Apply Corporate Tax Compliance Rules
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CPA Tax Compliance & Planning (TCP) › Apply Corporate Tax Compliance Rules
The current federal corporate income tax rate is:
35% for large corporations and 21% for small corporations.
28% flat rate established by the Tax Cuts and Jobs Act.
A graduated rate ranging from 15% to 35% depending on taxable income.
A flat 21% rate on all corporate taxable income, regardless of the amount.
Explanation
The Tax Cuts and Jobs Act of 2017 replaced the prior graduated corporate rate structure with a flat 21% rate on all corporate taxable income. Answer C is correct. The old graduated structure (A) was repealed. 28% (B) is incorrect. There is no size distinction in the current rate (D).
A domestic corporation's taxable income is calculated beginning with gross income and then:
Subtracting only cash expenses actually paid during the tax year.
Adding back all book-to-tax differences to reconcile to financial statement income.
Applying the effective tax rate used for financial reporting purposes.
Subtracting allowable deductions, including the dividends received deduction, net operating loss deduction, and other business deductions.
Explanation
Corporate taxable income = gross income minus allowable deductions, including special corporate deductions like the DRD and NOL deduction. Answer A is correct. Book-to-tax adjustments (B) are part of the return but not how taxable income is 'calculated.' Financial statement rates (C) are for GAAP purposes. Only cash expenses (D) describes cash method, not the general rule.
Which of the following correctly describes the limitation on the dividends received deduction?
The DRD is generally limited to the applicable percentage of taxable income, computed without the DRD - unless the full DRD creates or increases a net operating loss.
The DRD is limited to 50% of the dividends received regardless of ownership.
The DRD may not exceed the corporation's net income before the DRD deduction.
There is no limitation on the DRD when the corporation owns 20% or more of the payor.
Explanation
The DRD is limited to the applicable percentage of taxable income (without the DRD), but this limitation does not apply if claiming the full DRD results in a net operating loss. Answer C is correct. The net income limitation (A) is not precisely stated. A flat 50% (B) ignores ownership tiers. The taxable income limit applies at all ownership levels below 80% (D).
A corporation has a net operating loss (NOL) for the current year. Under current law (post-TCJA), the corporation may:
Carry the NOL back 5 years or forward indefinitely with no limitation.
Deduct the entire NOL in the carryforward year regardless of the amount of taxable income.
Carry the NOL back 2 years and forward 20 years.
Carry the NOL forward indefinitely but may only offset up to 80% of taxable income in the carryforward year.
Explanation
Post-TCJA, NOLs arising after 2017 can only be carried forward (no carryback for most taxpayers), indefinitely, but are limited to 80% of taxable income in the carryforward year. Answer B is correct. The 2-year carryback/20-year carryforward (A) was the pre-TCJA rule. The 5-year carryback (C) applies to farming NOLs. The 100% offset (D) was the pre-TCJA rule.
A corporation's estimated tax payments are required when:
The corporation expects to owe more than $500 in taxes for the year.
The corporation had taxable income in any prior year.
The corporation is a large corporation with assets over $10 million.
The corporation expects to owe $500 or more in taxes, and must pay in four equal installments due on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.
Explanation
Corporations must make estimated tax payments if expected taxes are $500 or more, in four equal installments due at the 4th, 6th, 9th, and 12th month marks. Answer D is correct. The $500 threshold is correct but the installment details are missing in A. Prior year income alone (B) doesn't trigger payments. Asset size (C) is not the threshold.
A corporation pays a dividend to its shareholders. Which of the following correctly describes the tax treatment to the corporation?
The dividend is not deductible by the corporation - dividends are paid from after-tax earnings, resulting in double taxation at the corporate and shareholder levels.
The dividend creates a loss carryforward for the corporation.
The dividend is deductible by the corporation as a business expense.
The dividend is deductible up to the corporation's earnings and profits.
Explanation
Corporate dividends are not deductible - they represent a distribution of after-tax profits, creating the classical double taxation of corporate income. Answer C is correct. Dividends are not business expenses (A). No loss carryforward is created (B). No E&P-based deduction exists for paid dividends (D).
Which of the following is a deduction available to C corporations but NOT to individual taxpayers?
The home office deduction.
The qualified business income (QBI) deduction.
The dividends received deduction (DRD).
The standard deduction.
Explanation
The DRD is a deduction unique to corporations, allowing partial exclusion of dividends received from other domestic corporations to reduce double taxation. Answer B is correct. Corporations do not have a standard deduction (A). The QBI deduction is for pass-through entities and individual taxpayers (C). Home office deductions apply to individuals and self-employed persons (D).
The accumulated earnings tax (AET) is imposed on corporations that:
Fail to pay sufficient estimated taxes during the year.
Accumulate earnings beyond the reasonable needs of the business for the purpose of avoiding the shareholder-level income tax.
Have accumulated earnings and profits exceeding $250,000.
Retain earnings in excess of $1 million without a documented business purpose.
Explanation
The AET is a penalty tax on improper accumulation - earnings retained beyond reasonable business needs with the intent to avoid shareholder taxes. Answer C is correct. Estimated tax failures (A) result in different penalties. Having E&P over $250,000 (B) is the AET credit amount, not the trigger. A $1 million threshold (D) is not the law.
A corporation sells a capital asset held for more than one year at a gain. The tax treatment of the long-term capital gain is:
Taxed at the flat 21% corporate rate - corporations do not receive preferential capital gains rates.
Taxed at the preferential 15% or 20% long-term capital gains rate applicable to individual taxpayers.
Subject to a maximum tax rate of 35% for capital gains.
Excluded from income as a long-term capital gain.
Explanation
Unlike individual taxpayers, C corporations do not receive preferential long-term capital gains rates - all income including long-term capital gains is taxed at the flat 21% rate. Answer B is correct. The 15%/20% preference (A) applies to individuals. Capital gains are not excluded (C). The 35% maximum (D) was the old pre-TCJA rule.
A corporation's Form 1120 requires Schedule M-1 or M-3 to reconcile:
Book income (per financial statements) to taxable income, identifying temporary and permanent differences between the two.
Federal taxable income to state taxable income for each state where the corporation operates.
The corporation's taxable income to its earnings and profits.
Prior year taxable income to the current year taxable income.
Explanation
Schedule M-1/M-3 reconciles book income to taxable income, identifying all book-tax differences (depreciation, meals, penalties, etc.). Answer A is correct. Year-over-year reconciliation (B) is not M-1/M-3's purpose. E&P reconciliation (C) is on Schedule M-2. State apportionment (D) is on separate state returns.