Module 2: Corporate Taxable Income

Question 1

What are some GAAP income items that are not includable as taxable income?

Answer 1

1. Interest from municipal/state obligations/bonds

2. Certain proceeds from life insurance on the life of an officer where corp is beneficiary

Question 2

What is form 1120?

Answer 2

US Corporation Income Tax Return

Question 3

Schedule M-1

Answer 3

Reconciliation of Income (Loss) per books with income per return

Question 4

Schedule M-2

Answer 4

Analysis of unappropriated R/E per books

Question 5

Schedule L

Answer 5

Balance Sheets per Books (Beginning of tax year & End of tax year)

Question 6

What does “ordinary and necessary” expenses mean?

Answer 6

The expenses are common (or accepted) in the particular business or profession and they relate to producing the current year’s income

Question 7

Domestic production deduction

Answer 7

Deduction of specific percentage of qualified production activities income

Question 8

DOMESTIC PRODUCTION DEDUCTION

Limitation

Answer 8

May not exceed 50% of W-2 wages paid by the corp for year

Question 9

DOMESTIC PRODUCTION DEDUCTION

How do you calculate qualified production activities income?

Answer 9

Domestic production gross receipts

= QPAI

Question 10

DOMESTIC PRODUCTION DEDUCTION

Define domestic production gross receipts

Answer 10

Gross receipts derived in significant part w/in the US from any disposition of qualified production property that is:

• manufactured
• produced
• grown
• extracted
• constructed
• engineering services
• architectural services

Question 11

DOMESTIC PRODUCTION DEDUCTION

What is the deduction %?

Answer 11

9% of the lesser of:

• QPAI
• Taxable income (disregarding QPAI deduction)

Question 12

What are the limitations on deduction of compensation expenses?

Answer 12

Publicly held corp may not deduct compensation expenses in excess of $1M paid to CEO or 4 other most highly compensated officer (unless based on commission/performance-based plan)

Question 13

Bad debts: Specific Charge-off method

—Accrual basis

Answer 13

Direct write-off method

Will write off bad debts as they become worthless

Question 14

Bad debts: Specific Charge-off method

—Cash basis

Answer 14

Bad debt is not deductible b/c rec’vable not included in gross income, except in case of uncollectible check

Question 15

Is interest expense on debt incurred to purchase “tax-free” bonds deductible?

Answer 15

No

Question 16

Bonus accruals to non-shareholder/employees

Answer 16

Must pay by April 15th in order to deduct

Question 17

Business interest expense:
On business
On investment
Prepaid

Answer 17

On business => incurred and paid = deduction
On investment => up to taxable investment income
Prepaid => Deduct “later” when incurred

Question 18

Max deduction for charitable contributions

Answer 18

10% of adjusted taxable income limiation

Disallowed may be carried forward 5 years

Accrual must be paid by April 15 to be deducted

Question 19

What are two important differences concerning business casualty for corp and for individuals?

Answer 19

1. No $100 reduction

2. No 10% of AGI reduction

Question 20

What is the casualty loss deduction limited to if property is only partially destroyed?

Answer 20

Lesser of:

• decline in value of property (change in FMV) or
• adjusted basis of property immediately before casualty (NBV)

Question 21

What are allowable org. expenditures and start-up costs? Excluded costs?

Answer 21

Fees paid for legal services in drafting corp charter, bylaws, minutes of org meetings, fees paid for acct services, and fees paid to state of incorp

Excluded: Costs of issuing and selling the stock, commissions, underwriter’s fees, and costs incurred in transfer of assets to corp (COST OF RAISING CAPITAL)

Question 22

Is a deduction for capital losses allowed?

Answer 22

Deduction not allowed; can only use to offset capital gains

Excess: carried back 3 forward 5

Question 23

Basic inventory valuation methods

Answer 23

1. Cost method
2. LCM
3. Rolling-average method
4. Retail method

Question 24

Common inventory ID methods

Answer 24

1. FIFO
2. LIFO
3. Specific identification method

Question 25

Uniform capitalization rules

Answer 25

RM
DL
FOH

If you’re making a product, you have to capitalize material, labor, and overhead and expense when sold

Question 26

Dividends-received deduction

Answer 26

Prevents triple taxation of earnings

Amount allowed dependent on % of investee corp owned by investor corp

Question 27

What is the DRD %s?

Answer 27

(UNRELATED COMPANY) 0% to < 20% ownership = 70% [small investment]
20% to < 80% ownership = 80% [large investment]
80% or more = 100% [consolidate]

Question 28

What are the taxable income limitations for the DRD?

Answer 28

DRD equals the lesser of:

• 70% (or 80%) of dividends rec’v; or
• 70% (or 80%) of taxable income computed w/out regard to DRD, any NOL deduction, cap loss carryback, or domestic production activities deduction

Question 29

What is the exception to taxable income limitation for DRD?

Answer 29

Does not apply if, after taking into account full DRD, the result is a net operating loss (NOL)

Question 30

Can a corporation deduct net long-term capital loss in the current year?

Answer 30

No, there is a 3 year carryback and a 5 year carryforward

Question 31

For business gifts, what is the maximum deduction per recipient per year?

Answer 31

$25 per recipient per year

Question 32

Are premiums paid for insurance on a officer’s life where the corp is the owner and beneficiary deductible?

Answer 32

No

Question 33

Are premiums paid for group-term life insurance premiums paid on employees’ lives, with employees’ dependents as owners and beneficiaries of the policies are considered to be a fringe benefit deductible

Answer 33

Yes