 27 1/2 years.

Used equipment follows the same rules as new equipment.

Question 35

Section 179 acquisitions

Answer 35

immediate expensing of the cost
of tangible personal property
used in a business
as well as off-the-shelf computer software
(as long as it has a life of over one year)

Real property (such as land and buildings) does not qualify (except in very special circumstances).

If the company buys a significant amount of such assets, the immediate expense deduction begins to be lost dollar for dollar after a limit is reached.

Question 36

In determining taxable income versus financial reporting for a company, the effects of:
income tax expense
loss on the securities 
state bond interest 
loss on treasury stock

Answer 36

TI would not include:
income tax expense
loss on the securities-capital losses not deductible for co.
state bond interest-tax free

All three included in net income for financial reporting

Loss on the treasury stock does not impact net income or taxable income

Depending on total assets, company reconciles book-to-tax income on either schedule M-1 or M-3.

Question 37

To be deductible, business expenses must be

Answer 37

ordinary and necessary

reasonable in amount

Question 38

When the IRS determines that there is unreasonable compensation,

Answer 38

the amount deemed unreasonable is taxed as a dividend.

For the owner receiving the payment, the tax rate is likely to be lower for qualified dividends than the marginal tax rate for ordinary income. Thus, the owner benefits from having compensation deemed unreasonable and pays less tax.

In contrast, the corporation will have a corresponding increase in taxable net income because the dividend is not deductible whereas the compensation would have been. Thus, the company must pay additional taxes.

Question 39

Corporate deduction for donated stock

Answer 39

Deduct fair value (subject to limitations).

Sale of stock would yield a long-term capital gain.

Question 40

Corporate deduction for donated inventory.

Answer 40

Deduct the lower of cost or fair value (subject to limitations).

Sale of inventory would yield regular ordinary income.

Question 41

G/L and basis in a like-kind exchange.

Answer 41

Each party to the exchange will retain the basis of the item(s) given up to be used as the basis for the item(s) received and no gain or loss will be recognized.

Question 42

Like-kind exchange and boot (usually cash) received.

Answer 42

potentially a taxable gain (to the extent of boot received).

The amount taxed is the lesser of the boot received or the gain.

Question 43

Like-kind exchange and boot (usually cash) received.

Answer 43

potentially a taxable gain (to the extent of boot received).

The amount taxed is the lesser of the boot received or the gain.

If gain without boot, no taxable gain is recognized.

Substitute the basis of the asset given up for the asset received.

Question 44

Schedules M-1 and M-3

Answer 44

schedule on corporate income tax return (Form 1120)

reconcile financial statement “book” income to taxable income (reported to government)

Reported for financial reporting but not tax and reconciled on M-1:
Life insurance proceeds,
state and municipal bond interest, and
penalties and fines are all Thus, they should all appear on the Schedule M-1

Schedule M-3 for corporations with more than $10 million in assets

Interest paid on corporate bonds is reported for both FS and Tax, so not included in reconciliation.

Question 45

S/H owns over 50 percent of stock and buys equipment for fair value.

Answer 45

No deduction if sold for a loss.

Gain must be recognized (unless s/h owns 80 percent or more of outstanding stock).

Equipment is classified as Section 1245 property for tax purposes and is not a capital asset.

Question 46

Net operating losses

Answer 46

can be carried back for 2 years (refund of previous tax payments)

remaining portion can be carried forward for up to 20 years

Question 47

In determining the alternative minimum taxable income, certain tax benefits and preferences are removed as

Answer 47

adjustments,
preference items, or
part of the ACE adjustment.

Question 48

For AMT, the benefit of the installment sales method (being able to defer income into future years) is

Answer 48

removed by being added to taxable income as an adjustment.

Question 49

For AMT, municipal bond interest

Answer 49

is included as a component of the ACE adjustment

which means that it is not moved into taxable income completely but only partially

Question 50

personal holding company tax

Answer 50

designed to encourage adequate dividend payments to be made by companies, with only a few owners, that generate a significant amount of passive income (such as dividends and interest).

The authoritative guidelines set the boundaries at
five or fewer individuals
owning 50 percent or more of the stock during the last half of the year and
passive income (dividends, interest, and the like) making up at least 60 percent of total ordinary income.

Without this tax, such companies would likely choose to hold onto their income and avoid double taxation by not paying dividends to the owners.

Tax can be avoided through the distribution of an adequate amount of dividends.

The rules on charitable contributions are looser in computing the personal holding company tax (rather than more restrictive).

Question 51

To escape the estimated tax underpayment penalty,

Answer 51

Estimated tax payments should be 100 percent of:

prior year’s tax liability (company w/TI $1 M)

Question 52

Uni Cap cost of inventory

Answer 52

includes costs to get inventory ready to sell:
purchase, 
label, 
handle, 
process, and 
store 

(not shipping - takes place after sale has been made)

Question 53

G/L and related parties/company sales

Answer 53

S/h owns between 50 and 80%:
Losses between them cannot be deducted until the property is eventually sold to an outside party.

Gains continue to be taxable until the ownership level hits 80 percent.

Question 54

US Company operates a manufacturing facility in a foreign company through a wholly-owned subsidiary

Answer 54

total income will be taxed at US rate but US Company receives a tax credit equal to the amount of foreign tax paid

Question 55

consolidation of parent/subsidiary for tax return vs. financial acctg

Answer 55

For tax accounting, consolidation is allowed once 80 percent of the stock is owned.

For financial accounting, consolidation is mandated when shares is acquired in excess of 50 percent.

Question 56

Schedule M-2

Answer 56

analyzes the changes in unappropriated retained earnings from the first day of the year to the last.

Question 57

Section 1231 property

Answer 57

refers to assets used in a trade or business.

Question 58

Section 1245 property

Answer 58

Section 1231 property further refined to report GAINS.

Section 1245 property is depreciable PERSONAL property used in a business. Equipment and machinery fall into this category.

This classification system makes it easier to report the property in designated ways for tax purposes.

Question 59

Section 1250 property includes business land and most real property that is subject to depreciation. This classification system makes it easier to report the property in designated ways for tax purposes.

Answer 59

Section 1231 property further refined to report GAINS.

Section 1250 property includes business LAND and most REAL property that is subject to depreciation.

This classification system makes it easier to report the property in designated ways for tax purposes.

Question 60

Taxable gain or loss to be recognized by company’S transactions in its own stock

Answer 60

either buying or selling is nontaxable and does not have an impact on taxable income.

Question 61

For a corporation, capital assets

Answer 61

normally limited to investments in
stocks,
bonds, and
land (held in hopes of appreciation in value).

Buildings, equipment, and inventory are bought to produce revenues and do not qualify as capital assets.

Question 62

DRD

Answer 62

For ownership of under 20 percent, this deduction is 70 percent.

For ownership of 20 percent up to 80 percent ownership, the dividends received deduction is 80 percent.

For ownership of 80 percent or more, the dividends received deduction is 100 percent.

Question 63

DRD % applied to

Answer 63

the lower of the dividend or the income

UNLESS the deduction creates a taxable loss or made a taxable loss larger (then the greater)

Question 64

Corporate capital loss

Answer 64

Corporations are not allowed any capital loss deduction.

Net capital gain and loss.

A net loss can be carried back for up to three years and then forward for up to five years TO REDUCE OTHER CAPITAL GAINS.

No reduction is allowed in taxable income.

Question 65

Corporations must net all short-term and long-term capital gains and losses. Any resulting capital gain is taxed but at the ordinary tax rate. There is no reduced rate as is applicable for individual taxpayers. Any net loss is not deductible. Instead, it can be carried back for three years to reduce or eliminate net capital gains. In addition, it can then be carried forward for up to five years. When a loss is carried back and forward in this manner, it is always handled as a short-term capital loss.

Answer 65

Corporations must net all short-term and long-term capital gains and losses.

Any resulting capital gain is taxed at the ordinary tax rate. (no reduced rate as for individuals)

Net loss is not deductible.

Net loss can be carried back for three years then carried forward for up to five years to reduce or eliminate net capital gains.

When a loss is carried back and forward, it is always handled as a short-term capital loss.

Question 66

Corporations short-term and long-term capital gains and losses.

Answer 66

Corporations must net all short-term and long-term capital gains and losses.

Any resulting capital gain is taxed at the ordinary tax rate. (no reduced rate as for individuals)

Net loss is not deductible.

Net loss can be carried back for three years then carried forward for up to five years to reduce or eliminate net capital gains.

When a loss is carried back and forward, it is always handled as a short-term capital loss.

Question 67

depreciation expense and gain

Answer 67

reduces ordinary income

gain up to the amount depreciation is reported as ordinary income.

depreciation expense is being recaptured through the sale of the asset.

gain in excess of recapture is reported as Section 1231 gain which may serve as a capital gain depending on the impact of other income items in this category

Question 68

DRD for div rec’d from US and foreign corporation

Answer 68

All of the dividends are included as revenue

dividend received deduction is allowed only for investments in domestic US corporations