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Exam 5: Corporate Operations

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Question 1

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The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero. A dividends received deduction is limited to 70% or 80% of taxable income unless it creates or increases a net operating loss deduction, in which case the full amount is allowed.

A) True
B) False

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False

Question 2

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

A) Temporary book-tax differences will reverse in future years whereas permanent differences will not.
B) Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C) Both A and B are reasons for why a corporation might distinguish between temporary and permanent differences.
D) Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.

E) B) and D)
F) A) and B)

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Question 3

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Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs) that were granted when ASC 718 applies?

In 2016, 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%. 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 2016 (see corporate tax schedule)?

In the current year, FurnitureKing Corporation recognized $32,000 of income from an installment sale it made in a previous tax year. If installment sales are the only difference between ACE and alternative minimum taxable income (before the ACE adjustment) , what is the amount and nature of the ACE adjustment for the current tax year?

A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.

What is the unextended due date of the tax return of a calendar-year corporation for 2016?

TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Inc. is the beneficiary. What is the nature of the book-tax difference created by this expense?

In 2013, Smith Traders Inc. reported taxable income of $100,000. In 2014, it reported taxable income of $15,000. In 2015, it reported taxable income of $95,000. In 2016, Smith Traders experienced a net operating loss of $25,000. What amount of refund can Smith Traders receive if it does not elect to forgo the carryback (see the corporate income tax schedule)?

Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 applies?

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?

VitalJuice Corporation reports the following schedule of prior year taxes it owed: What is VitalJuice's tax liability for Year 4?

In contrast to an individual, a corporation may deduct the entire amount of a net capital loss. A corporate capital loss can only be deducted against capital gains.

Corporations may carry net operating loss sustained in 2015 back two years and forward 20 years.

Assume a corporation is not required to pay AMT in the current year but will pay AMT next year. Also assume the corporation's regular marginal tax rate is 35%. Which tax planning strategy would minimize its after-tax cost of a charitable contribution it is considering paying to a qualified charity?

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2016. GenerUs made payment to FoodBank on February 2, 2017. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2016 tax return.

A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.

Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2016 with an estimated value of $5.50 per option. The options vest (accrue) at 25 percent per year for four years (beginning in 2016). Each option allows the holder to purchase one share of stock at $8. On January 1, 2017, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2017 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

Corporations are allowed to deduct at least some AMT exemption regardless of profitability. The AMT exemption is phased-out completely for corporations with AMTI of at least $310,000.