Exam 5: Corporate Operations

A corporation may carry a net capital loss back two years and forward 20 years. A corporation carries a net capital loss back 3 years and forward 5 years.

iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense?

Corporations calculate adjusted gross income (AGI) in the same way as individuals. Corporations do not calculate AGI.

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

Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2016. Chicken also reports financial accounting earnings of $20,000 for that year. Assume that Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

Calendar-year corporations that request an extension for filing their 2016 tax returns will have a tax return due date of September 15. Fiscal year corporations other than those with a June 30 year-end can extend their tax returns to October 15 beginning in 2016.

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

Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year. Large corporations can use the prior year liability to determine the first quarter estimated tax payment only.

Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence. A corporation may not use the cash method of accounting in the second year if it reported more than $5 million in gross receipts in the first year.

Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability). Schedule M-1 reconciles net income or loss with taxable income before NOL carryovers and special deductions (line 28 of Form 1120).

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2016. It also expensed $12,000 of radio station filing fines paid to the FCC the same year. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?

Net operating losses generally create permanent book-tax differences. NOLs are treated as deductible temporary differences.

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

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. The percentages are 70%, 80%, and 100%, depending on the stock ownership level.

In 2016, Datasoft Inc. received $350,000 in dividends from CSLabs Inc. Datasoft's taxable income before the dividends received deduction and $20,000 charitable contribution deduction is $300,000. What is Datasoft's DRD assuming it owns 15% of the CSLabs Inc. stock?

In January 2016, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2016, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2016, what is the nature of the book-tax difference due to the options exercised?

Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $5,000 in cash. Second, it could give stock it initially purchased two years ago for $4,000 but is now worth $6,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes?

In 2016, Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book-tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book-tax difference is permanent and what amount is temporary?

Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations?