Exam 5: Corporate Operations

Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.

Over what time period do corporations amortize purchased goodwill for tax purposes?

ValuCo gives you the following information: What is its ACE adjustment for the year? Is it favorable or unfavorable?

A nonqualified stock option will create a permanent book-tax difference in a given year if it accrues during the year but is exercised in a later year. A deductible temporary difference (deferred tax asset) is created in the year the option accrues and is recorded as an expense for book purposes.

WFO Corporation has gross receipts according to the following schedule: If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method? Year 1 \ 2 million Year 2 \ 4 million Year 3 \ 6 million Year 4 \ 4.5 million Year 5 \ 5 million Year 6 \ 7 million

Which of the following is unnecessary to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity?

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.?

IndusTree Inc. received $1,800,000 from the sale of a property in 2016. The property's adjusted basis for regular tax purposes was $200,000 at the time of the sale. The property's adjusted basis for AMT purposes was $290,000. What is the amount of the AMT adjustment due to the sale of the asset? Does it increase or decrease AMTI?

In 2016, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of meals and entertainment expenditures. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the book-tax difference is temporary and what amount is permanent?

In 2016, Webtel Corporation donated $50,000 to a qualifying charity. For the year, it reported taxable income of $310,000, which included the following: the $50,000 charitable contribution (before limitation), a $100,000 dividends received deduction, and a $20,000 net operating loss carryover. What is Webtel Corp.'s charitable contribution deduction?

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

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

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).

On January 1, 2015, GrowCo issued 50,000 nonqualified stock options (NQOs) valued at $1 per option. Each option entitles the owner to purchase one share of stock for $4. These options vest (accrue) at 20 percent per year for five years beginning in 2015. By the end of 2016, 20,000 of the options had vested. At the end of 2016, these options were exercised when the stock price is $6.25. What is the total value of the book-tax difference associated with the stock options for 2016? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary? (Note that ASC 718 applies to these transactions.)

Urban Corporation receives tax-exempt income from Denver municipal bonds. All the proceeds from the bonds were used to fund public projects. In computing adjusted current earnings in its AMT computation, Urban must add back the interest income from its municipal bonds. Only tax-exempt interest from a private activity bond is an adjustment in computing adjusted current earnings in the AMT computation.

Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent. Schedule M-1 is less detailed than Schedule M-3 and does not require the taxpayer to distinguish between temporary and permanent differences.

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?

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

Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true?