Topic 2

Question 1

All taxpayers must account for taxable income using a calendar year.

Answer 1

False

Question 2

A fiscal tax year can end on the last day of any month other than December.

Answer 2

True

Question 3

A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the business.

Answer 3

True

Question 4

Employers computing taxable income under the accrual method to unrelated taxpayers may deduct wages accrued as compensation expense in one year and paid in the subsequent year, as long as the company makes the payment within 2½ months after the employer’s year-end.

Answer 4

True

Question 5

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

1. Spouse when the taxpayer is an individual
2. A partner when the taxpayer is a partnership
3. Brother when the taxpayer is an individual
4. A minority shareholder when the taxpayer is a corp
5. All of the above

Answer 5

A minority shareholder when the taxpayer is a corporation. (Family members, shareholders and C corporations if the shareholder owns more the 50 percent of the corporation’s stock, and owners of partnerships and S corporations.)

Question 6

Which of the following is a true statement about accounting for business activities?

1. An overall accounting method can only be adopted with the permission of the Commissioner.
2. An overall accounting method is initially adopted on the first return filed for the business.
3. The cash method can only be adopted by individual taxpayers.
4. The accrual method can only be adopted by corporate taxpayers.

Answer 6

An overall accounting method is initially adopted on the first return filed for the business.

Question 7

Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation’s stock.

Answer 7

False

The DRD percentages are 50%, 65%, and 100%, depending on the stock ownership level.

Question 8

The dividends received deduction cannot create a net operating loss. The deduction can reduce income to zero but not below zero.

Answer 8

False
A dividends received deduction is limited to 50% or 65% of taxable income unless it creates or increases a net operating loss deduction, in which case the full amount is allowed.

Question 9

The dividends received deduction is subject to a limitation based on modified taxable income.

Answer 9

True

Question 10

Taxable income of C corporations is subject to a flat 21% tax rate.

Answer 10

True

Question 11

In general, all C corporations can elect to use either the accrual or cash method of accounting.

Answer 11

False
Corporations with annual average gross receipts exceeding $25 million over the prior three years are required to use the accrual method.

Question 12

C corporations with annual average gross receipts of $25 million or more are allowed to use the cash method of accounting for at least the first two years of their existence.

Answer 12

False
A corporation may not use the cash method of accounting in the second year if it reported more than $25 million in gross receipts in the first year.

Question 13

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

Answer 13

False
Any book-tax difference that requires an add-back to book income to compute taxable income is an unfavorable book-tax difference because it requires an adjustment that increases taxable income relative to book income.

Question 14

Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

Answer 14

True

Question 15

For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.

Answer 15

True

Question 16

For tax purposes, a corporation may deduct the entire amount of a net capital loss in the year incurred.

Answer 16

False

A corporate capital loss can only be deducted against capital gains.

Question 17

A corporation may carry a net capital loss back two years and forward 20 years.

Answer 17

False

A corporation carries a net capital loss back 3 years and forward 5 years.

Question 18

A corporation may carry a net capital loss back three years and forward five years.

Answer 18

True

Question 19

Corporations may carry a net operating loss sustained in 2019 back two years and forward 20 years.

Answer 19

False

An NOL sustained in 2019 can be carried forward indefinitely with no carryback permitted.

Question 20

Bingo Corporation incurred a $10 million net operating loss in 2019. Bingo reported taxable income of $12 million in 2020. Bingo can offset the entire $10 million NOL carryover against taxable income in 2020.

Answer 20

False
The NOL can only offset 80% of taxable income in the carryover year ($9.6 million). The remainder is carried over to 2021.

Question 21

For 2018, accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.

Answer 21

False
The deduction is allowed in the year authorized by the Board provided the payment is made within 3½ months after year-end.

Question 22

Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

Answer 22

True

Question 23

A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.

Answer 23

True

Question 24

Which of the following is not calculated in the corporate income tax formula?

1. Gross Income
2. Adjusted Gross Income
3. Taxable Income
4. Regular tax liability

Answer 24

Adjusted Gross Income

Adjusted gross income is calculated for individual returns, but not for corporate returns.

Question 25

Which of the following does NOT create a temporary book-tax difference?

1. Deferred compensation
2. Bad-debt expense
3. Depreciation expense
4. Dividends received deduction

Answer 25

Dividends received deduction

The dividends received deductions is a tax only deduction. It creates a favorable permanent book-tax difference.

Question 26

Which of the following statements regarding book-tax differences is true?

1. Corporations are not required to report book-tax differences on their income tax returns.
2. Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
3. Income excludable for tax purposes usually creates a temporary book-tax difference.
4. None of the above

Answer 26

Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
Temporary book-tax differences will eventually reverse; if a difference is favorable one year, it will be unfavorable in another.

Question 27

Which of the following statements regarding capital gains and losses is false?

1. In terms of tax treatment, corporations generally prefer capital gains to ordinary income.
2. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.
3. C corporations can carry back net capital losses three years and they can carry them forward for five years.
4. Corporations must apply capital loss carrybacks and carryovers in a particular order.

Answer 27

Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.
Corporations cannot deduct capital losses against ordinary income.

Question 28

Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?

1. $11,000 unfavorable.
2. $11,000 favorable.
3. $16,000 unfavorable.
4. $16,000 favorable.

Answer 28

$16,000 favorable.
Studios carries back $14,000 of the loss to year 4, and then carries the remaining $16,000 forward to year 6. In year 6 it deducts $16,000 for tax purposes and $0 for book purposes.

Question 29

Which of the following is allowable as a deduction in calculating a corporation’s net operating loss?

1. Charitable contribution deduction.
2. Net capital loss carryback.
3. Net operating loss carryover from other years.
4. Both A and C are deductible in computing the current year NOL.

Answer 29

Charitable contribution deduction.
Net capital loss carrybacks and net operating loss carryovers are not deductible in calculating a current year net operating loss.

Question 30

Which of the following statements regarding net operating losses generated in 2019 is true?

1. Corporations can carry NOLs back two years and forward up to 20 years.
2. A corporation can carryover the NOL indefinitely.
3. A corporation can carry NOLs back two years and forward indefinitely.
4. None of the above

Answer 30

A corporation can carryover the NOL indefinitely.

Question 31

Which of the following statements regarding charitable contributions is false?

1. Charitable contribution deductions are subject to a limitation based on the corporation’s taxable income (before certain deductions).
2. Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.
3. The amount deductible for non-cash contributions is always the adjusted basis of the property donated.

Answer 31

The amount deductible for non-cash contributions is always the adjusted basis of the property donated.

Question 32

Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of $72,000. Its charitable contributions for the year were $7,500. What is Remsco’s current-year charitable contribution deduction and contribution carryover?

1. $6,000 current-year deduction; $1,500 carryover.
2. $7,500 current-year deduction; $0 carryover.
3. $1,200 current-year deduction; $6,300 carryover.
4. $7,200 current-year deduction; $300 carryover.

Answer 32

$7,200 current-year deduction; $300 carryover.

The current-year deduction is limited to 10% of the charitable contribution limit modified taxable income

Question 33

Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true?

1. Corporations may not carry over or carry back excess charitable contributions.
2. Corporations can carry excess charitable contributions over to a future year or back to a prior year.
3. Corporations can carry excess charitable contributions over to a future year but not back to a prior year.
4. Corporations can carry excess charitable contributions back to a prior year but not over to a future year.

Answer 33

Corporations can carry excess charitable contributions over to a future year but not back to a prior year.
Corporations may carry excess charitable contributions over for up to five years but they may not carry them back.

Question 34

Which of the following statements regarding the dividends and/or the dividends received deduction (DRD) is true?

1. Dividends are taxed at preferential rates for corporations as well as for individuals.
2. The DRD can increase the net operating loss of a corporation.
3. Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation’s ownership in the distributing corporation’s stock.
4. The DRD allows corporations to deduct the amount of dividends that they distribute.

Answer 34

The DRD can increase the net operating loss of a corporation.

Question 35

Jazz Corporation owns 50% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.’s taxable income before the dividend was $100,000. What is the amount of Jazz’s dividends received deduction on the dividend it received from Williams Corp.?

1. $0
2. $5,000
3. $6,500
4. $10,000

Answer 35

$6,500
Because Jazz owns more than 20% and less than 80% of the Williams stock, it is entitled to a 65% dividends received deduction ($10,000 × 65%).

Question 36

Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.’s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz’s dividends received deduction on the dividend it received from Williams Corp.?

1. $0
2. $4,000
3. $5,000
4. $6,500

Answer 36

$4,000
Because Jazz owns less than 20% of the Williams stock, the DRD percentage is 50%. Further, $4,000 (50% × $8,000 taxable income before the DRD) is less than the full DRD of $5,000 and the full DRD does not create a net operating loss ($8,000 − $5,000 = $3,000). As a result, the DRD is limited to $4,000.

Question 36

Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.’s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz’s dividends received deduction on the dividend it received from Williams Corp.?

1. $0
2. $4,000
3. $5,000
4. $6,500

Answer 36

$4,000
Because Jazz owns less than 20% of the Williams stock, the DRD percentage is 50%. Further, $4,000 (50% × $8,000 taxable income before the DRD) is less than the full DRD of $5,000 and the full DRD does not create a net operating loss ($8,000 − $5,000 = $3,000). As a result, the DRD is limited to $4,000.