CPA Regulation Reg Quiz: Determine C Corporation Taxable Income

What this quiz covers

This quiz focuses on Determine C Corporation Taxable Income, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Regulation Reg.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. 50% DRD; $50,000 deduction.
2. 80% DRD; $80,000 deduction.
3. 100% DRD; $100,000 deduction.
4. 65% DRD; $65,000 deduction. (correct answer)

Explanation: Under Section 243 (post-TCJA), the dividends-received deduction for a C corporation that owns 20% or more but less than 80% of the distributing corporation is 65%. Since Westbrook owns 25% of the stock, it qualifies for the 65% DRD. DRD = $100,000 x 65$65,000. Answer D is correct. Answer A (50%) applies to ownership below 20% under current law. Answer B (80%) is not a valid DRD percentage; 80% is the ownership threshold for the 100% DRD tier, not a DRD rate. Answer C (100%) applies when ownership is 80% or more and the corporations are part of an affiliated group.

Question 2

1. If the subsidiary is an affiliated corporation (80% or more owned) and meets the Section 165(g)(3) requirements, the loss is treated as an ordinary loss rather than a capital loss. (correct answer)
2. The worthless stock deduction is always a capital loss regardless of the ownership percentage.
3. The worthless stock deduction is a Section 1231 loss if the stock was held for more than one year.
4. There is no deduction available for worthless stock; the loss must be offset against future gains.

Explanation: Under Section 165(g)(3), when a domestic corporation's stock in an affiliated subsidiary (80% or more owned) becomes worthless and the subsidiary is an operating company (deriving more than 90% of its gross receipts from active business sources), the loss is treated as an ordinary loss, not a capital loss. This allows the parent to deduct the full loss against ordinary income. Answer B is incorrect because the Section 165(g)(3) exception converts the loss to ordinary for qualifying affiliated subsidiaries. Answer C is incorrect because worthless stock is not a Section 1231 asset; it is capital unless the ordinary loss election applies. Answer D is incorrect because worthless stock deductions are specifically allowed under Section 165(g).

Question 3

1. The NOL may be carried back 2 years and forward 20 years.
2. The NOL may be carried back 5 years and forward indefinitely.
3. The NOL may be carried forward indefinitely but may only offset up to 80% of taxable income in any carryforward year; no carryback is permitted. (correct answer)
4. The NOL may be carried forward for 20 years and may fully offset taxable income in any year.

Explanation: Under the TCJA (effective for NOLs arising in tax years beginning after December 31, 2017), corporate NOLs have an indefinite carryforward period but are limited to offsetting 80% of taxable income (before the NOL deduction) in any given year. The carryback provision was eliminated for most taxpayers (though a temporary 5-year carryback was allowed for 2018-2020 NOLs under the CARES Act, that provision has expired). Answer A describes pre-TCJA rules. Answer B describes CARES Act rules that are no longer in effect for 2022 NOLs. Answer D describes the old 20-year carryforward rule without the 80% limitation.

Question 4

1. By December 31 of the current year.
2. By March 15 of the following year (2.5 months after year-end) for a calendar-year corporation. (correct answer)
3. By April 15 of the following year.
4. By the end of the following tax year.

Explanation: Under Section 404(a)(11) and the recurring item exception, accrual-method corporations may deduct bonuses accrued at year-end if the liability is fixed by year-end and the bonuses are paid within 2.5 months after year-end (by March 15 for a calendar-year corporation). This is the 2.5-month rule for deferred compensation. Answer A is incorrect because the deduction is allowed even if paid after year-end, provided the 2.5-month window is met. Answer C (April 15) is too late for the 2.5-month rule. Answer D (end of following year) does not meet the requirement for current-year deductibility under the 2.5-month rule.

Question 5

1. The corporation may elect to deduct up to $5,000 of organizational expenditures in the first year, reduced dollar-for-dollar by expenditures exceeding$50,000, with the remainder amortized over 180 months. (correct answer)
2. All organizational expenditures are fully deductible in the year incurred.
3. Organizational expenditures must be capitalized and are never deductible.
4. Organizational expenditures are deducted over 60 months beginning with the month the corporation begins business.

Explanation: Under Section 248, a corporation may elect to deduct up to $5,000 of organizational expenditures in the tax year the business begins. This$5,000 immediate deduction is reduced dollar-for-dollar by the amount of organizational expenditures that exceed $50,000. Any remaining organizational expenditures are amortized ratably over 180 months (15 years) beginning with the month the corporation begins business. Answer B is incorrect because immediate full deduction of all organizational costs is not permitted. Answer C is incorrect because the election allows both a current deduction and amortization. Answer D (60 months) was the rule under prior law but has been replaced by the 180-month amortization period.

Question 6

1. $345,000
2. $370,000 (correct answer)
3. $375,000
4. $400,000

Explanation: C corporations may not deduct net capital losses; capital losses can only offset capital gains. Since Moreland has no capital gains, the $25,000 net capital loss is not deductible in Year 1 (it carries back 3 years or forward 5 years). The charitable contribution is limited to 10$400,000 = $40,000; since$30,000 is less than $40,000, the full$30,000 is deductible. Taxable income = $400,000 -$30,000 = $370,000. Answer A ($345,000) would result from also deducting the $25,000 capital loss, which is not permitted. Answer C ($375,000) would result from limiting the charitable contribution to $25,000. Answer D ($400,000) takes no deductions.

Question 7

1. $600,000, because all start-up costs are deductible when a business begins.
2. $60,000, the first year straight-line amortization over 10 years.
3. $100,000, the maximum deduction for start-up costs.
4. $40,000; the$5,000 immediate deduction is entirely phased out because costs exceed $50,000 by$550,000, so all $600,000 is amortized over 180 months at$3,333 per month, yielding $40,000 for a full 12-month first year. (correct answer)

Explanation: Under Section 195, a corporation may elect to deduct up to $5,000 of start-up expenditures in the first year, but this is reduced dollar-for-dollar when total start-up costs exceed$50,000. Here, costs of $600,000 exceed$50,000 by $550,000, reducing the immediate deduction to$0 ($5,000 -$550,000). All $600,000 is amortized over 180 months. Because the business began January 1 (a full 12 months), the first-year amortization =$600,000 / 180 x 12 = $40,000. Answer D is correct. Answer A is incorrect because full immediate deduction is not allowed when costs exceed$50,000 by this magnitude. Answer B (60 months) was the old rule. Answer C ($100,000) is not a statutory amount under Section 195.

Question 8

1. $130,000 (65% DRD)
2. $100,000 (50% DRD) (correct answer)
3. $200,000 (100% DRD)
4. $0 (no DRD for minority shareholders)

Explanation: Under post-TCJA Section 243, the DRD for a corporation owning less than 20% of the distributing corporation is 50%. Stanton owns 15% of Verdant, which is less than 20%, so the 50% DRD applies. DRD = $200,000 x 50$100,000. Answer A (65%) applies when ownership is 20% or more but less than 80%. Answer C (100%) applies for affiliated group members with 80% or more ownership. Answer D is incorrect because the DRD is available at 50% for all eligible corporate shareholders, not only those with 20% or more ownership.

Question 9

1. The common parent must own at least 51% of the voting stock of each subsidiary.
2. The common parent must own at least 50% of all classes of stock of each subsidiary.
3. The common parent (directly or through other group members) must own at least 80% of the total voting power and 80% of the total value of each subsidiary's stock. (correct answer)
4. The common parent must own 100% of each subsidiary's stock for consolidated filing.

Explanation: Under Section 1504(a), an affiliated group for consolidated return purposes requires that the common parent directly own at least 80% of the total voting power and 80% of the total value of at least one includible corporation, and each other member is connected through stock ownership meeting the 80% voting/value threshold (directly or through other group members). Answer A (51%) is not the statutory threshold. Answer B (50%, all classes) does not meet the 80% voting and value requirement. Answer D (100%) is not required; 80% is the threshold, and minority interests are permitted.

Question 10

1. Approximately $270,000 ($210,000 corporate + $60,000 shareholder at 15$400,000). (correct answer)
2. Approximately $210,000 because dividends are taxed only once.
3. Approximately $358,000 because the shareholder pays 37% on the distribution.
4. Approximately $290,000 ($210,000 corporate + $80,000 shareholder at 20$400,000).

Explanation: The corporate tax on $1,000,000 is$1,000,000 x 21% = $210,000. The shareholder receives$400,000 as a qualified dividend. A taxpayer in the 22% ordinary income bracket falls within the 15% qualified dividend rate. Shareholder tax = $400,000 x 15$60,000. Total federal tax burden = $210,000 +$60,000 = $270,000. This illustrates the double taxation of C corporation earnings. Answer A is correct. Answer B is incorrect because dividends are subject to shareholder-level tax. Answer C (37%) is the top ordinary income rate, not the applicable qualified dividend rate for this taxpayer. Answer D uses 20%, which applies to taxpayers in the highest income brackets, not a 22% bracket individual.

Question 11

1. The AET applies to all C corporations that have retained earnings in excess of $250,000.
2. The AET applies automatically whenever a corporation does not pay dividends for two consecutive years.
3. The AET applies when a corporation is found to have accumulated earnings and profits beyond the reasonable needs of the business with the purpose of avoiding shareholder-level income tax. (correct answer)
4. The AET applies only to personal holding companies with fewer than five shareholders.

Explanation: The accumulated earnings tax under Section 531 is a penalty tax imposed on C corporations that accumulate earnings beyond the reasonable needs of the business for the purpose of avoiding shareholder-level income tax on dividends. The AET rate is 20%. Corporations may accumulate up to $250,000 (or$150,000 for professional service corporations) without facing a presumption of unreasonable accumulation. Answer A is incorrect because the $250,000 threshold is a safe harbor, not an automatic trigger. Answer B is incorrect because the AET does not apply automatically based on dividend payment history alone; purpose and reasonable business needs are the key factors. Answer D describes the personal holding company (PHC) tax, a different provision.

Question 12

1. $550,000
2. $350,000
3. $500,000
4. $450,000 (correct answer)

Explanation: Taxable income before the DRD = gross receipts - COGS - operating expenses + dividends received = $900,000 -$400,000 - $150,000 +$100,000 = $450,000. This$450,000 is used to compute the taxable income limitation on the DRD. The DRD (50% x $100,000 =$50,000) is then compared to 50% of $450,000 =$225,000. Since $50,000 is less than$225,000, the full DRD of $50,000 is allowed. Answer D is correct. Answer A ($550,000) would result from omitting operating expenses or adding dividends twice. Answer B ($350,000) omits the dividends received from the computation. Answer C ($500,000) would result from computing gross profit only ($900,000 -$400,000) without subtracting operating expenses or adding dividends.

Question 13

1. Only in Year 2 when the plan year ends.
2. In Year 1, the year in which the contribution was made, because accrual-method corporations may deduct qualified plan contributions when paid. (correct answer)
3. In Year 2 only if the plan is a defined benefit plan.
4. In the year the employees vest in their benefits.

Explanation: Under Section 404(a), contributions to qualified pension, profit-sharing, or stock bonus plans are deductible in the year paid, provided the plan is funded by the tax return due date (including extensions). Corella paid the $60,000 on September 30, Year 1, which is within Year 1. The deduction is taken in Year 1, the year of payment. Answer A is incorrect because the deduction is taken when paid, not when the plan year ends. Answer C is incorrect because the plan type (defined benefit vs. defined contribution) does not determine the year of deduction here. Answer D is incorrect because vesting schedules do not control the deduction timing for plan contributions.

Question 14

1. Long-term capital gain of $90,000.
2. Section 1231 gain of $90,000.
3. Section 1245 ordinary income recapture of $90,000. (correct answer)
4. Section 1245 ordinary income recapture of $120,000 and Section 1231 loss of$30,000.

Explanation: Adjusted basis = $200,000 -$120,000 = $80,000. Amount realized =$170,000. Total gain = $170,000 -$80,000 = $90,000. Under Section 1245, all gain on the sale of depreciable personal property is recaptured as ordinary income to the extent of depreciation taken. Since the total gain ($90,000) is less than the depreciation taken ($120,000), the entire$90,000 gain is recaptured as ordinary income under Section 1245. No Section 1231 gain exists because Section 1245 recapture absorbs the entire gain. Answer A and B are incorrect because Section 1245 recapture overrides Section 1231 treatment for the recaptured amount. Answer D is incorrect because the gain ($90,000) does not exceed the depreciation ($120,000), so there is no unrecaptured portion to treat as Section 1231 gain.

Question 15

1. $30,000, limited to adjusted basis.
2. $80,000, the full fair market value.
3. $55,000, the unrealized appreciation.
4. $80,000 if the property is capital gain property;$30,000 if it is ordinary income property. (correct answer)

Explanation: When a C corporation donates capital gain property (property that would produce long-term capital gain if sold), the deduction is the fair market value ($80,000). When a corporation donates ordinary income property (property that would produce ordinary income or short-term capital gain if sold), the deduction is limited to the property's adjusted basis ($30,000). The character of the gain that would have been recognized on a hypothetical sale determines whether the deduction is FMV or basis. Answer A (adjusted basis only) applies only to ordinary income property. Answer B (FMV for all property) is correct only for capital gain property. Answer C ($55,000) has no basis in the Code.

Question 16

1. Dividends paid to shareholders. (correct answer)
2. Interest paid on business loans.
3. Salaries paid to employees.
4. Depreciation on business property.

Explanation: C corporations may not deduct dividends paid to shareholders. Unlike interest (which is deductible) or compensation (which is deductible), dividends are a return of profits to equity holders and are not deductible under Section 162. This non-deductibility of dividends, combined with shareholder-level taxation on dividend receipts, creates the double taxation of C corporation earnings. Answer B is incorrect because business interest is generally deductible (subject to Section 163(j) limitations). Answer C is incorrect because reasonable compensation to employees is deductible under Section 162. Answer D is incorrect because depreciation on business property is a specifically allowed deduction under Sections 167 and 168.

Question 17

1. Business interest expense is deductible only up to the sum of business interest income plus floor plan financing interest expense plus 30% of adjusted taxable income (ATI), with disallowed interest carried forward indefinitely. (correct answer)
2. Business interest expense is fully deductible without limitation for all C corporations.
3. Business interest expense is limited to 50% of taxable income before the interest deduction.
4. Business interest expense is deductible only for corporations with gross receipts below $27 million.

Explanation: Under Section 163(j), the deduction for business interest expense is limited to the sum of (1) business interest income, (2) floor plan financing interest expense (applicable to dealers in motor vehicles, boats, and farm equipment), and (3) 30% of adjusted taxable income (ATI). For tax years beginning before 2022, ATI was computed before depreciation, amortization, and depletion (similar to EBITDA). For 2022 and beyond, ATI is computed after depreciation (similar to EBIT), making the limitation more restrictive. Disallowed interest carries forward indefinitely. Answer A is correct. Answer B is incorrect because Section 163(j) applies to most C corporations; small businesses with average gross receipts at or below the inflation-adjusted threshold (approximately $31 million for 2024) are exempt. Answer C (50% of taxable income) is not the Section 163(j) formula. Answer D is incorrect because corporations with gross receipts above the threshold are subject to the limitation, not exempt.

Question 18

1. $105,000 (operations taxed at 21%, capital gains taxed at 15%).
2. $147,000 (21$500,000 operations only; capital gains exempt).
3. $168,000 (21$700,000 combined, but capital gains exempt from tax).
4. $147,000 (21$700,000 total taxable income, including capital gains). (correct answer)

Explanation: C corporations do not receive preferential capital gains rates. All income, including net capital gains, is taxed at the flat 21% corporate tax rate. Total taxable income = $500,000 +$200,000 = $700,000. Tax =$700,000 x 21% = $147,000. Answer A is incorrect because corporations do not have a separate 15$700,000 is taxable at 21%.

Question 19

1. The $40,000 capital loss is deductible as an ordinary loss because it exceeds$3,000.
2. The $40,000 capital loss is deductible but only against ordinary income up to$3,000 per year.
3. The $40,000 capital loss may be carried back 3 years and forward 5 years to offset capital gains; it cannot offset ordinary income. (correct answer)
4. The $40,000 capital loss is permanently disallowed because there are no capital gains to absorb it.

Explanation: C corporations may only deduct capital losses against capital gains. Unlike individuals, corporations have no $3,000 ordinary income offset for capital losses. If a C corporation has a net capital loss, it may carry the loss back 3 years and forward 5 years to offset capital gains in those years. When carried back or forward, the loss is treated as a short-term capital loss. Answer A is incorrect because corporations cannot deduct capital losses against ordinary income. Answer B describes the individual capital loss rule ($3,000 annual deduction), which does not apply to C corporations. Answer D is incorrect because the loss is not permanently disallowed; it carries over to other years.

Question 20

1. The DRD may not exceed 50% of taxable income computed before the DRD.
2. The DRD may not exceed the amount of dividends actually received.
3. The taxable income limitation does not apply if the corporation has a net operating loss after taking the DRD.
4. The DRD is limited to the applicable DRD percentage (50% or 65%) of taxable income computed before the DRD, unless taking the full DRD would create or increase a net operating loss; the 100% DRD for affiliated group members is not subject to this taxable income limitation. (correct answer)

Explanation: Under Section 246(b), the DRD is limited to the applicable percentage of the corporation's taxable income computed before the DRD and before any NOL deduction. This taxable income limitation applies only to the 50% and 65% DRD tiers; the 100% DRD available to members of an affiliated group filing a consolidated return is not subject to the taxable income limitation. Additionally, the taxable income limitation does not apply to the 50% or 65% DRD if taking the full DRD would create or increase a net operating loss for the year. Answer D is correct. Answer A is incorrect because the limitation percentage matches the DRD percentage (65% or 50%), not a flat 50% cap. Answer B is incorrect because the limitation is based on taxable income, not simply the amount of dividends. Answer C reverses the rule; the taxable income limitation does not apply precisely when the DRD creates or increases an NOL.