CPA Regulation (REG) : Corporate Income Tax Deductions

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

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Example Question #1 : Dividends Received Deductions

The corporate dividends-received deduction:

Possible Answers:

Is unaffected by the percentage of the investee’s stock owned by the investor corporation.

Must exceed the applicable percentage of the recipient shareholder’s taxable income.

Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period.

May be claimed by S corporations.

Correct answer:

Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period.

Explanation:

The dividends-received deduction (DRD) depends on the percentage of the investor’s share of the investee. To take advantage of the DRD, investors must hold the investee’s stock for a specific period prior to the ex-dividend date. The DRD is only available to domestic C corporations, and is limited to the investor’s taxable income for the period.

Example Question #2 : Dividends Received Deductions

Rohr, a C corporation, owns 18% of Alda Corporation. Alda paid a $3,000 cash dividend to Rohr. What is the amount of Rorh’s dividends-received deduction?

Possible Answers:

$0

$1,500

$1,950

$3,000

Correct answer:

$1,500

Explanation:

For the dividends-received deduction (DRD), less than 20% ownership results in a 50% deduction, so Rohr gets a DRD of $1,500 (50% of the $3,000 dividend received).

Example Question #3 : Dividends Received Deductions

In Year 2, Buy 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. Buy recorded the following information for Year 2:

  • Loss from Buy’s operations: (10,000)
  • Dividends received: 100,000
  • Taxable income (before dividends-received deduction): 90,000

Buy’s dividends-received deduction on its Year 2 tax return was:

Possible Answers:

$50,000

$45,000

$100,000

$65,000

Correct answer:

$45,000

Explanation:

Generally, the minimum dividends-received deduction (DRD) is 50%, which would mean in this case a $100,000 would result in a $50,000 DRD. However, the DRD is limited to the lesser of the DRD % applied to dividends received or the DRD % applied to taxable income without consideration of the DRD. Since we are told the taxable income is $90,000, the maximum DRD at 50% would be $45,000. (Had the company been eligible for a 65% DRD, the DRD could only have been $58,500, which was not an option.) 

Example Question #4 : Dividends Received Deductions

The corporate dividends received deduction:

Possible Answers:

Is unaffected by the percentage of the investee’s stock owned by the investor corporation

Must exceed the applicable percentage of the recipient shareholder’s taxable income

May be claimed by an S corporation

Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period

Correct answer:

Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period

Explanation:

The corporate DRD is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period of more than 45 days.

Example Question #5 : Dividends Received Deductions

Canada Co, a C Corp, owns 15% of Apple Corp. Apple paid a $3,000 cash dividend to Canada. What is Canada’s DRD?

Possible Answers:

$1,500

$3,000

$0

$1,900

Correct answer:

$1,500

Explanation:

Per the DRD rates, with a 15% ownership in Apple, the percentage used for the deduction is 50%. 50% * $3,000 = $1,500.

Example Question #6 : Dividends Received Deductions

The Dividends Received Deduction applies to:

Possible Answers:

Individuals in the United States

A C Corporation in the United States

A company in France

All of the above

Correct answer:

A C Corporation in the United States

Explanation:

Of the following choices, only a C Corporation in the United States would be applicable for the DRD under current US tax law.

Example Question #1 : Charitable Contribution Deduction

Which of the following types of organizations is considered a public charity for purposes of the charitable contribution deduction?

Possible Answers:

Cemetery companies.

Supplemental unemployment benefit trusts.

Religious organizations.

Chambers of commerce.

Correct answer:

Religious organizations.

Explanation:

Under the section 170(c) of the Internal Revenue Code, the charitable contribution deduction only applies to specific organizations. Among these include organizations such as government owned possession (if made exclusively for public purposes), a foundation organized exclusively for the public good, religious organizations, and nonprofit cemetery companies. Chambers of Commerce are considered political organizations and are disallowed, and supplemental unemployment benefits are not IRS designated charities.

Example Question #2 : Charitable Contribution Deduction

Which of the following transactions would not qualify as a charitable contribution by a corporation in order to receive the charitable contribution deduction?

Possible Answers:

Two $2,500 awards to local religious groups

A $500 check written to a nonprofit entity.

A $3,000 contribution to a political party

A $10,000 grant to a University

Correct answer:

A $3,000 contribution to a political party

Explanation:

Donations to political parties, whether by a corporation or an individual, never qualify for charitable contributions. Donations made to nonprofits (which includes universities and colleges) as well as to religious groups qualify for the charitable contribution deduction.

Example Question #3 : Charitable Contribution Deduction

For year 19, Fallon Corp., an accrual basis calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from year 18. Fallon’s Year 19 taxable income before the deduction for charitable contributions was $200,000. On December 15, year 19, Fallon’s board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 8, Year 20. What is the maximum allowable deduction that Fallon may take as a charitable contribution on its Year 19 tax return?

Possible Answers:

$8,000

$15,000

$23,000

$20,000

Correct answer:

$20,000

Explanation:

C corporations may deduct up to 10% of their gross income before deductions, so Fallon has a maximum of $20,000 it may deduct. Fallon’s board authorized a transfer of $15,000 cash prior to the end of the tax year, and companies are allowed to deduct accrued contributions if paid within 3 ½ months after year-end, meaning they may take the entire $15,000. Fallon also had an $8,000 carryover from the prior year, and corporations may carryover excess charitable contributions for up to five years after the contribution was made. As a  result, Fallon can also take an additional $5,000 from the carryover amount and apply that to the Year 19 tax year, for the maximum deduction of $20,000.

Example Question #4 : Charitable Contribution Deduction

A corporation deduction for charitable contributions that exceed the current limit for deduction in one year can be carried back __ years and forward __ years.

Possible Answers:

5, 3

5, 0

0, 5

3, 5

Correct answer:

0, 5

Explanation:

For the corporate charitable deduction, there is no carryback and only a 5 year carry forward period.

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