Corporate Income, Losses, and Deductions Questions PDF

**EA2 Study Unit 14.1-14.6 Corporate Income, Losses, and Deductions -- Questions** 63)During the current year, Chris Corporation, a domestic corporation, had the following income, expenses, and deductions: Gross receipts \$125,000 Net capital gains 10,000 Expenses, not including cash contributio...

**EA2 Study Unit 14.1-14.6 Corporate Income, Losses, and Deductions -- Questions** 63)During the current year, Chris Corporation, a domestic corporation, had the following income, expenses, and deductions: Gross receipts \$125,000 Net capital gains 10,000 Expenses, not including cash contributions 75,000 Contributions to qualified charities 20,000 Net operating loss carryover from last year 20,000 What is the amount of Chris Corporation's allowable charitable contribution deduction for the current tax year? A.\$5,000 B.\$20,000 C.\$6,000 Answer (C) is incorrect.\ *The NOL was not used when computing taxable income.* **D.\$4,000** **Answer (D) is correct.\ Section 170(b)(2) limits a corporation's charitable contributions deduction to 10% of its taxable income excluding the dividends-received deduction, capital loss carrybacks, and the charitable contribution itself. Therefore, Chris Corporation is permitted a charitable contributions deduction of up to \$4,000. The threshold is computed below:** **Gross receipts \$125,000** **Net capital gains 10,000** **Total income \$135,000** **Less: Expenses (75,000)** **Less: NOL carryover (20,000) -** *but not carryback* **Taxable income \$  40,000  Limit ×    10%  = Charitable contributions deduction \$  4,000** === ****Study Unit 14: Corporate Income, Losses, and Deductions \| Subunit 5: Net Operating Loss (NOL) and Capital Losses**** 10)In the current year, Little Company sold land, which had been held strictly for investment purposes, for \$70,000. The original cost of the land when purchased 2 years ago was \$80,000. During the year, Little also had a capital gain of \$6,000 and received dividends from investments of \$3,000. The amount of the loss that is deductible by Little in the current year from the sale of the land is A.\$9,000 B.\$3,000 C.\$0 Answer (C) is incorrect.\ Capital losses are deductible to the extent of capital gains. **D.\$6,000** **Answer (D) is correct.\ Section 1211 provides that a corporation may deduct capital losses only to the extent of capital gains (without regard to whether they are short- or long-term). Therefore, Little can deduct only \$6,000 of its net long-term capital loss in the current year. The remaining \$4,000 long-term capital loss will be carried back 3 years or carried forward up to 5 years.** === ****Study Unit 14: Corporate Income, Losses, and Deductions \| Subunit 6: Related Party Transactions**** 76)Mitchell sold his Saratoga Bombers Corporation stock to his brother Sheldon for \$7,000. Mitchell's cost basis in the stock was \$10,000. Sheldon later sold this stock to Morey, an unrelated party, for \$10,500. What is Sheldon's recognized gain? A.\$2,100 B.\$3,500 Answer (B) is incorrect.\ *The realized gain is \$3,500.* C.\$3,000 **D.\$500** **Answer (D) is correct.\ Under Sec. 267, losses are not allowed on sales or exchanges of property between related parties. Brothers are related parties. Mitchell realized a \$3,000 (\$10,000 -- \$7,000) loss on the sale but may not deduct it. On the subsequent sale, Sheldon realized a \$3,500 gain (\$10,500 sales price -- \$7,000 basis). However, he does not have to recognize a gain on the \$3,000 because the Sec. 267(d) disallowed loss is used to offset the subsequent gain on the sale of the property. Thus, the recognized gain is \$500 (\$10,500 sales price -- \$10,000 brother's basis).** **===** 3)On January 2, Year 1, Tek Corp., an accrual-basis, calendar-year C corporation, purchased all the assets of a sole proprietorship, including \$60,000 in goodwill. Tek's reported book income before federal income taxes was \$400,000. A \$1,500 deduction for annual amortization of goodwill was taken based on a 40-year amortization period. What should be the amount of Tek's taxable income, as reconciled on Tek's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return? A.\$389,500 B.\$400,000 **C.\$397,500** **Answer (C) is correct.\ Schedule M-1 reconciles income or loss per books with income or loss per return. Intangible assets, such as acquired goodwill, are amortized for tax purposes over a 15-year period. Therefore, the deduction for tax purposes would be \$4,000 (\$60,000 ÷ 15), resulting in a \$2,500 (\$4,000 -- \$1,500) Schedule M-1 adjustment. Taxable income is \$397,500 (\$400,000 book income less \$2,500).** D.\$401,500 Answer (D) is incorrect.\ The adjustment is subtracted from net income (tax deduction \> book). === 4)During the current year, ABC Corporation had the following income and expenses: Gross receipts \$233,600 Salaries 175,000 Contributions to qualified charitable organizations 20,000 Capital gains 3,000 Capital loss carryback 3,000 Depreciation expense 14,000 Dividend income 30,000 Dividends-received deduction 15,000 What is ABC's charitable contribution deduction for the year? A.\$3,960 B.\$5,960 C.\$20,000 **D.\$7,760** **Answer (D) is correct.\ Under Sec. 170, charitable contributions made to qualified organizations and paid within the taxable year may be deducted from taxable income. A corporation's charitable deduction is limited to 10% of taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. ABC's charitable contribution deduction for the year is \$7,760 as computed below.** **Gross receipts \$233,600** **Capital gains 3,000** **Dividend income 30,000** **Less: Salaries (175,000)** **Less: Depreciation expense (14,000)** **Taxable income before special deductions \$  77,600** **Times: Limit percentage ×     10%\ Charitable contribution deduction \$  7,760** === 5)Alpha is a U.S. corporation that owns 21% of the stock of Omega, a foreign corporation that is not a foreign personal holding company. **Forty percent of Omega's post-1986 undistributed income is from effectively connected business sources** in the U.S. Alpha's dividend from Omega is \$20,000 in the current year. Alpha has no debt related to its stock holdings. ****What is Alpha's dividends-received deduction?**** A.\$13,000 Answer (A) is incorrect.\ The deduction is limited to the amount attributable to U.S. operations. **B.\$5,200** **Answer (B) is correct.\ A portion of dividends from a foreign corporation 10% or more of which is owned by a U.S. corporation qualifies for the dividends-received deduction. The portion of the dividends that qualifies is the U.S.-source portion of the dividends \[Sec. 245(a)\]. The U.S.-source portion is the portion of undistributed earnings earned after 1986 attributable to income effectively connected with the conduct of a business in the U.S. and subject to U.S. tax. The dividends-received deduction is 65% for dividends received from corporations in which the recipient owns 20% or more of the stock. Therefore, Alpha's dividends-received deduction is \$5,200 (\$20,000 dividend × 65% × 40% effectively connected income). -** ****how do we know that 40% is effectively connected income? - see above**** C.\$0 D.\$4,200 === 14)With regard to the treatment of capital losses by a corporation other than an S corporation, ****which of the following statements is false?**** A.If a corporation has a net capital loss, it cannot deduct the loss in the current year. B.When a corporation carries a long-term net capital loss to another year, it is treated as a short-term loss. **C.When figuring a current-year net capital loss, you must include any capital loss carried from another year.** **Answer (C) is correct.\ A corporation's capital losses are deductible only to the extent of capital gains, whether they are short- or long-term. A net capital loss is not deductible against ordinary income in the tax year incurred. It cannot produce or increase an NOL. Net capital loss (NCL) = CLs (ST + LT) -- CG (ST + LT). When figuring a current-year net capital loss, capital losses carried from other years are not included.** D.A corporation may not carry a capital loss from, or to, a year during which it is an S corporation. Answer (D) is incorrect.\ A capital loss cannot be carried from, or to, any year during which the corporation was classified as an S corporation. === 19)In its first year of operations, Rowley Corporation, not a dealer in securities, realized taxable income of \$128,000 from the operation of its business. In addition to its regular business operations, it realized the following gains and losses from the sale of marketable securities: Short-term capital gain \$ 10,000 Short-term capital loss (4,000) Long-term capital gain 12,000 Long-term capital loss (32,000) What is Rowley's total taxable income? A.\$124,000 **B.\$128,000** **Answer (B) is correct.\ Section 1211 provides that a corporation may deduct capital losses only to the extent of capital gains (without regard to whether they are short- or long-term). Therefore, Rowley may deduct only \$22,000 of its capital losses since capital gains are \$22,000 (\$10,000 short-term and \$12,000 long-term). The \$14,000 balance of the capital losses may be carried forward 5 years. Rowley's total taxable income is** **Income from operations \$128,000** **Capital gains 22,000** **Capital losses (22,000)** **Taxable income \$128,000** C.\$134,000 Answer (C) is incorrect.\ Capital losses may be deducted only to the extent of its capital gains. D.\$114,000 === 24)During the current year, Dowdy, a C corporation, realized a long-term capital gain of \$8,000 from the sale of a tract of land, a short-term capital gain of \$6,000 from the sale of stock of Ornery Corporation, and a long-term capital loss of \$18,000 from the sale of U.S. government securities. What amount of the long-term capital loss may Dowdy deduct on its current year income tax return? A.\$18,000 B.\$0 C.\$8,000 Answer (C) is incorrect.\ Capital losses may be deducted to the extent of capital gains, regardless if they are short- or long-term. **D.\$14,000** **Answer (D) is correct.\ Section 1211 provides that a corporation may deduct capital losses only to the extent of capital gains (without regard to whether they are short- or long-term).** ****Therefore, Dowdy can deduct only \$14,000 of its net long-term capital loss in the current year.**** **The remaining \$4,000 long-term capital loss will be carried back 3 years or carried forward to the 5 succeeding tax years.** === 27)Which of the following **are NOT related persons** for purposes of disallowing an accrual deduction for interest payable to a cash-basis person until payment of the interest is made? A.A personal service corporation and any employee-owner, regardless of the amount of stock owned by the employee-owner. *--- related person* B.Two corporations that are members of the same controlled group. *--- related person* C.The grantor and fiduciary, and the fiduciary and beneficiary of any trust. *--- related person* Answer (C) is incorrect.\ They are all situations involving related taxpayers. **D.Any two S corporations if the same person owns 25% in value of the outstanding stock of each corporation.** **Answer (D) is correct.\ ******A related person relationship exists if the same person owns more than 50% in value of the outstanding stock of each S corporation.**** === 1)During the current year, Zack Corporation experienced a \$15,000 loss from operations. It received \$100,000 in dividends from a domestic corporation of which Zack owns 15% of total stock outstanding. Zack's taxable income before the dividends-received deduction was \$85,000. What is the amount of Zack's dividends-received deduction? A.\$50,000 Answer (A) is incorrect.\ The taxable income limitation applies. **B.\$42,500** **Answer (B) is correct.\ The dividends-received deduction for dividends received from a 15%-owned corporation cannot exceed 50% of taxable income for the year. Zack's taxable income is \$85,000 (\$100,000 dividends -- \$15,000 loss). The tentative dividends-received deduction of \$50,000 would not cause an NOL; therefore, the dividends-received deduction is limited to 50% of taxable income, or \$42,500 (\$85,000 × 50%).** C.\$100,000 D.\$65,000 === 2)Daynite Corporation, a domestic corporation, acquired a 90% interest in KDN Corporation 10 years ago for \$50,000. During the current year, the stock of KDN was declared worthless. KDN's income for all taxable years was from sources other than passive income. What are the character and the amount of the deduction Daynite should take in the current year? A.No loss is permitted. **B.Ordinary loss of \$50,000.** **Answer (B) is correct.\ Section 165(g)(1) states that, if a security becomes worthless during the taxable year, the resulting loss will be treated as a loss from the sale or exchange of the security. However, Sec. 165(g)(3) provides an exception to this rule in the case of affiliated corporations. Under this exception, if a domestic corporation owns at least 80% of the voting and nonvoting stock of a corporation that derives at least 90% of its income from sources other than passive income, the stock is not treated as a capital asset. Therefore, any loss will be treated as an ordinary loss. Daynite will claim an ordinary loss of \$50,000 on the KDN stock.** C.Long-term capital loss of \$3,000. D.Long-term capital loss of \$50,000. Answer (D) is incorrect.\ An ordinary loss results from worthlessness of stock in an affiliated corporation if not more than 10% of its income was passive. === 76)Mitchell sold his Saratoga Bombers Corporation stock to his brother Sheldon for \$7,000. Mitchell's cost basis in the stock was \$10,000. Sheldon later sold this stock to Morey, an unrelated party, for \$10,500. What is Sheldon's recognized gain? A.\$2,100 B.\$3,500 Answer (B) is incorrect.\ *The realized gain is \$3,500.* C.\$3,000 **D.\$500** **Answer (D) is correct.\ Under Sec. 267, losses are not allowed on sales or exchanges of property between related parties. Brothers are related parties. Mitchell realized a \$3,000 (\$10,000 -- \$7,000) loss on the sale but may not deduct it. On the subsequent sale, Sheldon realized a \$3,500 gain (\$10,500 sales price -- \$7,000 basis). However, he does not have to recognize a gain on the \$3,000 because the Sec. 267(d) disallowed loss is used to offset the subsequent gain on the sale of the property. Thus, the recognized gain is \$500 (\$10,500 sales price -- \$10,000 brother's basis).** === 2)Net income per books of Pat's psychology clinic was \$140,825 for the year ended September 30, Year 1. Select from the following account information those items that would be necessary to reconcile book income to the income to be reported on the return, and compute taxable income per return. Capital gains \$   3,600 Capital losses 8,200 *\* add back net capital losses* Business meals expense **(before 50% limitation) 10,850** --- ****subtract 50% when adding to Net Income per books**** Federal income tax expense 62,225 *--- add back* Tax-exempt interest income 5,000 *--- not subtracted* Net income 140,825 Cash distribution to shareholders 20,000 --- n/a A.\$202,225 Answer (A) is incorrect.\ To determine taxable income, federal income taxes, excess net losses, and excess meals are added to the net income per books, and the tax-exempt interest is subtracted from the net income per books. B.\$203,050 C.\$207,650 **D.\$208,075** **Answer (D) is correct.\ Schedule M-1 reconciles income or loss per books with income or loss per tax return.** **Net income per books \$140,825** **Add back: Federal income taxes 62,225 Excess net capital losses 4,600 Excess meals 5,425 ** **\$213,075** **Subtract:** **Tax-exempt interest (5,000)** **Taxable income \$208,075** === 3)For the current year, Roberts Corporation had a beginning balance of unappropriated retained earnings of \$100,000 and net income per books of \$125,000. During the year, it paid cash dividends of \$60,000, had a loss on sale of securities of \$3,600, and received a refund of the previous year's income taxes of \$6,000. What is its ending balance of unappropriated retained earnings for the year? **A.\$171,000** **Answer (A) is correct.\ A corporation's unappropriated retained earnings balance is computed on Schedule M-2 of Form 1120. The balance at the end of the year is the beginning balance, plus net income per books, less distributions of cash, property, or stock. Other adjustments may be made as necessary. Roberts Corporation's unappropriated retained earnings balance is** **Beginning balance \$100,000** **Add: Net income per books 125,000** **Income tax refund 6,000** **Less: Cash dividends paid (60,000)** **Unappropriated retained earnings \$171,000** ****The loss on the sale of securities is already included in the net income per books amount. Thus, no further adjustment is needed.**** B.\$225,000 C.\$167,400 Answer (C) is incorrect.\ *No adjustment is needed for the loss on the sale of securities.* D.\$219,000 === 4)Corporation T's records reflect the following information: Net income per books \$50,000 *--- added* Federal income tax 8,500 *--- not subtracted* Refund of prior year's income tax 1,000  *--- added* Contributions carryover from prior year 300 *--- not subtracted* Increase in reserve for contingencies 1,200 *--- subtracted* Unappropriated retained earnings at beginning of year 40,000 Cash dividends paid 2,000 *--- subtracted* Stock dividends paid 1,500*--- subtracted* Tax-exempt interest 3,500 *--- not subtracted* Based on this information and using generally accepted accounting principles, ****what is T's unappropriated retained earnings balance at the end of the year****? A.\$77,800 B.\$74,000 Answer (B) is incorrect.\ Taxes, excess contributions carryover, and tax-exempt interest are not subtracted. **C.\$86,300** **Answer (C) is correct.\ A corporation's unappropriated retained earnings balance is computed on Schedule M-2 of Form 1120. The balance at the end of the year is the beginning balance, plus net income per books, less distributions of cash, property, or stock. Other adjustments may be made as necessary. T's unappropriated retained earnings balance is** **Beginning balance \$40,000** **Add: Net income per books 50,000** **Income tax refund 1,000** **Less: Reserve for contingencies (1,200)** **Cash dividends paid (2,000)** **Stock dividends paid (1,500)** **Unappropriated retained earnings \$86,300** **The reserve for contingencies is subtracted because it represents an amount that is appropriated. The other items in the facts not used in the answer only represent differences between book and taxable income, which do not affect retained earnings.** D.\$85,300 === 9)Newport, Inc., a small business investment company, had the following items of income and expense for the year: Income from operations\$55,000 Dividend income from Strauss, Inc. (a domestic corporation) 15,000 Expenses of operations 20,000 What is Newport, Inc.'s dividends-received deduction? A.\$3,000 **B.\$15,000** **Answer (B) is correct.\ Under Sec. 243(a), a small business investment company operating under the Small Business Investment Act of 1958 may deduct 100% of the dividends received from a domestic taxable corporation.** C.\$12,000 D.\$10,500 === 15)Universal Corporation had the following items of income and expenses in the current year: Gross income \$1,000,000 Deductible expenses 1,200,000 Dividends received from domestic corporations (20% owned) 20,000 Universal had no debt related to its stock ownership. Universal is entitled to a dividends-received deduction in the current year of A.\$20,000 B.\$0 **C.\$13,000** **Answer (C) is correct.\ Section 243(a) allows a corporation to deduct 65% of the dividends received from domestic corporations when the taxpayer owns 20% or more of the distributing corporation. Section 246(b) limits this deduction to 65% of the corporation's taxable income computed without the dividends-received deduction and certain other deductions and losses. This limit, however, does not apply for any taxable year in which the dividends-received deduction creates or increases a net operating loss. Since Universal has a net operating loss of \$180,000 (\$1,000,000 income + \$20,000 dividends -- \$1,200,000 expenses), the 65%-of-income limitation does not apply, and the dividends-received deduction will be 65% of dividends received from domestic corporations, which is \$13,000 (\$20,000 × 65%)** D.\$10,000 Answer (D) is incorrect.\ Universal may deduct 65% of the dividends received. === 16)Which of the following statements about the dividends-received deduction (DRD) **is true?** **A.The taxable income limit does not apply if a current NOL exists or an NOL results from the DRD.** **Answer (A) is correct.\ The taxable income limit does not apply if a current NOL exists or an NOL results from the DRD.** B.If dividends are received from both 15%-owned and non-15%-owned corporations, the limit is first computed with respect to 15%-and-more-owned corporate dividends. Answer (B) is incorrect.\ If dividends are received from both 20%-owned and non-20%-owned corporations, the limit is first computed with respect to 20%-and-more-owned corporate dividends. C.To be eligible for the DRD, a corporation must hold the stock for at least 41 days during the 61-day period that begins 40 days before the dividends are paid. D.A corporation cannot take the DRD if it holds a long position in substantially similar or related property. === 19)During the year, HOOS Corporation had the following income and expenses: Gross receipts \$436,600 *= beginning point* Salaries 300,000 *--- subtracted* Contributions to qualified charitable organizations 60,000 *N/A* Capital gains 7,000 *+ added* Depreciation expense 28,000 * N/A* Dividend income 60,000 *+ added* Dividends-received deduction 42,000 * N/A* ****What is the amount of HOOS Corporation's charitable contribution deduction for the year?**** A.\$7,360 B.\$60,000 C.\$13,360 **D.\$17,560** **Answer (D) is correct.\ Under Sec. 170, charitable contributions made to qualified organizations and paid within the taxable year may be deducted from taxable income. A corporation's charitable deduction is limited to 10% of taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. HOOS's charitable contribution deduction for the year is \$17,560, as computed below.** **Gross receipts \$436,600** **Capital gains 7,000** **Dividend income 60,000** **Less: Salaries (300,000)** **Less: Depreciation expense (28,000)** **Taxable income before special deductions \$175,600** **Times: Limit percentage × 10%\ Charitable contribution deduction \$ 17,560** === 20)Kelli Corporation had the following income and expense items during the current year: Dividends received (10% owned) \$ 10,000 Revenue from operating activities 130,000 Expenses from operating activities 100,000 Charitable contributions paid 5,000 In addition to the above items, Kelli had a \$1,000 unused charitable contribution from 4 years ago. ****The proper treatment of Kelli Corporation's charitable contributions when calculating its current-year tax liability is to:**** **A.First use the current contributions and then apply the carryover from 4 years ago.** **Answer (A) is correct.\ Section 170(d)(2) requires that the current contributions be used first and then requires that carryovers be applied in a first-in, first-out (FIFO) manner. Excess contributions may be carried forward for 5 years.** B.Use only the current contributions since unused charitable contributions can be carried forward for only 3 succeeding tax years. C.First apply the carryover from 4 years ago and then use the current contributions. Answer (C) is incorrect.\ Current contributions should be deducted first. D.Lump both amounts together and treat the total as contributions made in the current year. === 21)Which of the following contributions made by Natvale Corporation, a domestic corporation, ****is NOT deductible for federal income tax purposes?**** **A.\$2,000 to Chilean Adoptions, a private foundation in Chile that operates orphanages.** **Answer (A) is correct.\ Section 170(c) defines charitable contributions to include any contribution to an organization operated exclusively for religious, charitable, scientific, literary, or educational purposes. However, the organization must have been created or organized in the United States or selected foreign countries with which the U.S. has a tax treaty.** B.\$7,500 to the American Red Cross. *--- deductible* C.\$2,500 to the local humane society.*--- deductible* Answer (C) is incorrect.\ The organization qualifies under Sec. 170(c). D.100 shares of Natvale's preferred stock to Soo Valley Community College that are held in the treasury (\$60 per share FMV on the date of gift). *--- deductible* === 25)Tapper Corp., an accrual-basis, calendar-year corporation, was organized on January 2, Year 1. During the year, revenue was exclusively from sales proceeds and interest income. The following information pertains to Tapper: Taxable income before charitable contributions for the year ended December 31, Year 1 \$500,000 Tapper's matching contribution to employee-designated qualified universities made during Year 1 10,000 Authorized contribution by board of directors to a qualified charity (authorized December 1, Year 1; made February 1, Year 2) 30,000 *What is the ***maximum allowable deduction (among what has been already contributed)*** that Tapper may take as a charitable contribution on its tax return for the year ended December 31, Year 1?* **A.\$40,000** **Answer (A) is correct.\ The total amount of charitable contributions is limited to 10% of a corporation's adjusted taxable income. Tapper is limited to a \$50,000 (\$500,000 × 10%) deduction. Contributions to qualifying charities are deductible in the year paid. In addition, an accrual-method corporation may deduct a contribution authorized by the board of directors during the current tax year and paid by the due date for filing the corporation's tax return (not including extensions) for the applicable tax year. Tapper has qualifying contributions totaling \$40,000, which is under the 10% limit of \$50,000, so Tapper may fully deduct its qualifying contributions in Year 1.** B.\$30,000 Answer (B) is incorrect.\ The contribution to qualified universities is fully deductible in Year 1. C.\$0 D.\$10,000 === 26)During the year, PARD Corporation had the following income and expenses: Gross receipts \$467,200 Salaries 350,000 --- subtracted Contributions to qualified charitable organizations 40,000 Capital gains 6,000 *+ added* Capital loss carryback 6,000 *N/A* Depreciation expense 28,000 *--- subtracted* Dividend income 60,000 *+ added* Dividends-received deduction 30,000  *N/A* ****What is PARD's charitable contribution deduction for the year?**** A.\$7,920 B.\$40,000 C.\$11,920 **D.\$15,520** **Answer (D) is correct.\ Under Sec. 170, charitable contributions made to qualified organizations and paid within the taxable year may be deducted from taxable income. A corporation's charitable deduction is limited to 10% of taxable income computed before the charitable contribution deduction, capital loss carryback, and the dividends-received deduction. PARD's charitable contribution deduction for the year is \$15,520 as computed below.** **Gross receipts \$467,200** **Capital gains 6,000** **Dividend income 60,000** **Less: Salaries (350,000)** **Less: Depreciation expense (28,000)** **Taxable income before special deductions \$155,200** **Times: Limit percentage × 10%\ Charitable contribution deduction \$ 15,520** === 1)For Year 2, a corporation had taxable income of \$70,000 without regard to the contribution deduction. Cash contributions made in Year 2 totaled \$5,000, and a \$4,000 carryover of excess cash contributions from Year 1 is available to apply to Year 2. What is the amount of contribution carryover available for Year 3, and what is its source? **A.\$2,000 from Year 1** **Answer (A) is correct.\ Section 170(b)(2) limits the charitable contribution deduction to 10% of the corporation's taxable income computed before the charitable contribution deduction and certain special deductions. Section 170(d)(2) allows a corporation to carry excess contributions forward for 5 years. The total charitable contribution deduction including contribution carryovers, however, may not exceed the 10% limit. The current contributions are deducted first so that the Year 3 carryover consists of \$2,000 from Year 1.** **Contributions made in Year 2 \$ 5,000** **Carryover from Year 1 4,000** **Total charitable contributions \$ 9,000** **Year 2 deduction limited to 10% × \$70,000 = (7,000)\ Carryover to Year 3 from Year 1 = \$ 2,000** B.\$2,000 from Year 2. Answer (B) is incorrect.\ Current-year contributions are deducted first. C.\$3,000 from Year 1. D.\$0 === 3)In the current year, Best Corp., an accrual-basis, calendar-year C corporation, received \$100,000 in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt-financed and was held for over a year. Best recorded the following information for the year: Loss from Best's operations \$(10,000) Dividends received 100,000 Taxable income (before dividends-received deduction) \$ 90,000 Best's dividends-received deduction on its current year tax return was A.\$50,000 B.\$65,000 C.\$100,000 Answer (C) is incorrect.\ There are limitations for dividends received from unrelated domestic corporations. **D.\$45,000** **Answer (D) is correct.\ Holding stock in an unrelated domestic corporation implies less than 20% ownership. Therefore, Best Corp. is entitled to a dividends-received deduction equal to the lesser of (1) 50% of the dividends received (\$100,000 dividends × 50% = \$50,000) or (2) 50% of taxable income excluding any NOL deduction, any capital loss carryback, and the DRD itself \[(\$100,000 dividends -- \$10,000 operating loss) × 50% = \$45,000\]. Hence, Best Corp. is entitled to a DRD of \$45,000.** === 8)Snow Corporation owns a 20% interest in Hail Corporation, a domestic corporation. For the year, Snow Corporation had gross receipts of \$390,000, operating expenses of \$400,000, and dividend income of \$120,000 from Hail Corporation. The dividends were not from debt-financed portfolio stock. What is Snow Corporation's dividends-received deduction for the year? A.\$78,000 Answer (A) is incorrect.\ Section 246(b) limits deduction to 65% of taxable income before the dividends-received deduction. B.\$60,000 **C.\$71,500** **Answer (C) is correct.\ Under Sec. 243(a) and (c), a corporation is allowed a deduction for 65% of dividends received from unaffiliated domestic corporations of which it owns at least 20% of the stock. Section 246(b) limits the dividends-received deduction to 65% of taxable income before inclusion of the dividends-received deduction, dividends-paid deduction, net operating loss deduction, capital loss carrybacks, and certain adjustments for extraordinary dividends. Sixty-five percent of Snow's dividend income is \$78,000. However, 65% of the taxable income before the dividends-received deduction is \$71,500. Since the tentative dividends-received deduction of \$78,000 would not create an NOL if subtracted from the taxable income, then the dividends-received deduction is limited to 65% of the taxable income, or \$71,500.** **Gross business income \$ 390,000** **Dividend income 120,000\ Gross income\$ 510,000** **Less: Operating expenses (400,000)\ Taxable income without dividends-received deduction \$ 110,000\ Deduction is lesser of: 65% of dividend income, or \$ 78,000 OR\ 65% of taxable income without dividend deduction \$ 71,500**\ D.\$24,000 === 9)Maple Corporation had a net loss per its books for Year 1 as follows: Gross sales \$340,000 Cost of goods sold \$150,000 Depreciation 60,000 Charitable contributions 10,000 Salaries 130,000 Meals (50% limit) 20,000 Net income (loss) per books (30,000) Total per books \$340,000 Maple Corporation uses an accelerated method of depreciation for tax purposes, but not for book purposes. Maple Corporation's tax depreciation for Year 1 will be \$75,000. What is the taxable income for federal income tax purposes in Year 1 for Maple Corporation? A.\$(20,000) Answer (A) is incorrect.\ The deduction for meals is half of that for book purposes, the deduction for charitable contributions is disallowed, and the deprecation deduction is \$15,000 greater than that for books purposes. **B.\$(25,000)** **Answer (B) is correct.\ Maple Corporation has loss per books of \$30,000. Differences in depreciation, meals, and charitable contributions must be taken into account. Only half of the meals may be deducted for federal income tax purposes. None of the charitable contributions may be deducted because of the 10% of taxable income limitation. The taxable income is computed as follows:** **Gross sales \$ 340,000** **Cost of goods sold (150,000)** **Depreciation (75,000)** **Charitable contributions 0** **Salaries (130,000)** **Meals (10,000)** **Taxable income \$ (25,000)** C.\$(35,000) D.\$0 === 12)Corporations can take a deduction for dividends received from which of the following? A.None of the answers are correct. Answer (A) is incorrect.\ Corporations can take a deduction for dividends received from a corporation whose stock has been held for 91 days. **B.A corporation whose stock has been held for 91 days.** **Answer (B) is correct.\ A dividends-received deduction is disallowed for dividends received on any share of stock that the corporate shareholder has held for 45 days or less. The holding-period rule prevents a corporation from claiming a dividends-received deduction if it purchases stock immediately before the ex-dividend date and sells the stock immediately thereafter.** C.A real estate investment trust. D.A corporation exempt from tax for the tax year of the distribution. ===