ExpertHard1 markMultiple Choice
CPA · Question 23 · Area V: Entity Taxation
Corporation C had book income of $500,000. Included in book income was $10,000 of municipal bond interest. C paid $5,000 in premiums for a life insurance policy on its CEO (C is the beneficiary). C also had a net capital loss of $8,000 for the year. What is C's taxable income?
Corporation C had book income of $500,000. Included in book income was $10,000 of municipal bond interest. C paid $5,000 in premiums for a life insurance policy on its CEO (C is the beneficiary). C also had a net capital loss of $8,000 for the year. What is C's taxable income?
Answer options:
A.
$495,000
B.
$503,000
C.
$487,000
D.
$497,000
How to approach this question
Start with Book. 1) Subtract Muni Interest (nontaxable). 2) Add back Life Ins Premiums (nondeductible). 3) Add back Capital Loss (Corps can't deduct net capital losses).
Full Answer
B.$503,000✓ Correct
Start: $500,000. Less: Municipal interest (nontaxable) ($10,000). Add back: Life insurance premiums (nondeductible because Corp is beneficiary) +$5,000. Add back: Net capital loss (Corporations can only offset capital gains; net capital losses are not deductible in the current year) +$8,000 (assuming it was deducted to arrive at book income). Taxable Income = $500,000 - $10,000 + $5,000 + $8,000 = $503,000.
Common mistakes
Forgetting that corporations cannot deduct net capital losses (unlike individuals who get $3,000).
Practice the full CPA REG Practice Exam 2
72 questions · hints · full answers · grading
More questions from this exam
Q01A CPA is representing a client in an IRS examination regarding a complex tax shelter transaction....HardQ02A tax return preparer is facing a penalty for an understatement of tax liability on a client's re...HardQ03Taxpayer L received a Statutory Notice of Deficiency (90-day letter) from the IRS regarding a tax...HardQ04A CPA is sued for common law negligence by a third party who relied on the CPA's audit report. Th...HardQ05Which of the following communications between a CPA and a client would generally be protected by ...Hard