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Vital Corp. is an accrual-basis, calendar-year C corporation. Its year 2 reported book income before federal income taxes was $500,000. Included in that amount were the following items:
What should be the amount of Vital's year 2 taxable income as reconciled on Vital's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
Municipal bond interest income is not taxable, and so must be deducted from book income to determine taxable income. The state tax refund, however, is treated the same for book and tax purposes. As a result, to arrive at tax income, only the bond interest must be removed: $500,000 - $7,500 = $492,500.
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Which of the following items should be included on Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return, of Form 1120, U.S. Corporation Income Tax Return, to reconcile book income to taxable income?
Life insurance expenses paid on key individuals in the corporation are not treated as expenses for tax purposes, and as a result must be included on Schedule M-1. The rest of the options are all either treated the same for book and tax purposes or are non-taxable transactions.
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Taxi Co. reported book income of $140,000. Included in that amount was $50,000 for meal expenses and $40,000 for federal income tax expense. In Taxi’s Schedule M-1 of Form 1120, which reconciles book income and taxable income, what amount should be reported as taxable income?
To calculate taxable income from book income, income tax expense must be added back before reconciling. Additionally, meal expenses are 50% deductible for tax purposes, meaning half of the expense must be removed to arrive at tax income. So, to calculate taxable income:
$140,000 + $40,000 + ($50,000 * 50%) = $205,000
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Of the following items, which should be included on Schedule M1 of form 1120 to reconcile book income to taxable income?
Of the following items, only premiums paid on key person’s life insurance policy is a difference between book and tax.
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A C Corp had a beginning credit balance in its warranty reserve account of $120,000. During the year, it accrued estimated warranty expense of $16,000. At the end of the year, the Corp’s warranty reserve had a $90,000 credit balance. What amount of warranty expense should the C Corp deduct?
Companies may only deduct the actual amount of cost incurred in meeting their warranty obligations. The actual cost incurred by the Corp in meeting its warranty obligation is calculated as $120,000 + $16,000 - $90,000 = $46,000.
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Of the following items, which would result in a permanent book to tax difference as compared to a temporary?
Muni bonds are local government bonds which are tax-deductible for federal purposes. This income will never be taxed at the federal level, thus creating a permanent difference.
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Rigg, Steele, and Urco Corps., all accrual-basis, calendar-year C corporations, have only voting common stock outstanding. Rigg owns 85 percent of Steele and 40 percent of Urco. Steele owns 50 percent of Urco. Which group of corporations qualifies as an affiliated group and may join in the filing of a consolidated federal income tax return?
For tax purposes, entities may file as a consolidated group if the parent company owns at least 80% of all entities in the group. Here, Rigg owns 85% of Steele which qualifies for consolidation. Rigg owns 40% of Urco directly, and another 50% indirectly through Steele, which means Urco also qualifies for consolidation.
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Sunshine Corp., a wholly owned subsidiary of Pierpoint Corp., purchased land from Pierpoint for its fair market value of $10,000 on January 1 of the previous tax year. Pierpoint's adjusted basis of the land on the date of sale was $8,000. During the current tax year, Sunshine sold the land for $9,000 to an unrelated taxpayer. What gain or loss will be reported on a consolidated tax return filed by Sunshine and Pierpoint for the current tax year?
Related party transfers of property are disregarded for tax purposes, and as a result the basis of the parent company is retained by the subsidiary. Only when the property leaves the consolidated group is a gain or loss recognized, again from the parent’s (original owner’s) basis. Since the parent’s basis is $8,000, when the subsidiary sells the property for $9,000, a $1,000 gain is recognized.
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Which of the following statements regarding the election to file a consolidated tax return is correct?
One feature of consolidated tax returns is that intercompany gains and losses are deferred for tax purposes. All parties must agree to the initial filing as a group, but the election is binding until the group is disbanded (e.g., the parent sells its stake in the subsidiary). The group as a whole is responsible for the tax liability, and no rules about NOL application within the group exist.
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Of the following, which groups may elect to file a consolidated corporate return?
An affiliated group of corporations may file a consolidated return. Not all corporations have the privilege of filing a consolidated return.
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In a consolidated income tax return of a corp and its wholly owned subsidiary, what percent of cash dividends paid by the sub to the parent is tax free?
The DRD is increased to 100% of qualifying dividends received from a consolidated affiliated group of a common parent who owns at least 80% of the includible corporations if elected.
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Under consolidation rules between a corporation and a 100% owned subsidiary, the Dividends Received Deduction percentage would be:
When a company is wholly owned, the distribution of dividends from one to another can be viewed as a cash transfer among the same entity, thus eliminating the tax.
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With regard to unrelated business income of an exempt organization, which one of the following statements is correct?
Unrelated business income (UBI) is tax exempt up to $1,000 (only UBI in excess of $1,000 is taxed). Any activity that would create UBI that results in a loss may be carried over like the NOL of any other organization. UBI does not have a specific limit above which tax exempt status is lost. Additionally, UBI relates to an ongoing business enterprise, and does not apply to one-time or intermittent activity.
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The private foundation status of an exempt organization will terminate if it:
Termination of tax-exempt status for a private foundation may occur voluntarily or involuntarily. Involuntary termination occurs when a foundation becomes a public charity; an organization cannot be both. Involuntary termination may also occur if the IRS makes a determination to terminate tax exempt status of an organization due to repeated or willful violations of private foundation provisions.
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Which of the following activities regularly conducted by a tax-exempt organization will result in unrelated business income?
I. Selling articles made by disabled persons as part of their rehabilitation, when the organization is involved exclusively in their rehabilitation.
II. Operating a grocery store almost fully staffed by emotionally disabled persons as part of a therapeutic program.
Unrelated business income (UBI) is an unrelated business that meets three criteria: 1) it is a trade or business; 2) it regularly carried on; and 3) is not substantially related to furthering the tax-exempt purpose of the organization. In both of the options given, the information indicates that these activities relate to a tax-exempt organization’s purpose (rehabilitation of disabled persons or therapy for emotionally disabled persons).
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Of the following types of business, which may not qualify for a 501c3 exemption from federal income taxes?
Partnerships are not included in the tax exempt section of IRC Section 501c3 which provides for corporations, funds, and foundations to be organizations eligible for exemption from federal income taxes.
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ABC Trust is an exempt organization that operates under a corporate charter granted by the state in which its principal office is located. ABC’s tax on unrelated business taxable income is:
ABC’s tax on unrelated business taxable income is computed at corporate income tax rates. Unless the organization is taxable as a trust, its UBTI is subject to regular corporate taxes.
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Which of the following is the correct designation for an exempt organization?
Under US Federal regulations, tax-exempt organizations are qualified under 501(c)(3).
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ABC Trust is an exempt organization that operates under a corporate charter granted by the state in which its principal office is located. ABC’s tax on unrelated business taxable income is:
ABC’s tax on unrelated business taxable income is computed at corporate income tax rates. Unless the organization is taxable as a trust, its UBTI is subject to regular corporate taxes.
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Which of the following is the correct designation for an exempt organization?
Under US Federal regulations, tax-exempt organizations are qualified under 501(c)(3).
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