STUDY UNIT SEVEN CORPORATE TAXABLE INCOME Flashcards
Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?
A The entity may have any number of owners.
B The owner may participate in management while limiting personal liability.
C The entity may make disproportionate allocations and distributions to members.
D The entity may avoid taxation.
B The owner may participate in management while limiting personal liability.
This answer is correct.
A great advantage of the LLC is that its creditors have no claim on the personal assets of members (owners) or managers. Moreover, an LLC is assumed to be member-managed unless its articles of organization state otherwise.
During 2015, Nale Corp. received dividends of $1,000 from a 10%-owned taxable domestic corporation. When Nale computes the maximum allowable deduction for charitable contributions in its 2015 return, the amount of dividends to be included in the computation of taxable A $0
B $1,000
C $200
D $300
B $1,000
This answer is correct.
The charitable contribution deduction is limited to 10% of a corporation’s taxable income before reduction for any charitable contributions, dividends-received deduction, NOL carryback, and capital loss carryback.
Wright Corporation reported $100,000 of book income before income taxes for the year ended December 31, 2015. The income statement disclosed the following information:
Christmas gifts to 40 customers at $100 each
Dividends of $20,000 received from Morley, Ltd., a 20%-owned corporation
that is not subject to United States income tax
Insurance premiums of $15,000 on a policy insuring the life of the president
of the corporation, under which Wright Corporation is the beneficiary
What should Wright report as its taxable income for 2015?
A $103,000
B $102,000
C $115,000
D $118,000
D $118,000
This answer is correct.
Business gifts are limited to $25 for each gift. Dividends received from foreign corporations are eligible for the dividends-received deduction only if the corporation is subject to U.S. income tax. No deduction is allowed for life insurance premiums on a policy covering the life of an officer if the corporation is directly or indirectly a beneficiary. Wright’s taxable income is
Pretax income per books
$100,000
Add back:
Christmas gifts (40 × $75)
3,000
Insurance premiums
15,000
Taxable income
$118,000
Note that the portion of Christmas gifts added back is the excess deduction taken in computing book income. Also, the dividends were included in book income, but no dividends-received deduction is allowed
During the current year, Ashley Corporation charged the following payments to miscellaneous expense:
1 Travel expense of $300 for the company president to offer voluntary testimony at the state capital against proposed legislation regarded as unfavorable to its business
2 Christmas gifts to 20 customers at $75 each
3 Contribution of $600 to local political candidate
The maximum deduction that Ashley can claim for these payments is A $800 B $1,800 C $2,400 D $1,400
A $800
This answer is correct.
The travel expenses of $300 incurred to provide testimony with regard to legislation are deductible. A denial of a deduction for influencing legislation does not occur since up to $2,000 of direct costs allocable to influencing state and federal legislation is deductible under the de minimis exception. Christmas gifts to customers are also deductible as ordinary and necessary business expenses. The deduction for business gifts is limited to $25 per donee in a single year. Accordingly, the taxpayer may deduct only $500 (20 customers × $25) for the Christmas gifts. No deduction is allowed for political contributions. The maximum deduction Ashley can claim is $800.
In 2014, Capital Corporation reported gross profits of $150,000, deductible expenses of $28,000, and a net capital loss of $10,000. Capital reported the following net capital gains during 2011-2013:
Year
Net Capital Gains 2011 $5,000 2012 $1,000 2013 $3,000 What is the amount of Capital’s capital loss carryover to 2015? A $1,000 B $5,000 C $10,000 D $7,000
A $1,000
This answer is correct.
The net capital loss for the corporation may be carried back 3 years and forward 5 years. The current year’s net capital loss will be carried back first to 2011, where it will offset $5,000 in net capital gain, then to 2012, where it will offset $1,000 of net capital gain, and then to 2013, where it will offset $3,000 of net capital gain. The remaining net capital loss of $1,000 will be carried over to 2015.
The rule limiting the allowability of passive activity losses and credits applies to
A. Personal service corporations.
B. S corporations.
C. Partnerships.
D. Widely held C corporations.
A. Personal service corporations.
Answer (A) is correct.
The passive activity loss rules apply to individuals, estates, trusts, closely held corporations, and personal service corporations. A corporation is considered closely held if, at any time during the last half of the year, 50% or more of the value of its stock is held by five or fewer individuals. The passive loss rules do not apply to widely held corporations, which would be any other C corporation.
For a domestic corporation to deduct a percentage of the dividends it receives from a foreign corporation, certain tests must be met. Which of the following conditions need not be present?
A. The domestic corporation owns at least 10% of the foreign corporation.
B. The foreign corporation has income effectively connected with a trade or business in the U.S.
C. The foreign corporation has derived income effectively connected with its U.S. business amounting to at least 50% of its gross income from all sources for a 36-month period.
D. The corporation is not a foreign personal holding company.
C. The foreign corporation has derived income effectively connected with its U.S. business amounting to at least 50% of its gross income from all sources for a 36-month period.
Answer (C) is correct.
The IRC lists requirements that must be met for the dividends of a foreign corporation to qualify for the dividends-received deduction. These requirements include that the foreign corporation (1) not be a foreign personal holding company, (2) be subject to federal income taxation, (3) be 10% or more owned by the domestic corporation, and (4) have income from effectively connected business sources within the United States.
(7.3.58)
Corporation P, a calendar-year taxpayer, sustained a net operating loss in 2014. The 2014 tax return was filed on March 1, 2015. Corporation P uses Form 1120X to carry back the net operating loss. What is the latest date Corporation P can file Form 1120X (ignoring holidays and weekends)?
A. March 15, 2018.
B. March 15, 2017.
C. March 1, 2018.
D. December 31, 2015.
A. March 15, 2018.
Answer (A) is correct.
Form 1120X, an Amended Corporate Income Tax Return, must be filed within the time set by law for a refund to be allowed. A claim for refund generally must be filed within 3 years of the time the return was filed or 2 years from the time the tax was paid, whichever expires later. However, if the return is filed before the due date, the 3-year period starts to run from the date the return was due. Corporations on the calendar year must file income tax returns by March 15 (ignoring holidays and weekends). The latest date Corporation P may file Form 1120X is March 15, 2018 (3 years from the due date of the return).
(7.4.98)
On December 31, 2015, PSC Corporation, an accrual-basis personal service corporation, accrued a $25,000 bonus to Mrs. Adams, an employee-owner. She owns 15% of the outstanding stock of the corporation. Mrs. Adams is a cash-basis taxpayer and received the bonus on April 15, 2016. PSC Corp., a calendar-year taxpayer, may take a deduction on its 2015 return of which of the following amounts?
A. $21,250
B. $25,000
C. $0
D. $3,750
C. $0
Answer (C) is correct.
Under Sec. 162(a), a reasonable allowance for salaries or other compensation for personal services actually rendered is deductible by the corporation if paid or incurred during the tax year. PSC Corporation is denied the deduction for the accrual in 2015 since compensation paid to employees must not only meet the economic performance requirement but also be paid within 2 1/2 months after the end of the employer’s tax year in which the services are rendered. Payments made after the end of the 2 1/2-month period are presumed to be deferred compensation, and the deduction is deferred until the year in which payment occurs.
(7.3.55)
For the current tax year, Sting Corporation had net income per books of $65,000, tax-exempt interest of $1,500, excess contributions of $3,000, excess tax depreciation over book depreciation of $4,500, premiums paid on term life insurance on corporate officers of $10,000 (Sting is the beneficiary), and accrued federal income tax of $9,700. Based on this information, what is Sting Corporation’s taxable income as would be shown on Schedule M-1 of its current year corporate tax return?
A. $61,700
B. $93,700
C. $58,700
D. $81,700
Answer (D) is correct.
Schedule M-1 reconciles income or loss per books with income or loss per tax return.
Net income per books
$65,000
Add back:
Federal income taxes
9,700
Excess contributions
3,000
Life insurance premiums
10,000
$87,700
Subtract:
Tax-exempt interest
(1,500)
Excess depreciation
(4,500)
Taxable income
$81,700
(7.5.122)
The following information for 2015 pertains to Bartley Corporation:
Capital contributions $50,000
Realized loss on sale of treasury stock (10,500)
Income from rental property in a sinking fund (in the hands of a trustee) 5,500
Rent paid directly to a bond holder on a lease of corporate property 8,000
What is the amount of gross income to Bartley Corporation for 2015?
A. $13,500
B. $53,000
C. $47,500
D. $8,000
A. $13,500
Answer (A) is correct.
Gross income of a corporation includes all income, unless specifically excluded. Excluded from a corporation’s gross income are capital contributions and any gain or loss realized by a corporation on the sale or exchange of its own stock (including treasury stock). Included in a corporation’s gross income are income from property in a sinking fund and income that has been assigned by the corporation to another. Thus, Bartley Corporation’s gross income is $13,500 ($5,500 sinking fund income + $8,000 assignment of income).
(7.2.21)
Corporation R was organized and began active business on January 4, 2015. R incurred the following expenses in connection with creating the business:
Professional fees for issuance of stock $ 4,000
State incorporation fees 2,000
Printing cost for stock certificates 1,500
Broker’s commissions on sale of stock 7,000
Legal fees for drafting the charter 32,000
Expense for temporary directors 5,000
Total $51,500
Electing no immediate expensing, the maximum amount of organizational expense that may be deducted by Corporation R on its 2015 income tax return is
A. $3,433
B. $34,333
C. $2,600
D. $51,500
C. $2,600
Answer (C) is correct.
The IRC allows a corporation to elect to amortize its organizational expenses over at least 180 months starting with the month in which it begins business. Organizational expenditures are those incurred incidental to the creation of the corporation. Expenditures connected with issuing or selling stock and with transferring assets to the corporation are excluded. Corporation R’s 2015 amortization deduction (assuming it is a calendar-year corporation) is
State incorporation fees
$ 2,000
Legal fees for drafting the charter
32,000
Expense for temporary directors
5,000
Total allowable expenses
$39,000
2015 amortization ($39,000 × 12/180 months)
$ 2,600
(7.3.54)
During 2015, Sea Corporation reported gross income from operations of $100,000 and operating expenses of $150,000. Sea Corporation also received dividend income of $90,000 from a domestic corporation in which Sea is a 20% shareholder. What is the amount of Sea Corporation’s net operating loss?
A. $32,000
B. $0
C. $23,000
D. $40,000
A. $32,000
Answer (A) is correct.
Sec. 172(c) defines a net operating loss as the excess of deductions over gross income, with certain modifications. One modification is that the dividends-received deduction is computed without regard to the 80% of taxable income limitation (i.e., $40,000 × 80% = $32,000 deduction limit) in Sec. 246(b); therefore, the deduction is the full amount of $72,000. Thus, Sea’s NOL is $32,000 as computed below.
Gross income from operations
$100,000
Dividend income
90,000
Less: Operating expenses
(150,000)
Gross income
$ 40,000
Less: Dividends-received deduction
(80% × $90,000)
(72,000)
Net operating loss
$ (32,000)
(7.4.92)
During 2015, ABC Corporation had the following income and expenses:
Gross sales receipts $350,000
Salaries 175,000
Contributions to qualified charitable organizations 20,000
Capital gains 3,000
Capital loss carryback 3,000
Depreciation expense 14,000
Dividend income 30,000
Dividends-received deduction 21,000
What is ABC’s charitable contribution deduction for 2015?
A. $17,000
B. $15,000
C. $20,000
D. $19,400
Answer (D) is correct.
Charitable contributions made to qualified organizations and paid within the taxable year may be deducted from taxable income. A corporation’s charitable deduction is limited to 10% of taxable income computed before the charitable contribution deduction, net operating loss carryback, capital loss carryback, and the dividends-received deduction. ABC’s charitable contribution deduction for 2015 is $19,400 as computed below.
Gross receipts
$350,000
Capital gains
3,000
Dividend income
30,000
Less: Salaries
(175,000)
Less: Depreciation expense
(14,000)
Taxable income before special deductions
$194,000
Times limit percentage
× .10
Charitable contribution deduction
$ 19,400
(7.3.63)
Wingate Corporation had the following income and expenses for 2015:
Income from operations $70,000
Dividend income (from less-than-20%-owned domestic corporations) 45,000
Expenses of operations 90,000
2014 net operating loss carryover 5,000
What is Wingate Corporation’s taxable income for 2015?
A. $0
B. $(11,000)
C. $(6,500)
D. $(11,500)
C. $(6,500)
Answer (C) is correct.
A net operating loss as the excess of deductions over gross income, with certain modifications. One modification is that the dividends-received deduction is computed without regard to the limitation of 70% of taxable income. Consequently, Wingate’s taxable income is computed as follows:
Gross income from business operations
$ 70,000
Dividends received
45,000
Gross income
$115,000
Less: Business expenses
(90,000)
Dividends-received deduction
($45,000 × 70%)
(31,500)
Taxable Income (NOL)
$ (6,500)
(7.4.106)
