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Exam 3: Corporations: Introduction and Operating Rules

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Question 21

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Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is a subtraction on Schedule M-1?

A) Book depreciation in excess of tax depreciation.
B) Excess of capital losses over capital gains.
C) Proceeds on key employee life insurance.
D) Income subject to tax but not recorded on the books.
E) None of these.

F) C) and D)
G) B) and E)

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Question 22

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In the current year, Tern, Inc., a calendar year C corporation, has $9 million of adjusted taxable income, $300,000 of business interest income, zero floor plan financing interest, and $3.2 million of business interest expense. Tern has average gross receipts for the prior three-year period of $45 million. Which of the following statements is correct about the treatment of Tern's business interest expense?

A) Current year deduction of $3.2 million.
B) Current year deduction of $2,790,000, carryforward of $410,000.
C) Current year deduction of $2,790,000, carryback of $410,000.
D) Current year deduction of $3 million, carryforward of $200,000.
E) Current year deduction of $3 million, carryback of $200,000.

F) C) and D)
G) C) and E)

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Question 23

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Saleh, an accountant, is the sole shareholder of Turquoise Corporation, a C corporation. Turquoise is a personal service corporation with a fiscal year ending September 30 pursuant to a § 444 election) . The corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2019. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2019, if the corporation is to continue to use its fiscal year without negative tax effects?

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

Canary Corporation, which sustained a $5,000 net short-term capital loss during the year, will enter $5,000 as an addition on Schedule M-1 of Form 1120.

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?

In general, all corporations that maintain inventory for sale to customers are required to use the accrual method of accounting for all income and expense items.

Azure Corporation, a C corporation, had a long-term capital gain of $50,000 in the current year. The maximum amount of tax applicable to the capital gain is $7,500 $50,000 × 15%).

Rodney, the sole shareholder of Orange Corporation, an accrual method, calendar year corporation, loaned the corporation a substantial amount of money on January 1, 2019. Orange Corporation accrued $45,000 of interest expense on the loan on December 31, 2019. Orange pays the interest to Rodney, a cash basis taxpayer, on January 1, 2020. Based on these facts:

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting five years ago for $10,000. Oriole's charitable contribution deduction is $30,000 ignoring the taxable income limitation).

Canary Corporation, an accrual method C corporation, uses the calendar year for tax purposes. Leticia, a cash method taxpayer, is both a shareholder of Canary and the corporation's CFO. On December 31, 2019, Canary has accrued a $75,000 bonus to Leticia. Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations. a. Leticia owns 35% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 4, 2020. b. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on May 6, 2020. c. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on April 7, 2020.

A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000.

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

A corporation must file a Federal income tax return even if it has no taxable income for the year.

Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation's taxable income is $140,000.

How is the limitation on the deduction of business interest computed? Does it apply to all taxpayers? What happens to any business interest deduction disallowed by the limitation?

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

During the current year, Skylark Company a calendar year entity) had operating income of $420,000 and operating expenses of $250,000. In addition, Skylark had a long-term capital loss of $20,000, and a charitable contribution of $5,000. How does Toby, the sole owner of Skylark Company, report this information on his individual income tax return under following assumptions? a. $170,000 operating profit, $20,000 long-term capital loss, and $5,000 charitable contribution on his individual return Form 1040). The LTCL will be subject to the capital loss limitations applicable to individual taxpayers. Toby would report any a. Skylark is an LLC, and Toby does not withdraw any funds from the company during the year. b. Skylark is an S corporation, and Toby does not withdraw any funds from the company during the year. c. Skylark is a regular C) corporation, and Toby does not withdraw any funds from the company during the year.

A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.