R3 M3 - C Corporation Tax Computations & Credit Flashcards
A company reported net income of $400,000 on its Year 2 audited financial statements. The company reported $240,000 in tax expenses to arrive at its net income for financial statement purposes in Year 2, as detailed below:
Federal income tax paid to the IRS $150,000
State income tax paid to state Q 50,000
Foreign income tax paid to country M 20,000
Property tax paid to state Q 15,000
Sales tax paid to state Q 5,000
The company will not take the foreign tax credit. What is the company’s deduction for taxes paid on its Year 2 federal income tax return?
A. $240,000 B. $170,000 C. $90,000 D. $70,000
Choice “C” is correct. The company can deduct all of the taxes shown except the federal income tax paid to the IRS. Since the company is not taking a credit for the foreign taxes paid, they can deduct them instead. The total deduction allowed is the state income tax paid (50,000) + the foreign income tax paid (20,000) + property tax paid (15,000) + sales tax paid (5,000) = 90,000.
Choice “A” is incorrect. This answer choice incorrectly includes all of the taxes as deductions, however, the federal income taxes paid are not allowed as a deduction on its federal tax return.
Choice “B” is incorrect. This answer choice incorrectly includes the federal income tax paid, which is not allowed as a deduction on its federal tax return. It also mistakenly excludes the state, property, and sales taxes as a deduction.
Choice “D” is incorrect. This answer choice does not include the property and sales taxes paid, which are allowed as ordinary deductions on its federal tax return.
Bass Corp., a calendar year C corporation, made qualifying Year 2 estimated tax deposits based on its actual Year 1 tax liability. On March 15, Year 3, Bass filed a timely automatic extension request for its Year 2 corporate income tax return. Estimated tax deposits and the extension payment totaled $7,600. This amount was 95% of the total tax shown on Bass’ final Year 2 corporate income tax return. Bass paid $400 additional tax on the final Year 2 corporate income tax return filed before the extended due date. For the Year 2 calendar year, Bass was subject to pay:
I. Interest on the $400 tax payment made in Year 3.
II. A tax delinquency penalty.
A. Neither I nor II. B. II only. C. Both I and II. D. I only.
Choice “D” is correct. A taxpayer does not extend the time for payment of tax by extending the filing deadline for the return. If there is tax owed when the return is filed, interest must be paid at the rate prescribed by IRC §6621; therefore, Bass was subject to pay interest on the $400 tax payment made in Year 3. There is no delinquency penalty if the taxpayer files its return, the amount owed on the return is not $500 or more, and the taxpayer pays the balance due on or before the extended due date (all of which Bass Corp. complied with).
Choice “A” is incorrect. Interest on the $400 will be due.
Choice “B” is incorrect. Interest will be due on the payment, but there is no delinquency penalty because it is under $500.
Choice “C” is incorrect. The delinquency penalty is not applied because the amount is under $500.
