Module 2

Question 1

Corporate Taxable Income Formula

Answer 1

Income
- Exclusions
=Gross Income
- Deductions (except NOL and DRD)
=Taxable Income before NOL and DRD
- NOL Deduction
- DRD Deduction
=Taxable Income
* Tax Rate
=Gross Federal Income Tax Liability
- Credits/Prepayments
=Tax Bill or Refund

Question 2

Marginal Tax Rate

Answer 2

Change in Tax/Change in Income

Question 3

Effective Tax Rate

Answer 3

Tax Expense/Pre-Tax Book Income

Question 4

Favorable Book-Tax Difference

Answer 4

Decreases taxable income relative to book income

Question 5

Unfavorable Book-Tax Difference

Answer 5

Increase taxable income relative to book income

Question 6

Permanent Book-Tax Difference

Answer 6

Difference that will never reverse over time

Question 7

Temporary Book-Tax Difference

Answer 7

A difference as a result of timing - these differences will reverse over time

Question 8

Permanent Differences

Answer 8

• Will affect either book income or taxable income but never both
• Affect only one tax year
• Directly impact the company’s effective tax rate

Question 9

Temporary Differences

Answer 9

• The result will be the same total amount of income/expense for book and tax purposes over the corporation’s life, but the amounts will occur in different reporting periods
• Temporary differences will affect multiple reporting periods

Question 10

Net capital gains

Answer 10

No preferential treatment - regular corporate tax rate

Question 11

Net capital losses

Answer 11

Only allowed to offset against capital gains
- Can be carried back 3 years and forward 5
- All carrybacks/forwards are treated as short-term
- Excess capital losses are an unfavorable temporary book-tax difference

Question 12

Net Operating Losses

Answer 12

• Can be carried forward indefinitely
• Usage limited to 80% of taxable income
• NOL carryforwards are an unfavorable temporary book-tax difference

Question 13

Charitable Contributions

Answer 13

• CCD is limited to 10% of taxable income before CCD, NOL, or DRD
• Contributions in excess of the 10% limit can be carried forward for 5 years
• Limitation amount is an unfavorable temporary difference

Question 14

Dividend Received Deduction

Answer 14

• Favorable permanent difference
• Limited by adjusted taxable income, lesser of…
• Deduction % * Dividends Received
• Deduction % * Adjusted Taxable Income

Question 15

Dividend Received Deduction Percentages

Answer 15

Less than 20% ownership-> 50% deduction
20%-80% ownership -> 65% deduction
80% or more ownership ->100% deduction