CPA Regulation (REG) : Deductible & Non-Deductible Corporate Expenses

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

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Example Questions

Example Question #1 : Deductible & Non Deductible Corporate Expenses

In the case of a corporation that is not a financial institution, which of the following statements is correct with regard to the deduction for bad debts?

Possible Answers:

On the approval form the IRS, a corporation may change its method from direct charge-off to reserve.

A corporation is required to use the direct charge-off method rather than the reserve method.

Either the reserve method or the direct charge-off method may be used, if the election is made in the corporation’s first taxable year.

If the reserve method was consistently used in prior years, the corporation may take a deduction of a reasonable addition to the reserve for bad debts.

Correct answer:

A corporation is required to use the direct charge-off method rather than the reserve method.

Explanation:

Accrual-basis taxpayers (which includes corporations) are required to use the specific charge-off (aka direct charge-off) method for tax purposes. This does not preclude a corporation from using the reserve method for financial reporting purposes, as required. 

Example Question #2 : Deductible & Non Deductible Corporate Expenses

What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year?

Possible Answers:

$3,000

$5,000

$10,000

$0

Correct answer:

$0

Explanation:

For C corporations, capital losses may only be deducted to the extent of capital gains in a given year. Excess capital losses may, however, be carried back three years or forward five (again, only to the extent of capital gains in those years).

Example Question #3 : Deductible & Non Deductible Corporate Expenses

Funnie, Inc. manufactures consumer products and sells them to distributors. Funnie advertises its products to increase sales and enhance the value of its trade name. What is the appropriate treatment for the advertising costs?

Possible Answers:

Amortize the costs over 36 months

Deduct the costs currently as ordinary and necessary business expenses

Amortize the costs over 15 years

Amortize the costs over 60 months

Correct answer:

Deduct the costs currently as ordinary and necessary business expenses

Explanation:

Advertising expenses are treated as those incurred in the normal course of business, and for tax purposes are expensed in the period the costs are incurred. There is no amortization of these costs.

Example Question #4 : Deductible & Non Deductible Corporate Expenses

ABC Corp, a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant and the reimbursement is not treated as wages subject to withholdings. What percentage of meal expenses may ABC deduct?

Possible Answers:

80%

100%

0%

50%

Correct answer:

50%

Explanation:

Only 50% of meal expenses are deductible.

Example Question #5 : Deductible & Non Deductible Corporate Expenses

A corporation’s penalty for underpaying federal estimated taxes is: 

Possible Answers:

Not deductible

Fully deductible if reasonable cause can be established for the underpayment

Fully deductible in the year paid

Partially deductible

Correct answer:

Not deductible

Explanation:

The penalty for underpayment of federal estimated taxes is not deductible.

Example Question #6 : Deductible & Non Deductible Corporate Expenses

ABC Corp, a calendar year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant and the reimbursement is not treated as wages subject to withholdings. What percentage of meal expenses may ABC deduct?

Possible Answers:

80%

50%

100%

0%

Correct answer:

50%

Explanation:

Only 50% of meal expenses are deductible.

Example Question #7 : Deductible & Non Deductible Corporate Expenses

A corporation’s penalty for underpaying federal estimated taxes is:

Possible Answers:

Fully deductible in the year paid

Not deductible

Partially deductible

Fully deductible if reasonable cause can be established for the underpayment

Correct answer:

Fully deductible in the year paid

Explanation:

The penalty for underpayment of federal estimated taxes is not deductible.

Example Question #8 : Deductible & Non Deductible Corporate Expenses

For a C Corporation, _____ are able to be expensed or amortized during the organizational process.

Possible Answers:

Underwriter commissions

All of the above

Legal fees associated with charter drafts

Costs associated with issuing company stock

Correct answer:

Legal fees associated with charter drafts

Explanation:

Stock sale costs cannot be expensed or amortized during the organizational period, only legal fees necessary to form the company.

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