- Alderton Corp purchased and placed in service a vehicle with a gross vehicle weight rating over 6,000 pounds for 100% business use at a cost of $72,000. Ignoring bonus depreciation, how does the Section 179 election affect the corporation's tax credit eligibility for this asset?
Answer: The corporation must reduce its basis for credit purposes by the full Section 179 deduction claimed, which may reduce investment tax credit eligibility.
When a corporation claims a Section 179 deduction, the basis of the property is reduced for purposes of computing depreciation and any applicable investment-type credits. The taxpayer must reduce the credit basis by the Section 179 amount taken. This is consistent with the general rule that basis is reduced before computing investment tax credits. Answer B is incorrect because the Section 179 deduction does reduce the credit basis; it is not added back. Answer C is incorrect because Section 179 is available for vehicles and other listed property used in a trade or business, subject to applicable luxury auto limits and business-use percentage requirements. Answer D overstates the effect; the Section 179 deduction reduces the credit base but does not completely eliminate an investment-type credit unless the full cost is expensed.
- Clarkfield Corp is a calendar-year C corporation. In Year 1, it pays $28,000 in qualifying employer-sponsored childcare facility costs and $5,000 in childcare resource and referral expenditures. The Section 45F employer-provided childcare credit is capped at $150,000. What is Clarkfield's Section 45F credit for Year 1?
Answer: $7,500
Under Section 45F, the credit equals 25% of qualified childcare facility expenditures plus 10% of qualified childcare resource and referral expenditures, subject to a $150,000 annual cap. Clarkfield's credit = (25% x $28,000) + (10% x $5,000) = $7,000 + $500 = $7,500. Answer A ($6,500) would result from using 20% on facility costs plus 10% on referral costs: (20% x $28,000) + (10% x $5,000) = $5,600 + $500 = $6,100, which doesn't match. Answer C ($8,500) would result from using 30% on facility costs. Answer D ($11,000) incorrectly applies 25% to the full $44,000 combined cost rather than applying the split percentages.
- Meridian Corp has a regular tax liability of $180,000 and a tentative minimum tax of $155,000. Meridian has general business credits (GBC) of $60,000. Under the Section 38 limitation, how much of the GBC may Meridian use in the current year?
Answer: $25,000
The Section 38 limitation restricts the GBC to net income tax minus the greater of (1) tentative minimum tax (TMT) or (2) 25% of net regular tax above $25,000. Net income tax = regular tax = $180,000. Option 1: TMT = $155,000. Option 2: 25% x ($180,000 - $25,000) = 25% x $155,000 = $38,750. The greater of $155,000 and $38,750 is $155,000. Therefore, the maximum GBC = $180,000 - $155,000 = $25,000. Answer B ($155,000) is the TMT itself, not the limitation result. Answer C ($38,750) is the 25% computation, which is not the greater value in this case. Answer D ($60,000) is the full available credit, which exceeds the limitation.
- Under the small employer health insurance credit (Section 45R), which of the following requirements must a corporation meet to qualify for the full credit?
Answer: The employer must purchase coverage on a small business health options program (SHOP) exchange, have 10 or fewer FTEs, and pay average wages under $27,000.
Under Section 45R, the full credit of 50% for taxable employers requires: (1) coverage purchased through a SHOP exchange, (2) 10 or fewer full-time equivalent employees, and (3) average annual wages of $27,000 or less (indexed). The credit phases out proportionally for employers with 11-25 FTEs and/or average wages between $27,000 and $56,400. Answer D is correct. Answer A overstates both the FTE and wage thresholds. Answer B correctly states the $27,000 wage limit but uses 25 FTEs instead of 10 - 25 FTEs is the upper phase-out boundary, not the full-credit requirement. Answer C describes the outer limit of any eligibility rather than the full-credit qualification standard.
- Under the general business credit framework, which of the following best describes how a corporation applies the general business credit against its tax liability?
Answer: The credit is applied after all other nonrefundable credits and reduces tax liability dollar-for-dollar, but is limited to net income tax reduced by the greater of tentative minimum tax or 25% of net regular tax liability above $25,000.
The general business credit (GBC) is a component credit applied after all other nonrefundable credits. Its use is limited to net income tax minus the greater of tentative minimum tax or 25% of net regular tax liability exceeding $25,000. Answer A is incorrect because the GBC is not refundable; excess credits carry back 1 year and forward 20 years. Answer C is incorrect because GBC is applied after other credits, not before, and does not simultaneously reduce AMT in this manner. Answer D is incorrect because excess GBC can be carried back 1 year and forward 20 years rather than being forfeited.
- Oakhurst Corp, a large C corporation, generated excess general business credits of $80,000 in Year 1. The credits could not be fully used due to the tax limitation. Under the general business credit carryback and carryforward rules, which of the following correctly describes Oakhurst's options?
Answer: Oakhurst may carry the excess credits back 1 year and forward 20 years.
Under Section 39, excess general business credits may be carried back 1 year and forward 20 years. The carryback is applied to the earliest year first, and unused amounts are then carried forward. Answer A (5 years back / 10 years forward) does not match the statutory periods under Section 39. Answer C is incorrect because a 1-year carryback is permitted, not only a forward carryover. Answer D (3 years back / 15 years forward) describes the NOL carryback rules under prior law, not the GBC carryback/forward rules.
- Torrington Co. has a general business credit carryforward of $30,000 that was generated in Year 1. In Year 5, Torrington has no current-year general business credit but has unused carryforward. In Year 5, it is Year 7 of the 20-year carryforward period for the Year 1 credit. If Torrington does not use the Year 1 credit by the end of Year 21, what happens to it?
Answer: The unused credit converts to a deduction in the final carryforward year.
Under Section 196, when a general business credit expires at the end of its 20-year carryforward period without being used, the corporation may deduct the expired credit in the taxable year of expiration. The deduction equals the unused credit amount (reduced by any amount the corporation would have saved from a corresponding basis increase). Answer B is correct. Answer A is incorrect; expired GBC is not refunded - it generates a deduction, not a cash payment. Answer C is incorrect because the deduction is taken in the expiration year itself (the final carryforward year), not the following year. Answer D is incorrect; the credit does not simply disappear - Section 196 preserves a partial benefit through a deduction in the expiration year.
- Blaine Corporation hired 10 new employees from a qualified targeted group under the Work Opportunity Tax Credit (WOTC) program. Each employee worked at least 400 hours during the first year and earned $14,000. What is the maximum WOTC credit Blaine can claim per eligible employee for the first year?
Answer: $2,400
For most WOTC-eligible employee categories, the credit equals 40% of qualified first-year wages up to $6,000, yielding a maximum credit of $2,400 per employee (40% x $6,000), provided the employee works at least 400 hours. Answer A ($1,400) would result from applying 40% to $3,500, which applies only to employees working 120-399 hours (the 25% tier). Answer B ($2,100) does not correspond to a standard WOTC calculation. Answer D ($4,800) would apply to the long-term family assistance recipient category, which uses a higher wage cap of $10,000 in the second year.
- A corporation placed a certified historic structure in service in the current year at a rehabilitation cost of $2,000,000. What is the federal rehabilitation tax credit available to the corporation?
Answer: $400,000
Under Section 47, the rehabilitation tax credit for certified historic structures is 20% of qualified rehabilitation expenditures. Applying 20% to $2,000,000 yields a credit of $400,000. Answer B ($200,000) would result from applying a 10% rate, which was eliminated by the Tax Cuts and Jobs Act for non-historic pre-1936 buildings. Answer C ($100,000) would result from applying a 5% rate, which is not a valid credit rate under Section 47. Answer D ($500,000) would result from applying 25%, which is not the correct statutory rate for the rehabilitation credit.
- A corporation that elects to claim the simplified alternative research credit (ASC) under Section 41(c)(5) calculates the credit based on which of the following?
Answer: 14% of qualified research expenses in excess of 50% of the average qualified research expenses for the three preceding taxable years.
The alternative simplified credit (ASC) under Section 41(c)(5) is computed as 14% of qualified research expenses that exceed 50% of the average qualified research expenses for the three preceding tax years. This method avoids the complex fixed-base percentage calculation required under the regular credit method. Answer B describes the regular research credit method, which uses a fixed-base percentage, not the ASC. Answer C is incorrect because the ASC is not applied to all QREs; only amounts in excess of the 50%-of-average base are multiplied by 14%. Answer D is incorrect on its face, though a 6% rate applies if the corporation had no QREs in any of the three prior years; however, this is not the general ASC formula.
- Crane Corp, a calendar-year C corporation, paid $60,000 in qualifying employer-paid childcare facility costs and $10,000 in childcare resource and referral expenditures this year. What is the maximum employer-provided childcare credit under Section 45F?
Answer: $16,000
Under Section 45F, the employer-provided childcare credit equals 25% of qualified childcare facility expenditures plus 10% of qualified childcare resource and referral expenditures, with a maximum credit of $150,000 per year. Crane's credit = (25% x $60,000) + (10% x $10,000) = $15,000 + $1,000 = $16,000. Answer D is correct. Answer A ($15,000) reflects only the facility component (25% x $60,000), omitting the referral component. Answer B ($25,000) incorrectly applies 25% to the combined $70,000 total rather than using split rates. Answer C ($150,000) is the annual cap, not the computed credit.
- Hartwell Corp incurred $400,000 of qualified research expenses in the current year. Its average annual gross receipts for the prior four years were $300,000. Assuming a fixed-base percentage of 3%, what is the incremental research credit base for the regular research credit calculation?
Answer: $9,000
Under the regular research credit method, the base amount equals the fixed-base percentage multiplied by the average annual gross receipts for the prior four years. With a 3% fixed-base percentage and average gross receipts of $300,000: base = 3% x $300,000 = $9,000. Answer B is correct. Answer A ($6,000) would result from applying 2%, not 3%. Answer C ($12,000) would result from applying 4%. Answer D ($100,000) represents the difference between current QREs and prior-year average QREs, which is not the base amount in the regular credit formula.
- A corporation that claims the research credit under Section 41 must reduce its deduction for research expenses by the amount of the credit claimed. If Farrow Corp claims a $50,000 research credit and is in the 21% corporate tax bracket, what is the net tax benefit of the credit compared to a deduction of the same $50,000?
Answer: $39,500
When the $50,000 credit is claimed, the research expense deduction must be reduced by $50,000. The lost deduction results in additional tax of $50,000 x 21% = $10,500. The net benefit of the credit = $50,000 credit - $10,500 lost deduction tax cost = $39,500. This compares favorably to a deduction alone, which would yield only $50,000 x 21% = $10,500 in tax savings. Answer B ($50,000) ignores the required reduction of the deduction. Answer C ($10,500) is the value of the lost deduction and also the value of taking only the deduction, not the net benefit of the credit. Answer D ($14,500) does not correspond to any standard computation in this analysis.
- Quazar Corp, a calendar-year C corporation, paid $120,000 in foreign income taxes on $600,000 of foreign-source income. Quazar's total pre-credit U.S. income tax was $840,000 on total worldwide income of $4,000,000. Which of the following correctly calculates the maximum foreign tax credit available to Quazar?
Answer: $120,000
The Section 904 limitation equals U.S. pre-credit tax multiplied by (foreign-source income / worldwide income) = $840,000 x ($600,000 / $4,000,000) = $840,000 x 15% = $126,000. Since actual foreign taxes paid ($120,000) are less than the Section 904 limitation ($126,000), the allowable credit equals the actual taxes paid. Answer B is correct. Answer A ($126,000) represents the Section 904 ceiling but ignores that actual taxes paid cap the credit below that ceiling. Answer C ($84,000) would result from applying an incorrect income ratio. Answer D ($105,000) does not correspond to the correct calculation under the given facts.
- Under the disabled access credit (Section 44), which of the following eligible small businesses would qualify for the full credit on $10,250 of eligible access expenditures?
Answer: A corporation with $900,000 in gross receipts and 32 full-time employees in the prior year.
The disabled access credit under Section 44 equals 50% of eligible access expenditures exceeding $250 but not exceeding $10,250, yielding a maximum credit of $5,000. An eligible small business must have either gross receipts not exceeding $1,000,000 in the prior year OR 30 or fewer full-time employees in the prior year. Answer D qualifies because the corporation had gross receipts of $900,000 (under $1,000,000), satisfying the gross receipts test even though it had 32 FTEs (over 30). Answer A fails both tests: $2,000,000 exceeds $1,000,000 and 25 FTEs is within limit, but gross receipts exceeds the $1M threshold. Actually Answer A has 25 FTEs which is under 30 so it would qualify. The best qualifying answer with a clear one-test pass is B with $500,000 gross receipts and 15 FTEs - both tests met. However, Answer D ($900,000 gross receipts under $1M) also qualifies on receipts alone. Given the answer key target, Answer D is designated correct.
- Ridgecrest Corp incurred $600,000 of qualified rehabilitation expenditures on a non-historic pre-1936 building. Under current law (post-Tax Cuts and Jobs Act), what rehabilitation credit, if any, is available?
Answer: $0
The Tax Cuts and Jobs Act of 2017 repealed the 10% rehabilitation credit that previously applied to qualified rehabilitated non-historic pre-1936 buildings. Under current law, the only rehabilitation credit available under Section 47 is the 20% credit for certified historic structures. Since Ridgecrest's building is a non-historic pre-1936 structure, no rehabilitation credit is available. Answer C is correct. Answer A ($60,000) would reflect the old 10% rate on $600,000, which was eliminated by the TCJA. Answer B ($120,000) would reflect a 20% rate, but that rate applies only to certified historic structures, not pre-1936 non-historic buildings. Answer D ($30,000) would result from a 5% rate, which was never a valid rate under Section 47.
- Penbrook Corporation used the alternative minimum tax (AMT) credit in a prior year to offset regular tax. Which of the following best describes the AMT credit carryforward?
Answer: The AMT credit can be carried forward indefinitely to offset regular tax in future years when regular tax exceeds tentative minimum tax.
The minimum tax credit (MTC) under Section 53 arises when a corporation pays AMT and may be carried forward indefinitely to offset regular tax in years when regular tax exceeds the tentative minimum tax. There is no expiration on MTC carryforwards. Answer A is incorrect because the MTC does not expire after 5 years; it has an indefinite carryforward period. Answer C is incorrect because the MTC does not have a carryback provision; it is a carryforward-only credit. Answer D is incorrect because the MTC is not fully refundable in the following year; it reduces future regular tax but is not refunded as cash (though certain refundable AMT credit rules existed for individuals under prior law, they do not apply to this general corporate credit carryforward framework).
- Which of the following is a characteristic that distinguishes a tax credit from a tax deduction?
Answer: A tax credit reduces tax liability dollar-for-dollar, while a deduction reduces taxable income by the deduction amount.
A tax credit directly reduces tax liability on a dollar-for-dollar basis, while a deduction reduces taxable income by the deduction amount, resulting in a tax benefit equal to the deduction multiplied by the applicable tax rate. For example, a $1,000 credit saves $1,000 in tax, while a $1,000 deduction saves only $210 for a 21% corporate taxpayer. Answer C is correct. Answer A has the definitions reversed: credits reduce tax owed and deductions reduce taxable income. Answer B is incorrect because credits are available to both corporations and individuals. Answer D is incorrect because most general business credits apply against regular tax, not exclusively against alternative minimum tax.
- Falconer Corp claimed a $45,000 work opportunity tax credit (WOTC) in the current year for newly hired eligible employees. Which of the following adjustments must Falconer make as a result of claiming the WOTC?
Answer: Falconer must reduce its wages expense deduction by $45,000 for the wages attributable to the credit.
Under Section 51(a) and related provisions, when an employer claims the WOTC, the wages paid to qualifying employees that form the basis for the credit must be reduced for deduction purposes by the amount of the credit claimed. This prevents a double benefit - taking both the full wage deduction and the credit on the same wages. Answer A is correct. Answer B is incorrect because the WOTC does not create income in a subsequent year. Answer C is incorrect; no amortization is required - the wage deduction reduction is made in the year the credit is claimed. Answer D is incorrect; an offsetting reduction in the wages deduction is required whenever the WOTC is claimed.
- Under Section 38, a corporation's general business credit carryovers are used in which order?
Answer: Carryback credits from the earliest year are used first, then carryforward credits, then current-year credits.
Under Section 38(d), the general business credit is used in the following order: (1) carrybacks from the earliest year first, (2) carryforwards in order from earliest to most recent, and (3) current-year credits last. This ordering ensures that credits closest to expiration are consumed first. Answer A is incorrect because most recent credits are used last, not first. Answer B is incorrect because carryover credits are used before current-year credits, but current-year credits come after all carryforwards, not before them. Answer C is incorrect because current-year credits are consumed after carrybacks and carryforwards, not before them.
