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Exam 5: Corporate Operations

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Question 51

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Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

A) True
B) False

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Question 52

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In 2019, LuxAir Inc. (LA) has book income of $160,000. Included in this figure is income generated from ownership in Jet Repair Corporation (JRC), of which LA owns 30 percent. JRC has $270,000 in earnings for the year and pays $32,000 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD) are its only book-tax differences, what is LA's tax liability for 2019?

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$18,942, c...

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Question 53

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Corporations calculate adjusted gross income (AGI) in the same way as individuals.

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters) . What is Omnidata's annual estimated taxable income as of the end of the third quarter?

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.

For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2018. 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?

For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.

Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2018, with an estimated value of $5.50 per option. The options vest (accrue) at 25 percent per year for four years (beginning in 2019). Each option allows the holder to purchase one share of stock at $8. On January 1, 2020, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2020 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.

In 2019, 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 business meals 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?

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?

Jazz Corporation owns 10 percent of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000) . What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?

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

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs) ?

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

For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

Which of the following is not required to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity?

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

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