D557 Section 2 Exam QUESTIONS AND
CORRECT ANSWERS
What are the similarities between corporate and individual tax treatment? - CORRECT ANSWER
Gains and losses from property are handled similarly. Business deductions apply for interest,
taxes, and losses.
How do corporate and individual tax treatment differ? - CORRECT ANSWER Corporations
have a flat tax rate, while individuals have progressive tax rates. Corporate taxable income is simply
gross income minus deductions.
What accounting periods can corporations choose? - CORRECT ANSWER Corporations can
elect either a calendar year or a fiscal year.
What are Personal Service Corporations (PSCs)? - CORRECT ANSWER Formed to provide
personal services (health, law, etc.). Services are substantially performed by shareholder-employees.
More than 10% of stock is owned by shareholder-employees.
What tax year must S corporations and PSCs use? - CORRECT ANSWER S Corps & PSCs
must use a fiscal year, unless a PSC makes a business purpose election or 444 election.
When is the cash method of accounting unavailable for corporations? - CORRECT ANSWER
Corporations cannot use cash accounting, except for:
S Corps
Farming corporations
Qualified PSCs
Corporations with <$29 million in annual gross receipts
, How do related-party accruals affect tax deductions? - CORRECT ANSWER Corporations
cannot deduct accruals until the related party reports the amount as income.
How must accrual basis taxpayers recognize gross income? - CORRECT ANSWER Must
recognize gross income no later than when it is included in financial statements.
How are capital gains taxed for corporations? - CORRECT ANSWER Corporations do not
receive favorable tax rates on long-term capital gains. Capital gains are taxed at the normal corporate
tax rate.
Can corporations deduct net capital losses? - CORRECT ANSWER Corporations cannot
deduct net capital losses against ordinary income. Capital losses can be carried back 3 years and
forward 5 years.
How is a long-term capital loss treated for corporations? - CORRECT ANSWER Long-term
capital losses are treated as short-term capital losses.
What depreciation recapture rules apply to corporations? - CORRECT ANSWER Both § 1245
& § 1250 recapture rules apply to corporations and individuals. § 1250 recapture is limited to excess
of accelerated depreciation over straight-line depreciation.
What is § 291 depreciation recapture for corporations? - CORRECT ANSWER Corporations
must recognize additional ordinary income equal to 20% of the excess between the amount of
depreciation recapture required if § 1245 applied and actual § 1250 depreciation recapture.
What qualifies as a business interest expense? - CORRECT ANSWER Interest paid or accrued
on trade or business debt.
How is the business interest deduction calculated? - CORRECT ANSWER Deduction =
Business interest income + 30% of adjusted taxable income + floor plan financing interest.
What happens if business interest deductions are disallowed? - CORRECT ANSWER They
carry forward indefinitely as business interest paid/accrued in future years.
CORRECT ANSWERS
What are the similarities between corporate and individual tax treatment? - CORRECT ANSWER
Gains and losses from property are handled similarly. Business deductions apply for interest,
taxes, and losses.
How do corporate and individual tax treatment differ? - CORRECT ANSWER Corporations
have a flat tax rate, while individuals have progressive tax rates. Corporate taxable income is simply
gross income minus deductions.
What accounting periods can corporations choose? - CORRECT ANSWER Corporations can
elect either a calendar year or a fiscal year.
What are Personal Service Corporations (PSCs)? - CORRECT ANSWER Formed to provide
personal services (health, law, etc.). Services are substantially performed by shareholder-employees.
More than 10% of stock is owned by shareholder-employees.
What tax year must S corporations and PSCs use? - CORRECT ANSWER S Corps & PSCs
must use a fiscal year, unless a PSC makes a business purpose election or 444 election.
When is the cash method of accounting unavailable for corporations? - CORRECT ANSWER
Corporations cannot use cash accounting, except for:
S Corps
Farming corporations
Qualified PSCs
Corporations with <$29 million in annual gross receipts
, How do related-party accruals affect tax deductions? - CORRECT ANSWER Corporations
cannot deduct accruals until the related party reports the amount as income.
How must accrual basis taxpayers recognize gross income? - CORRECT ANSWER Must
recognize gross income no later than when it is included in financial statements.
How are capital gains taxed for corporations? - CORRECT ANSWER Corporations do not
receive favorable tax rates on long-term capital gains. Capital gains are taxed at the normal corporate
tax rate.
Can corporations deduct net capital losses? - CORRECT ANSWER Corporations cannot
deduct net capital losses against ordinary income. Capital losses can be carried back 3 years and
forward 5 years.
How is a long-term capital loss treated for corporations? - CORRECT ANSWER Long-term
capital losses are treated as short-term capital losses.
What depreciation recapture rules apply to corporations? - CORRECT ANSWER Both § 1245
& § 1250 recapture rules apply to corporations and individuals. § 1250 recapture is limited to excess
of accelerated depreciation over straight-line depreciation.
What is § 291 depreciation recapture for corporations? - CORRECT ANSWER Corporations
must recognize additional ordinary income equal to 20% of the excess between the amount of
depreciation recapture required if § 1245 applied and actual § 1250 depreciation recapture.
What qualifies as a business interest expense? - CORRECT ANSWER Interest paid or accrued
on trade or business debt.
How is the business interest deduction calculated? - CORRECT ANSWER Deduction =
Business interest income + 30% of adjusted taxable income + floor plan financing interest.
What happens if business interest deductions are disallowed? - CORRECT ANSWER They
carry forward indefinitely as business interest paid/accrued in future years.
