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Exam 17: Corporations: Introduction and Operating Rules

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Question 21

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For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

A) True
B) False

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Question 22

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The accumulated earnings and personal holding company taxes are designed to prevent the accumulation of earnings within a corporation.

A) True
B) False

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Question 23

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In working with Schedule M-2 (analysis of unappropriated retained earnings per books) of Form 1120, which of the following is an addition to beginning retained earnings?

Briefly describe the accounting methods available for adoption by a C corporation.

Which of the following items represents a temporary book-tax difference?

Warbler Corporation, an accrual method regular corporation, was formed and began operations on March 1, 2019. The following expenses were incurred during its first year of operations (March 1 - December 31, 2019): $\begin{array}{lr}\text { Expenses of temporary directors and organizational meetings } & \$ 25,000 \\\text { Incorporation fee paid to state } & 2,000 \\\text { Expenses incurred in printing and selling stock certificates } & 10,000 \\\text { Accounting services incident to organization } & 12,000\end{array}$ a. Assuming a valid election under § 248 to amortize organizational expenditures, what is the amount of Warbler's deduction for 2019? expenditures? b. Same as a., except that Warbler also incurred in 2019 legal fees of $15,000 for the drafting of the corporate charter and bylaws. What is the amount of Warbler's 2019 deduction for organizational

Robin Corporation, a calendar year C corporation, had taxable income of $700,000, $1.2 million, and $1 million for 2017, 2018, and 2019, respectively. Robin has taxable income of $1.8 million for 2019. The minimum 2020 estimated tax installment payments for Robin are:

Clipp, Inc., earns book net income before tax of $600,000. Clipp puts into service a depreciable asset this year, and its first-year tax depreciation exceeds book depreciation by $120,000. Clipp has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21%, what is Clipp's deferred income tax liability reported on its GAAP financial statements?

Woodchuck, Inc., a closely held personal service corporation, has $115,000 of net active income, $40,000 of portfolio income, and $135,000 of passive activity loss. What is Woodchuck's taxable income for the current year?

As a general rule, C corporations must use the cash method of accounting. However, under several exceptions to this rule (e.g., average annual gross receipts of $25 million or less for the most recent 3-year period), a C corporation can use the accrual method.

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

South, Inc., earns book net income before tax of $400,000 in year 1. It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $10,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21%, what is South's total provision for income tax expense reported on its GAAP financial statements for year 2?

South, Inc., earns book net income before tax of $400,000 in year 1. It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $10,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21% in both years, what is South's balance in its deferred tax liability account at the end of year 2?

Sunset Corporation (a C corporation) had operating income of $200,000 and operating expenses of $175,000. In addition, Sunset had a $30,000 long-term capital gain, a $52,000 short-term capital loss, and $5,000 tax-exempt interest income. What is Sunset Corporation's taxable income for the year?

Peach Corporation had $210,000 of net active income, $45,000 of portfolio income, and a $230,000 passive loss during the current year. If Peach is a closely held C corporation that is not a PSC, it can deduct $210,000 of the passive loss in the year.

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. It's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2019. The following expenses were incurred during the first tax year (April 1 through December 31, 2019) of operations. $\begin{array}{lr}\text { Expenses of temporary directors and of organizational meetings }&\$27,000\\\text { Fee paid to the state of incorporation } & 1,000 \\\text { Accounting services incident to organization } & 15,500 \\\text { Legal services for drafting the corporate charter and bylaws } & 9,500 \\\text { Expenses incident to the printing and sale of stock certificates } & 6,000\end{array}$ Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2019?

Purple, Inc., a domestic corporation, owns 100% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 40% of Green, a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities' net income is included in Purple's GAAP income statement for current- year financial reporting purposes?

A corporate net operating loss arising in 2019 for a calendar year C corporation can be carried back 2 years and forward 20 years to offset taxable income for those years.

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.