Exam 17: Corporations: Introduction and Operating Rules

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

In the current year,Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum,a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $10,000.Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

A corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years.

On December 16,2015,the directors of Quail Corporation (an accrual basis,calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society,a qualified charity.The payment,which is made on April 11,2016,may be claimed as a deduction for tax year 2015.

On December 31,2015,Flamingo,Inc. ,a calendar year,accrual method C corporation,accrues a bonus of $50,000 to its president (a cash basis taxpayer),who owns 75% of the corporation's outstanding stock.The $50,000 bonus is paid to the president on February 2,2016.For Flamingo's 2015 Form 1120,the $50,000 bonus will be a subtraction item on Schedule M-1.

For a corporation,the domestic production activities deduction is equal to 9% of the lesser of (1) qualified production activities income or (2) taxable income.However,the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

Heron Corporation,a calendar year C corporation,had an excess charitable contribution for 2014 of $5,000.In 2015,Heron made a further charitable contribution of $20,000.Heron's 2015 deduction is limited to $15,000 (10% of taxable income).The 2015 contribution must be applied first against the $15,000 limitation.

Azul Corporation,a calendar year C corporation,received a dividend of $30,000 from Naranja Corporation.Azul owns 25% of the Naranja Corporation stock.Assuming it is not subject to the taxable income limitation,Azul's dividends received deduction is $21,000.

A corporation must file a Federal income tax return even if it has no taxable income for the year.

A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation.The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Crow Corporation,a C corporation,donated scientific property (basis of $30,000,fair market value of $50,000) to State University,a qualified charitable organization,to be used in research.Crow had held the property for four months as inventory.Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Hornbill Corporation,a cash basis and calendar year C corporation,was formed and began operations on May 1,2015.Hornbill incurred the following expenses during its first year of operations (May 1 - December 31,2015): temporary directors meeting expenses of $10,500,state of incorporation fee of $5,000,stock certificate printing expenses of $1,200,and legal fees for drafting corporate charter and bylaws of $7,500.Hornbill Corporation's current year deduction for organizational expenditures is $5,800.

Ed,an individual,incorporates two separate businesses that he owns by establishing two new C corporations.Each corporation generates taxable income of $50,000.As a general rule,each corporation will have a tax liability of $11,125.

Because of the taxable income limitation,no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

Peach Corporation had $210,000 of net active income,$45,000 of portfolio income,and a $230,000 passive loss during the current year.If Peach is a closely held C corporation that is not a PSC,it can deduct $210,000 of the passive loss in the year.