- Description
ACC 455 Practice: Week 3 Knowledge Check
Complete the Week 3 Knowledge Check in McGraw-Hill Connect.
What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property nonliquidating distribution to a shareholder?
rev: 09_18_2018_QC_CS-138794
Multiple Choice
Recognizes either gain or loss.
Does not recognize gain or loss.
Recognizes gain but not loss.
Recognizes loss only.
If individual taxpayers are the shareholders of PST Corporation and PST corporation is a shareholder of MNO Corporation, how many levels of tax is MNO’s pre-tax income potentially exposed to?
Multiple Choice
No taxation.
Single taxation.
Double taxation.
Triple taxation.
Which tax classifications can potentially apply to LLCs?
Multiple Choice
Partnership.
Partnership and sole proprietorship.
S corporation.
C corporation.
All of the choices are correct.
Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an S corporation, which type of investor group could Robert obtain capital from?
Multiple Choice
30 different partnerships.
10 different C corporations.
90 nonresident individuals.
120 unrelated resident individuals.
None of the choices are correct.
Which of the following entity characteristics are generally key drivers for small business owners in deciding which entity to choose?
Multiple Choice
Rate at which income from entity will be taxed.
Required accounting period.
Liability protection.
Rate at which income from entity will be taxed and required accounting period.
Rate at which income from entity will be taxed and liability protection.
For which type of entity does the entity not pay compensation to an owner who is working for the entity?
Multiple Choice
S corporation.
C corporation.
Entity taxed as a partnership.
None of the choices are correct.
Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would not allow you to offset the entity losses against your income from other sources?
Multiple Choice
C corporation.
LLC.
General partnership.
S corporation.
The excess loss limitations apply to owners of all of the following entities except which of the following?
Multiple Choice
C corporations.
S corporations.
Entities taxed as partnerships.
Single member LLCs (owned by an individual taxpayer).
Jorge is a 100 percent owner of JJ LLC (taxed as an S Corporation). He works full-time for JJ and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge’s tax treatment of business income allocated to him from JJ?
Multiple Choice
Business income allocations are subject to self-employment tax.
Business income allocations are not subject to the net investment income tax.
Business income allocations are subject to the additional Medicare tax.
Business income allocations are taxed at a maximum 23.8 percent tax rate.
Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity’s liabilities?
Multiple Choice
LLC – LLC members.
Corporation – Corporation.
General Partnership – Partnership.
Limited Partnership – General partner.
Corporation – Corporation and Limited Partnership – General partner.
On which tax form does a single member LLC with one individual owner report its income and losses?
Multiple Choice
Form 1120.
Form 1120S.
Form 1065.
Form 1040, Schedule C.
From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?
Multiple Choice
Partnership.
S corporation.
C corporation.
S corporation and C corporation.
Which of the following statements is true for a C corporation incurring a net operating loss (NOL) for a tax year that begins in 2018?
Multiple Choice
It may carry the NOL back two years and forward 20 years.
It may not carry the NOL back to prior years but it may carry it forward 20 years.
It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.
It may carry the loss back two years and carry the loss forward indefinitely.
None of the choices are correct.
If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?
Multiple Choice
Liability protection.
Legal flexibility in defining rights and responsibilities of owners.
Facilitates initial public offerings.
Minimal time and cost to organize.
On which tax form do LLCs with more than one owner generally report their income and losses?
Multiple Choice
Form 1120.
Form 1120S.
Form 1065.
Form 1040, Schedule C.
What kind of deduction is the deduction for qualified business income?
Multiple Choice
A for AGI deduction.
A from AGI deduction that is not an itemized deduction.
A from AGI deduction that is an itemized deduction.
None of the choices are correct.
Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an S corporation, how much income will be allocated to Roberto?
Multiple Choice
$31,250
$62,500
$75,000
$125,000
Which legal entity is generally best suited for going public?
Multiple Choice
Corporation.
LLC.
Limited Liability Partnership.
General Partnership.
All of these entities are equally suited for going public.
Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year ending in 2017?
Multiple Choice
If it carries back the NOL and/or carries it forward, it may offset up to 80% of the taxable income (before the NOL deduction) in those years.
It may carry the NOL forward for up to 20 years and offset up to 100% of the taxable income (before the NOL deduction) in those years.
It may carry the NOL back two years and offset up to 100% of the taxable income (before the NOL deduction) in those years.
None of these (selecting this option means you believe all of these responses are true).
Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?
Multiple Choice
Both the self-employment tax and the additional Medicare tax are deductible for AGI in full.
Half of the self-employment tax and all of the additional Medicare tax are deductible for AGI.
Half of the self-employment tax and none of the additional Medicare tax are deductible for AGI.
None of the self-employment tax and none of the additional Medicare tax are deductible for AGI.
Owners of which of the following entity types could potentially increase their after-tax cash flow from the entity by reducing the compensation they receive in order to increase the amount of business income that flows-through to them from the entity?
Multiple Choice
Sole-proprietorship.
Entity taxed as a partnership.
S corporation.
“Entity taxed as a partnership” and “S corporation”.
On which form is income from a single member LLC with one corporate (C corporation) owner reported?
Multiple Choice
Form 1120 used by C corporations to report their income.
Form 1120S used by S corporations to report their income.
Form 1065 used by partnerships to report their income.
Form 1040, Schedule C used by sole proprietorships to report their income.
None of the choices are correct.
What document must LLCs file with the state to organize their business?
Multiple Choice
Articles of incorporation.
Certificate of LLC.
Articles of organization.
Partnership agreement.
None of the choices are correct. LLCs do not have to file with the state to organize their business.
When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?
Multiple Choice
FICA tax only.
Self-employment tax only.
FICA and self-employment tax.
Regular income tax.
None of the choices are correct.
Jorge is a 60 percent owner of JJ LLC (taxed as a partnership). He is a passive investor in JJ (he doesn’t perform any work for JJ) and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge’s tax treatment of business income allocated to him from JJ?
Multiple Choice
Business income allocations are not subject to self-employment tax.
Business income allocations are not subject to the net investment income tax.
Business income allocations are subject to the additional Medicare tax.
Business income allocations are taxed at a maximum 23.8 percent tax rate.
Which of the following statements regarding capital gains and losses is false?
Multiple Choice
In terms of tax treatment, corporations generally prefer capital gains to ordinary income.
Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.
C corporations can carry back net capital losses three years and they can carry them forward for five years.
Corporations must apply capital loss carrybacks and carryovers in a particular order.
If a corporation’s cash charitable contributions exceed the charitable contribution deduction limit, what kind of book-tax difference is created?
Multiple Choice
Permanent; favorable.
Permanent; unfavorable.
Temporary; favorable.
Temporary; unfavorable.
Corporation A receives a dividend from Corporation B. Corporation A includes the dividend in its gross income for tax and financial accounting purposes (no book-tax difference). If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own?
Multiple Choice
A owns less than 20 percent of the stock of B.
A owns at least 20 but not more than 50 percent of the stock of B.
A owns more than 50 percent of the stock of B.
Cannot be determined.
In January 2018, Khors Company issued 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 2018, the company experienced 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 2018, what is the nature of the book-tax difference due to the options exercised?
Multiple Choice
Favorable and temporary.
Favorable and permanent.
Unfavorable and temporary.
Unfavorable and permanent.
Not enough information to determine.
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?
Multiple Choice
$6,000 current-year deduction; $1,500 carryover.
$7,500 current-year deduction; $0 carryover.
$1,200 current-year deduction; $6,300 carryover.
$7,200 current-year deduction; $300 carryover.
For Corporation P to file a consolidated tax return with Corporation S, P must own what percentage of P’s voting stock?
Multiple Choice
100%.
80%.
More than 50%.
50% or more.
Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years—half in 2018 (the year of issue) and half in 2019. One thousand options are exercised in 2019 with a bargain element on each option of $6. What is the 2019 book-tax difference associated with the stock options?
Multiple Choice
$14,000 unfavorable.
$6,000 favorable.
$24,000 unfavorable.
$24,000 favorable.
None of the choices are correct.
Which of the following is deductible in calculating the charitable contribution limit modified taxable income?
Multiple Choice
Net capital loss carrybacks.
Dividends received deduction.
NOL carryovers.
Charitable contributions.
Which of the following statements is false regarding corporate estimated tax payments?
Multiple Choice
The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation’s tax year.
Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000 (including the alternative minimum tax).
Even though a corporation extends its tax return, it still must pay its tax liability for the year by three and one-half months after year-end.
Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.
Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?
Multiple Choice
In general, smaller corporations are required to complete Schedule M-1 while larger corporations are required to complete Schedule M-3.
Schedule M-3 lists more book-tax differences than Schedule M-1.
Both Schedules M-1 and M-3 reconcile to a corporation’s bottom line taxable income.
Schedule M-1 does not distinguish between temporary and permanent book-tax differences whereas Schedule M-3 does.
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?
Multiple Choice
Permanent; favorable.
Permanent; unfavorable.
Temporary; favorable.
Temporary; unfavorable.
XPO Corporation has a minimum tax credit of $50,000 from 2017. XPO’s tax liability before any MTC carryover is $30,000. What is XPO’s minimum tax credit carryover to 2019, if any?
Multiple Choice
$50,000.
$20,000.
$10,000.
$0.
Tatoo Inc. reported a net capital loss of $13,000 in 2018. The company had a net capital gain of $4,300 in 2016 and $3,000 in 2015. In 2017, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo’s capital loss carryover remaining after it applies the carryback?
Multiple Choice
$4,700.
$5,700.
$8,700.
$13,000.
Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.’s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz’s dividends received deduction on the dividend it received from Williams Corp.?
Multiple Choice
$0.
$4,000.
$5,000.
$6,500.
None of the choices is correct.
Which of the following statements regarding charitable contributions is false?
Multiple Choice
Only contributions made to qualified charitable organizations are deductible.
Charitable contribution deductions are subject to a limitation based on the corporation’s taxable income (before certain deductions).
Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.
The amount deductible for non-cash contributions is always the adjusted basis of the property donated.
Which of the following does NOT create a permanent book-tax difference?
Multiple Choice
Organizational and start-up expenses.
Key employee death benefit income.
Fines and penalties expenses.
Municipal bond interest income.
Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)?
Multiple Choice
Financial—no expense; tax—no deduction.
Financial—no expense; tax—deduct bargain element at exercise.
Financial—expense value over vesting period; tax—no deduction.
Financial—expense value over vesting period; tax—deduct bargain element at exercise.
Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true?
Multiple Choice
Corporations may not carry over or carry back excess charitable contributions.
Corporations can carry excess charitable contributions over to a future year or back to a prior year.
Corporations can carry excess charitable contributions over to a future year but not back to a prior year.
Corporations can carry excess charitable contributions back to a prior year but not over to a future year.
Which of the following statements regarding nonqualified stock options (NQOs) is false?
Multiple Choice
Book-tax differences associated with NQOs may be either permanent or temporary.
If the value of the options that accrue is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable.
No expense recognition is required for NQOs for financial accounting purposes.
All stock option-related book-tax differences are temporary.
Which of the following statements regarding incentive stock options (ISOs) is false?
Multiple Choice
ISO-related compensation expense create permanent book-tax differences.
Book-tax differences related to ISO-related compensation expense is always unfavorable.
The ISO-related compensation expense is recorded for book purposes as the ISO vests.
Book-tax differences associated with ISO-related compensation expenses can be either permanent or temporary.
Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?
Multiple Choice
$11,000 unfavorable.
$11,000 favorable.
$16,000 unfavorable.
$16,000 favorable.
Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume 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)?
Multiple Choice
$2,000 unfavorable.
$2,000 favorable.
$10,000 unfavorable.
$10,000 favorable.
None of the choices are correct.
Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B’s earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B’s stock does A own?
Multiple Choice
A owns less than 20 percent of the stock of B.
A owns at least 20 but not more than 50 percent of the stock of B.
A owns more than 50 percent of the stock of B.
Cannot be determined.
Which of the following statements is false regarding consolidated tax returns?
Multiple Choice
An affiliated group can file a consolidated tax return only if it elects to do so.
To file a consolidated tax return, one corporation must own at least 50% of the stock of another corporation.
For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member.
For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.
Over what time period do corporations amortize purchased goodwill for tax purposes?
Multiple Choice
180 months.
150 months.
60 months.
None of the choices are correct.