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Exam 16: Corporate Operations

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Question 1

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A corporation may carry a net capital loss back three years and forward five years.

A) True
B) False

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Question 2

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Net operating losses generally create permanent book-tax differences.

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B) False

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On January 1, 2013, GrowCo issued 50,000 nonqualified stock options (NQOs) valued at $1 per option. Each option entitles the owner to purchase one share of stock for $4. These options vest at 20 percent per year for five years beginning in 2013. By the end of 2014, 20,000 of the options had vested. At the end of 2014, these options were exercised when the stock price is $6.25. What is the total value of the book-tax difference associated with the stock options for 2014? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary? (Note that ASC 718 applies to these transactions.)

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.

Which of the following statements regarding charitable contributions is false?

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

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $5,000 in cash. Second, it could give stock it initially purchased two years ago for $4,000 but is now worth $6,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes?

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.?

Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year.

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).

In 2014, AutoUSA Inc. received $4,600,000 of book income, including $20,000 of interest income from tax-exempt municipal bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $350,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return? Assume AutoUSA pays taxes at a flat 34 percent rate and disregard the alternative minimum tax.

Netgate Corporation's gross regular tax liability for 2014 was $95,375. What was its taxable income?

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while NOL and capital loss carrybacks are not.

Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability).

Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2014 with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning in 2014). Each option allows the holder to purchase one share of stock at $8. On January 1, 2015, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2015 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year?

An affiliated group must file a consolidated tax return.

VitalJuice Corporation reports the following schedule of prior year taxes it owed: $\begin{array} { | l | l | l | } \hline \text { Year } & \begin{array} { l } \text { Regular tax } \\\text { liability }\end{array} & \begin{array} { l } \text { Tentative minimum } \\\text { tax }\end{array} \\\hline \text { Year 1 } & \$ 750,000 & \$ 700,000 \\\hline \text { Year 2 } & \$ 800,000 & \$ 900,000 \\\hline \text { Year 3 } & \$ 850,000 & \$ 900,000 \\\hline \text { Year 4 } & \$ 900,000 & \$ 700,000 \\\hline\end{array}$ What is VitalJuice's tax liability for Year 4?

The dividends received deduction is subject to a limitation based on modified taxable income.