Section 5B-D-F-G--H Flashcards
Schedule M-3 of the Form 1120 has checkboxes for disclosures related to:
consolidated versus nonconsolidated ___.
whether certified audited versus nontax basis was used for the ___.
whether or not the income statement had been ___in the previous five years (___).
returns
income statement
restated
(not seven years)
Birch Corp. is an accrual-basis, calendar-year C corporation. Its reported book income before federal income taxes was $250,000, which included $46,000 in municipal bond interest income. Birch’s book expenses included $4,000 of interest incurred on indebtedness used to carry the municipal bonds. What should be the amount of Birch’s taxable income, as reconciled on Birch’s Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return?
$208K
Taxable income is computed as follows:
Net income per books $250,000
Plus: Nondeductible interest expense 4,000
Less: Tax-exempt municipal bond
interest income 46,000
Taxable income $208,000
As part of the corporate tax return, corporations must reconcile the difference between ____on Schedule M-1
Corporations, and related groups of corporations, with total assets between $___ and __are allowed to file Schedule M-1
Corporate taxpayers must also reconcile the \_\_\_balances in retained earnings on Schedule M-2.
Schedule M-1 of IRS Form 1120 is required to be filed when a corporation has both total assets and total receipts between ___
taxable income and accounting income
10 million and $50
opening and closing
$250,000 or more.
Media Corp. is an accrual-basis, calendar-year C corporation. Its reported book income included $6,000 in municipal bond interest income. Its expenses included $1,500 of interest incurred on indebtedness used to carry municipal bonds and $8,000 in advertising expense. What is Media’s net M-1 adjustment on its Form 1120, U.S. Corporation Income Tax Return, to reconcile to its taxable income?
The M-1 reconciles book to tax income. Of the following:
($6,000) municipal bond interest income
1,500 interest expense
8,000 advertising expense
Only the first two ($6,000 − $1,500 = $4,500) are nontaxable.
Which of the following corporations are required to file Form 1120, Schedule M-3?
Corporations with net income of $10 million or more
Corporations with total assets of $10 million or more
Corporations with taxable income of $10 million or more
Corporations with retained earnings of $10 million or more
Corporations with total assets of $10 million or more
Corporations and related groups of corporations with more than $___ in assets must reconcile financial statement net income to the net income or loss of the corporation reported for U.S. taxable income using Schedule M-3.
50 million
An accrual-basis C corporation that prepared its financial statements based on GAAP recorded $800,000 of bad debt expense. The total amount of bad debts that actually became worthless was $930,000. In respect to bad debt expense, what type of disclosure should the corporation show on Schedule M-3?
A permanent bad debt expense difference of $130,000
A temporary difference in which book deductions exceed tax deductions by $130,000
A temporary difference in which tax deductions exceed book deductions by $130,000
No difference between bad debt expense per income statement and deduction per tax return
A temporary difference in which tax deductions exceed book deductions by $130,000
Only actual bad debt expense of $930,000 is allowed for tax purposes, so there would be a temporary timing difference of $130,000 on Schedule M-3 ($930,000 − $800,000 per GAAP).
For the current year, Kelly Corp. had net income per books of $300,000 before the provision for federal income taxes. Included in the net income were the following items:
Dividend income from an unaffiliated domestic taxable
corporation (taxable income limitation does not apply
and there is no portfolio indebtedness) $50,000
Bad debt expense (represents the increase in the
allowance for doubtful accounts) 80,000
Assuming that no bad debt was written off, what is Kelly’s taxable income for the current year?
Taxable income is $355,000:
$300,000 Net Income per Books - 25,000 Dividends-Received Deduction (50% x $50,000)* \+ 80,000 Bad Debts Expense** $355,000 Taxable Income
A corporation is entitled to a special deduction from gross income for dividends received from a domestic corporation. Since this dividend was from an unaffiliated Domestic corporation (this means less than 20% of the company was owned) 50% of the dividends received are not taxable.
A corporation is entitled to a special deduction from gross income for dividends received from a domestic corporation. The special deduction is 50% of the dividends received are ___
Unafilliated dividends mean what?
not taxable.
Unaffiliated means that less than 20% of the company is owned by the company receiving the dividend.
The corporate limit for charitable contributions is ___%
Contributions in excess of the 10% limit may be ___ years
Accrual-basis corporations may accrue contributions if the commitment was made ___and the contribution is paid within 2-1/2 months after the close of the tax year.
10%
Carried forward 5 years
Before year end
Ownership Deduction Percentage
Less than 20% __
20% or more, but less than 80%)) __
80% or more _
50%
65%
100%
Banks Corp., a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. What percentage of the meal expense may Banks Corp. deduct?
50%
For tax years beginning after 1993, only 50% of business meals are deductible provided business is discussed.
Corporate capital losses carry back three years and forward five years as ___.
Net operating loss is calculated the same way as taxable income. T/F
short-term capital losses
A deduction for compensation paid or accrued with respect to a “covered employee” of a publicly held corporation is limited to no more than $___
For tax years beginning after 2017, no deduction is allowed for “___” expenses, and while 50% of business meals are deductible, that cost should be clearly separated from entertainment.
1 million per year.
entertainment
Starke Corp., an accrual-basis calendar-year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What amount should Starke’s taxable income be as reconciled on Starke’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
Book income $380,000
Less:
1. Municipal bond interest income - 50,000
$330,000
Add:
2. Federal income tax expense + 170,000
3. Interest expense on the debt
incurred to carry tax-exempt bonds 2,000
Taxable income $502,000
A corporation’s Schedule M-1 (Form 1120) reconciles book income to taxable income.
__bond interest is not taxable income.
___income taxes are not deductible in determining taxable income.
No deduction is allowed for interest paid on a ___or continued in order to purchase or carry tax-exempt bonds.
Municipal
Federal
debt incurred
The purpose of Schedule M-1 is to reconcile the differences between book and tax income. For book purposes, interest earned on municipal bonds is included in revenue. For tax income, what amount is included in income?
0%
Interest on municipal bonds is not taxable; therefore, it is a reconciling item on the Schedule M-1.
For the current year, Oaktree Corporation’s books and records reflect the following:
Net income per books (after tax) $52,800
Tax-exempt interest 500
Excess book depreciation 7,222
Capital losses 3,000
Federal income tax 8,478
Excess contributions 1,710
Premiums on officer life insurance (payable to corp.) 1,500
Meals in excess of 50% limitation 400
What is the amount of Oaktree’s taxable income as it would be shown on Schedule M-1 of its corporate income tax return?
Net income per books $52,800
Add back:
Federal income tax + 8,478
Capital losses + 3,000
Depreciation + 7,222
Officer life insurance + 1,500
Meals in excess of 50% limitation + 400
Excess contributions + 1,710
Total $75,110
Deduct: Nontaxable interest 500
Taxable income $74,610
Corporations are not allowed a deduction for capital losses. Corporate capital losses are only deductible against capital gains.
Contributions are limited to 10% of taxable income.
On January 2, Year 1, Shaw Corp., an accrual-basis, calendar-year C corporation, purchased all the assets of a sole proprietorship, including $300,000 in goodwill. Federal income tax expense of $110,100 and $7,500 for impairment of goodwill were deducted to arrive at Shaw’s reported book income of $239,200. What should be the amount of Shaw’s Year 1 taxable income, as reconciled on Shaw’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
Shaw’s Year 1 taxable income will be $336,800, as computed below:
Book income $239,200
\+ Federal income tax 110,100
\+ Goodwill impairment 7,500
- Amortization of goodwill
($300,000 ÷ 15) (20,000)
Taxable income $336,800
The federal income tax is not deductible on the corporate tax return. The carrying value of goodwill is only adjusted for impairment on the books, while on the tax return goodwill is amortized over 15 years, beginning in the month the goodwill is acquired.
When reconciling Book to net…
Adding to taxable income means
Subtracting from Taxable income means…
it’s not deductible
Its not taxable
Which of the following expenses incurred by a C corporation are not deductible and therefore must be reported as an M-1 adjustment on the corporate income tax return?
$1,000 of in-house lobbying expense
$3,000 paid to a professional lobbyist to lobby Congress
$500 local lobbying expenses
$5,000 travel expense incurred by a professional lobbyist to lobby Congress
$3,000 paid to a professional lobbyist to lobby Congress
Generally, lobbying expenses are not deductible. However, there is a limited exception which allows a deduction for local lobbying expenses and up to $2,000 of in-house lobbying expenses. Expenses incurred by a taxpayer engaged in the business of providing lobbying services are deductible by that taxpayer.
Dues paid to a tax-exempt organization are generally not deductible to the extent they are used to fund lobbying activities.
Jagdon Corp.’s book income was $150,000 for the current year, including interest income from municipal bonds of $5,000 and excess capital losses over capital gains of $10,000. Federal income tax expense of $50,000 was also included in Jagdon’s books. What amount represents Jagdon’s taxable income for the current year?
$205K
ook income $150,000
Less: Municipal bond interest (5,000)
Add: Nondeductible capital losses 10,000
Add: Federal income tax expense 50,000
Taxable income $205,000
========
Premiums paid on life insurance are not deductible by any person that is directly or indirectly a beneficiary under the policy. T/F
True
Azure, a C corporation, reports the following:
Pretax book income is $543,000.
Depreciation on the tax return is $20,000 greater than depreciation on the financial statements.
Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements.
Fines for pollution appear as a $10,000 expense in the financial statements.
Interest earned on municipal bonds is $25,000.
What is Azure’s taxable income?
Azure’s taxable income is $544,000, calculated as follows:
Pretax book income $543,000
Less: Additional tax depreciation (20,000)
Add: Additional rent income 36,000
Add: Nondeductible fines 10,000
Less: Nontaxable municipal bond interest (25,000)
———
Taxable income $544,000
Carol Calloway purchased a business with four assets and paid $210,000. The tangible assets acquired are as follows:
Equipment $ 10,000 FMV Land $50,000 FMV
Building $100,000 FMV Inventory $30,000 FMV
What is the amount that must be allocated to goodwill at the time of purchase?
$20k
Any difference between the fair market value of assets transferred to a corporation ($190,000) and the amount paid ($210,000) must be recorded as goodwill.
Cash Paid $210,000
FMV Equipment - 10,000
FMV Land - 50,000
FMV Building - 100,000
FMV Inventory - 30,000
Goodwill $ 20,000
=========
Which of the following can be an advantage of a limited liability company over an S corporation?
Double taxation of profits is avoided.
Owners receive limited liability protection.
Appreciated property can be distributed tax-free to an owner.
Incentive stock options can be used to compensate owners.
Appreciated property can be distributed tax-free to an owner.
An S corporation recognizes a gain on the distribution of appreciated property to a shareholder. The transaction is treated as a “__” of the property to the shareholder at fair market value (FMV).
sale
An LLC is generally created under state law by filing ___with the secretary of state’s office.
Articles of Organization includes: __ of LLC, __ of its existence, name and address of LLC ____
The LLC’s name must generally include the words “limited liability company” or similar words that indicate to third parties that the owners of the entity have limited liability. T/F
Owners of the interests in an LLC are referred to as \_\_ Most statutes require an LLC to have \_\_\_ members
articles of organization
Name of LLC, Duration of existence, name & Address of LLC’s Agent
TRue
members.
2 or more
. Generally, members of an LLC can be individuals, partnerships, corporations, or other LLCs. T/F
The members of an LLC have a right to manage that which is proportionate to their __
Members who actually engage in management owe __to the LLC
An LLC will generally dissolve upon the death, retirement, bankruptcy, or dissolution of a member. T/F
True
capital contributions
fiduciary duties
True
In year 1, a domestic LLC with two members elected classification as a corporation. In year 2, one of the members withdrew from the LLC. What is the LLC’s tax classification for year 2 immediately after the member withdrew?
Corporation
For income tax purposes, a single-member LLC is a sole proprietorship with the reporting of income or loss on Schedule C of IRS Form 1040, unless the single member elects to be treated as a corporation
For income tax purposes, a single-member LLC is a sole proprietorship with the reporting of income or loss on Schedule C of IRS Form 1040, unless the single member elects to be treated as a __
Liquidation of an LLC, however, can generally be avoided by ___of the remaining member(s) to continue the LLC’s business.
For LLCs, he owner may participate in management while limiting personal liability. T/F
corporation
unanimous consent
True
A newly formed single member domestic limited liability company is eligible to file an election to be taxed as a:
An election is required to receive the default tax treatment.
Under the “check the box” regulations, an entity is given a ___
corporation or a disregarded entity.
False -no election is required
default tax treatment
T/F
LLCs have complete pass-through of tax attributes generated by operations.
Every member is allowed to participate in an LLC.
Every member of an LLC has liability protection.
All True
If the entity does not file IRS Form 8832 and is a domestic LLC with at least two members, the entity will be classified as a __
partnership.
If the organization’s UBI is taxed, ___rates apply if it is a trust and ___rates apply if it is a corporation.
Unrelated business income (UBI) is net income derived from: the regular operation of a business activity that is unrelated to the organization's exempt \_\_\_ or \_\_\_property. The first $\_\_\_of UBI is exempt from tax
UBI: The tax does not apply to dividends, interest, royalties, capital gains, most rents, and similar items that are accepted as proper sources of income for a charity or trust. Income from debt-financed investments will be taxed, however. T/F
trust., corporate
purpose, debt-financed
1,000
The tax does not apply to dividends, interest, royalties, capital gains, most rents, and similar items that are accepted as proper sources of income for a charity or trust. Income from debt-financed investments will be taxed, however.
Help, Inc., an exempt organization, derived income of $15,000 from conducting bingo games. Conducting bingo games is legal in Help’s locality and is confined to exempt organizations in Help’s state. Which of the following statements is true regarding this income?
The entire $15,000 is exempt from tax on unrelated business income…..WHY
the bingo game is legal in both the state and the locality. and
commercial bingo games are not permitted in the locality.
The income from “qualified” bingo games is exempt from tax if the following three requirements are met:
- The bingo game is legal in the __.
- The bingo game is legal in the __.
- Commercial bingo games are not allowed in the ___
state
locality
locality.
To qualify as an exempt organization, the applicant:
must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.
may be organized and operated for the primary purpose of carrying on a business for profit, provided that all of the organization’s net earnings are turned over to one or more tax-exempt organizations.
must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.
To qualify as an exempt organization, the applicant:::::
may not be organized and operated for the primary purpose of carrying on a business for __
An exempt organization must not be a private foundation organized and operated exclusively to influence ___pertaining to protection of the environment.
profit,
legislation
f an exempt organization engages in a prohibited transaction, part or all of its income will be subject to ____It may also lose its ___
Prohibited Transactions
- Failure to maintain ___requirements
- Attempting to influence legislation and participating in political campaigns T/F
- ) No part of the organization’s net earnings will inure to the benefit of any private ___or ___.
tax, exempt status
qualification
True
shareholder or individual
___are organizations that carry on a trade or business and turn over all of their profits to an exempt
Private foundations may be partially subject to tax.organization. T/F
Private foundations are exempt organizations that are not broadly supported by the ___. They’re supported by ___
Private foundations must file annual __returns.
If other exempt organizations exceed gross receipts of $50k, they must file a ____…who can avoid this?
Feeder organizations
True
general public, donors
information
Information return, churches can avoid
Title holding companies organized as a corporation will qualify for exemption from federal income tax if it is organized for the following activities:
(1) holding title to __,
(2) collecting ___from such property,
(3) turning over the ___, less expenses, to an organization that itself is exempt under Section 501(a).
property
income
entire amount collected
Charitable organizations are generally either public charities or private foundations. Therefore, when an exempt organization becomes a public charity, it can no longer be a private foundation (terminates the private foundation). T/F
A 501(c)(3) organization is a corporation, trust, community chest, fund, or foundation. T/F
Truee to both
An ___for exemption must be filed with the Internal Revenue Service (IRS) because exemption from taxation is not automatic.
An entity may not operate as a tax exempt organization while it is waiting for their application to be approved by the IRS, which may take up to 12 months. T/F
when churches own and operate separate businesses that are not part of their religious function, they can be subject to various federal and state taxes on that income. T/F
application
False -t hey can operate as a tax exempt org
True
An incorporated exempt organization must make ___estimated tax payments on any taxable unrelated business income.
Quarterly installments
Under IRC Section 501(c)(10), domestic fraternal societies must operate under the ___to be exempt from federal income taxation.
a political organization is considered a tax-exempt organization T/F
A social or recreation club under IRC Section 501(c)(7) is allowed to receive up to ___% of its gross receipts from sources outside of its membership without losing its status as a tax-exempt organization.
lodge system
True
35
Unrelated business income of an exempt organization does not include an activity where all the work is performed for the organization by ___
unpaid volunteers.
Tax-exempt organizations are not taxed on investment income derived from investments that are accepted as proper sources of income for a charity or trust. Which of the following types of income would be taxable income for a nonprofit?
Dividends and interest
Rent from a debt-financed building
Royalties and capital gains
Other rents not using debt financing
come from a debt-financed property is included in the same category as the regular operation of a business that is unrelated to the organization’s exempt purpose. Income from both of these activities is taxed as unrelated business income (UBI).
Nontaxable income includes dividends and interest, royalties and capital gains, and other rental income (not financed by debt).
Private foundations are not subject to an accumulated earnings tax, but may be subject to the following taxes:
Tax on ___income
Tax on self-___
Tax on failure to ___income for exempt purposes
Tax on excess business ___
Tax on speculative ___that jeopardize the foundation’s assets
Tax on ___that should not be made by private foundations
investment dealing distribute holdings investments expenditures
The organizational test to qualify a public service charitable entity as tax exempt requires the ___to limit the purpose of the entity to the charitable purpose.
articles of organization
Maple Avenue Assembly, a tax-exempt religious organization, operates an outreach program for the poor in its community. A candidate for the local city council has endorsed Maple’s anti-poverty program. Which of the following activities is (are) consistent with Maple’s tax-exempt status?
Endorsing the candidate to members
Collecting contributions from members for the candidate
Neither
IRC 501(c)(3) organizations are prohibited from participating in or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. This strict prohibition is one of the basic requirements for qualification under IRC Section 501(c)(3).
They are also prohibited from engaging in more than an insubstantial amount of lobbying and grass roots activities to influence legislation.
A loss from an unrelated trade or business is taken into account and may create a net operating loss. (IRC Section 512(b)(6)) T/F
Salud Welfare Associates is an exempt organization that operates under a corporate charter granted by the state in which Salud’s principal office is located. Salud’s tax on unrelated business taxable income is:
computed at corporate income tax rates….WHY
True
Because Salud Welfare Associates operates under a corporate charter, then any unrelated business income will be taxed at corporate rates. If the company was organized as a trust, then the trust tax rates would apply.
___is income from the regular operation of a business activity unrelated to the organization’s exempt purpose.
UBI
An organization that operates for the prevention of cruelty to animals will fail to meet the operational test to qualify as an exempt organization if:
the organization engages in insubstantial nonexempt activities.
the organization directly participates in any political campaign
II only
An organization which engages in insubstantial nonexempt activities will not lose its tax-exempt organization status, but it will be taxed on its unrelated business income.
The sole shareholder of an S corporation had a basis for her stock of $30,000 and a basis for a loan to the S corporation of $15,000. In Year 6, the S corporation operated at a loss of $39,000. What is the shareholder’s basis in the stock and loan on December 31, Year 6?
The loss reduces the shareholder’s stock basis first. The remaining loss ($39,000 − $30,000) of $9,000 is deducted from the loan basis.
Stock Loan Total Beg. Basis $30,000 $15,000 $45,000 Less: Loss ( 30,000) ( 9,000) ( 39,000) Ending Basis: $ 0 $ 6,000 $ 6,000
A shareholder’s tax basis in an S corporation is increased by any stock purchases and capital contributions. T/F
Basis can below zero
Increase Basis: Taxable ___, Separately stated ___ items, _– in excess of property’s basis
Decrease basis: Loss from operations, separately stated loss items, nontax distributions, nondeductible loss items T/F
The qualified business income deduction (IRC Section 199A) does not affect the basis of a shareholder’s interest. T/F
True
False - never below 0
Income, income items, Depletion
True
True
Bern Corp., an S corporation, had an ordinary loss of $36,500 for the year ended December 31, Year 0. At January 1, Year 0, Meyer owned 50% of Bern’s stock. Meyer held the stock for 40 days in Year 0 before selling the entire 50% interest to an unrelated third party. Meyer’s basis for the stock was $10,000. Meyer was a full-time employee of Bern until the stock was sold. Meyer’s share of Bern’s Year 0 loss was:
$2k
Meyer owned 50% of Bern Corp for 40 days during Year 0. Therefore, Meyer will include in his Year 0 tax return a loss of $2,000 from Bern Corporation, as computed below:
$36,500 × 0.50 × 40/365 = $2,000
Each shareholder of an S corporation will include in his taxable income his pro rata share of corporate items of income, deduction, loss, and credit in his tax year in which the corporation’s tax year ends.
S CORP
Certain domestic corporations may elect not to be taxed. Instead, the income is passed through to the ___, who are taxed on their share of the corporation’s earnings.
Shareholders are taxed on their share of the earnings even though the earnings are not distributed. T/F
S corporations must file IRS Form 1120S each year before ___following the close of the taxable year.
S corporations may be part of an affiliated group, but a ___return is prohibited.
shareholders
March 15th
consolidated
A sole proprietorship incorporated on January 1 and elected S corporation status. The owner contributed the following assets to the S corporation:
Basis Fair Market Value
------- ----------------- Machinery $ 7,000 $ 8,000 Building 11,000 100,000 Cash 1,000 1,000 Two years later, the corporation sold the machinery for $4,000 and the building for $110,000. The machinery had accumulated depreciation of $2,000, and the building had accumulated depreciation of $1,000. What is the built-in gain recognized on the sale?
$0 – BUILT IN GAINS APPLY TO C CORPS CHANGING TO S CORP….. Because this is a sole proprietorship changing to an S corporation, the built-in gains tax does not apply.
