Sample Questions and Answers
What is the corporate tax rate for C corporations as of 2024?
a) 21%
b) 35%
c) 28%
d) 15%
Answer: a) 21%
Which of the following is a tax-deductible expense for a corporation?
a) Dividends paid to shareholders
b) Salaries and wages paid to employees
c) Corporate taxes paid
d) Shareholder distributions
Answer: b) Salaries and wages paid to employees
Which of the following is not a type of income subject to corporate tax?
a) Active business income
b) Interest income
c) Capital gains from sales of stock
d) Personal income of shareholders
Answer: d) Personal income of shareholders
A corporation has a $100,000 net operating loss (NOL) in 2024. How long can it carry this loss forward to offset future taxable income?
a) 2 years
b) 5 years
c) 20 years
d) Indefinitely
Answer: d) Indefinitely
Which of the following is true about the dividends-received deduction (DRD) for corporations?
a) It allows a deduction for dividends received from foreign corporations only.
b) It can be 50%, 65%, or 100% depending on the ownership percentage.
c) It applies to all types of dividend income, regardless of ownership percentage.
d) It does not apply to dividends from domestic corporations.
Answer: b) It can be 50%, 65%, or 100% depending on the ownership percentage.
Which of the following best describes the temporary difference in accounting for income taxes?
a) A difference between accounting income and taxable income that will reverse in the future.
b) A permanent difference between accounting income and taxable income.
c) A type of income that is exempt from taxes.
d) A difference that never reverses and is recognized as a tax liability.
Answer: a) A difference between accounting income and taxable income that will reverse in the future.
What is the purpose of creating a deferred tax liability?
a) To account for future tax savings from deductible temporary differences.
b) To recognize taxes that have been paid but not yet expensed.
c) To reflect taxes that will be paid in the future due to temporary differences.
d) To adjust tax rates for inflation.
Answer: c) To reflect taxes that will be paid in the future due to temporary differences.
How does a corporation account for income tax expense under the accrual method?
a) Recognizes income tax expense when the tax is paid.
b) Recognizes income tax expense based on taxable income for the period.
c) Recognizes income tax expense based on book income, with adjustments for temporary and permanent differences.
d) Only recognizes income tax expense at the end of the fiscal year.
Answer: c) Recognizes income tax expense based on book income, with adjustments for temporary and permanent differences.
Which of the following is a permanent difference in accounting for income taxes?
a) Depreciation methods that differ for tax and financial reporting purposes.
b) Revenue earned from foreign operations subject to lower tax rates.
c) Interest income on municipal bonds that is exempt from taxes.
d) A warranty expense recognized for financial reporting but not deductible for tax purposes.
Answer: c) Interest income on municipal bonds that is exempt from taxes.
Which of the following tax positions must a corporation assess when preparing its income tax provision under ASC 740 (formerly FAS 109)?
a) Whether a tax position is probable of being sustained upon examination.
b) Whether the tax position is supported by authoritative guidance only.
c) Whether a tax position can be reconciled with the tax return filed.
d) Whether the corporation has a tax loss carryback available.
Answer: a) Whether a tax position is probable of being sustained upon examination.
How does state income tax differ from federal income tax for corporations?
a) State taxes apply only to multinational corporations.
b) State income tax is based on a company’s worldwide income, similar to federal taxation.
c) States may allow deductions and credits not available under federal tax laws.
d) States do not tax corporate income, only property and sales.
Answer: c) States may allow deductions and credits not available under federal tax laws.
Which of the following factors would likely impact a corporation’s state income tax liability?
a) Whether the corporation operates across multiple states and is subject to their tax codes.
b) The corporation’s net operating loss carryforwards.
c) The international tax treaties affecting foreign operations.
d) The rate of dividends paid to shareholders.
Answer: a) Whether the corporation operates across multiple states and is subject to their tax codes.
What is the significance of an “apportionment factor” in state corporate income taxation?
a) It determines the federal tax rate applicable to a corporation’s income.
b) It is used to allocate a corporation’s income between different states based on factors like sales, property, and payroll.
c) It applies to corporations with international operations to calculate foreign taxes.
d) It is a penalty imposed by states for failing to file tax returns.
Answer: b) It is used to allocate a corporation’s income between different states based on factors like sales, property, and payroll.
Which method of apportionment is most commonly used by states to allocate corporate income?
a) The gross receipts method
b) The cost-of-performance method
c) The three-factor formula (property, payroll, and sales)
d) The value-added tax (VAT) method
Answer: c) The three-factor formula (property, payroll, and sales)
A corporation files a state tax return in multiple jurisdictions. If one state allows a higher depreciation deduction than another, how is this handled in the corporation’s consolidated tax return?
a) The corporation must report the maximum allowable depreciation across all states.
b) Each state’s tax rate and deductions are applied to the portion of income apportioned to it.
c) The corporation applies a uniform depreciation rate for all states.
d) Depreciation deductions are not allowed for state tax purposes.
Answer: b) Each state’s tax rate and deductions are applied to the portion of income apportioned to it.
How do corporations account for differences in state tax rates?
a) By using the highest state tax rate applicable to all income.
b) By calculating state taxes based on local county rates.
c) By applying the state’s rate to the apportioned income for each jurisdiction.
d) By excluding income from lower-rate states to reduce overall tax liability.
Answer: c) By applying the state’s rate to the apportioned income for each jurisdiction.
Which of the following is an example of a tax credit that might reduce a corporation’s state tax liability?
a) Charitable contributions credit
b) Foreign tax credit
c) R&D tax credit
d) Credit for foreign exchange losses
Answer: c) R&D tax credit
What is the accounting treatment for a corporation’s uncertain tax position under ASC 740?
a) The corporation must recognize the full tax benefit in its financial statements if the position is reasonably certain.
b) The corporation must measure the tax benefit based on the most likely amount of future tax benefits.
c) The corporation must recognize a tax benefit only if the tax position has a greater than 50% chance of being sustained.
d) The corporation must avoid recognizing any tax benefits unless there is clear supporting guidance.
Answer: c) The corporation must recognize a tax benefit only if the tax position has a greater than 50% chance of being sustained.
What is the significance of the “valuation allowance” in accounting for deferred tax assets?
a) It is used to adjust the tax rates on deferred tax assets to reflect changes in future rates.
b) It reduces the value of a deferred tax asset when it is more likely than not that the asset will not be realized.
c) It is used to offset the impact of permanent tax differences.
d) It is created when there is a potential tax liability that needs to be accounted for.
Answer: b) It reduces the value of a deferred tax asset when it is more likely than not that the asset will not be realized.
Which of the following is considered a permanent difference for a corporation under ASC 740?
a) Depreciation differences between book and tax reporting.
b) Revenue from a sale of stock.
c) The interest expense on debt that is deductible for tax purposes but not for financial reporting.
d) Non-deductible fines and penalties.
Answer: d) Non-deductible fines and penalties.
Under the IRS Section 162, which of the following costs can a corporation deduct for tax purposes?
a) Dividends paid to shareholders.
b) Salaries and bonuses paid to employees.
c) Contributions to charity.
d) Purchase of capital assets.
Answer: b) Salaries and bonuses paid to employees.
Which of the following is true about the federal income tax treatment of state income taxes paid by a corporation?
a) State income taxes are always considered tax-exempt for corporations.
b) State income taxes are generally deductible as an ordinary and necessary business expense for federal tax purposes.
c) State income taxes are excluded from the corporate tax returns.
d) State income taxes reduce the effective federal tax rate.
Answer: b) State income taxes are generally deductible as an ordinary and necessary business expense for federal tax purposes.
How do state tax credits typically impact a corporation’s tax provision?
a) State tax credits reduce the corporation’s gross income for the state return.
b) State tax credits are recorded as income for financial reporting.
c) State tax credits reduce the tax expense reported for financial reporting purposes.
d) State tax credits increase the corporation’s federal tax liability.
Answer: c) State tax credits reduce the tax expense reported for financial reporting purposes.
When a corporation has a net operating loss (NOL), what is the tax treatment for carrybacks and carryforwards in most states?
a) Most states do not allow NOL carrybacks but allow carryforwards.
b) NOLs can be carried back 5 years and carried forward indefinitely in all states.
c) Most states allow both carrybacks and carryforwards of NOLs.
d) NOLs are only carried forward in states with no income tax.
Answer: a) Most states do not allow NOL carrybacks but allow carryforwards.
Which of the following best describes “economic nexus” in state income taxation?
a) A state tax concept based on a corporation’s physical presence in the state.
b) A requirement for corporations to file a state income tax return only if their gross income exceeds a state-specific threshold.
c) A concept that allows a corporation to be taxed in a state regardless of physical presence, based on economic activity in the state.
d) A state-specific policy that applies only to international corporations.
Answer: c) A concept that allows a corporation to be taxed in a state regardless of physical presence, based on economic activity in the state.
What is the impact of a “taxable event” in accounting for state income taxes?
a) A taxable event results in an immediate recognition of a tax expense.
b) A taxable event is used to determine the state tax rate applicable to a corporation’s income.
c) A taxable event creates a permanent difference between book income and taxable income.
d) A taxable event triggers a deferred tax asset or liability based on temporary differences.
Answer: d) A taxable event triggers a deferred tax asset or liability based on temporary differences.
In state taxation, what does the term “throwback rule” generally refer to?
a) The rule that requires corporations to report revenue from out-of-state operations as income in the state of origin.
b) The rule requiring corporations to allocate a certain percentage of sales back to the state of domicile.
c) The rule that ensures tax credits can be applied across multiple states.
d) The rule that allows corporations to exclude revenue from foreign operations when calculating state income tax.
Answer: a) The rule that requires corporations to report revenue from out-of-state operations as income in the state of origin.
Which of the following best describes the “pass-through” entity taxation model?
a) The corporation pays taxes directly on income before distributing earnings to shareholders.
b) Income is taxed at the corporate level, and then taxed again when distributed to shareholders.
c) Profits and losses of certain entities pass through to the shareholders, who report them on their personal tax returns.
d) A pass-through entity is exempt from state taxes but must file federal returns.
Answer: c) Profits and losses of certain entities pass through to the shareholders, who report them on their personal tax returns.
How do states treat the taxation of income generated by intangible assets such as patents or trademarks?
a) All states tax intangible income at the same rate as tangible assets.
b) States typically have lower tax rates for income generated from intangible assets.
c) Intangible income may be taxed differently based on whether the income is sourced from in-state or out-of-state activities.
d) Intangible income is generally exempt from state taxation.
Answer: c) Intangible income may be taxed differently based on whether the income is sourced from in-state or out-of-state activities.
What is the primary difference between “sales tax” and “corporate income tax” in terms of state taxation?
a) Sales tax is levied on a corporation’s gross income, while corporate income tax is levied on a corporation’s net income.
b) Sales tax applies to goods and services sold to consumers, while corporate income tax applies to profits earned by corporations.
c) Sales tax is paid only by the corporation, while corporate income tax is passed onto consumers.
d) Sales tax applies only to retail corporations, while corporate income tax applies to all corporations.
Answer: b) Sales tax applies to goods and services sold to consumers, while corporate income tax applies to profits earned by corporations.
Which of the following is an example of a temporary difference in accounting for income taxes?
a) A corporation’s charitable contributions that are deductible for tax purposes but not for financial reporting.
b) A corporation’s income from an investment that is excluded from taxable income under tax laws but included in financial reporting.
c) The treatment of goodwill amortization, which is deductible for tax purposes but not expensed for financial reporting.
d) Non-deductible fines and penalties.
Answer: c) The treatment of goodwill amortization, which is deductible for tax purposes but not expensed for financial reporting.
What is the purpose of “state apportionment formulas” in state taxation?
a) To allocate income among various states based on the state’s total income.
b) To determine how much of a corporation’s income is subject to taxation by each state.
c) To avoid double taxation by applying uniform tax rates across states.
d) To calculate the amount of federal income tax a corporation must pay.
Answer: b) To determine how much of a corporation’s income is subject to taxation by each state.
Under which circumstances would a corporation be required to file a state tax return in a state where it has no physical presence?
a) Only if the corporation generates more than $1 million in revenue in that state.
b) If the corporation has “economic nexus” in the state based on economic activities such as sales.
c) If the corporation is engaged in foreign business operations.
d) Corporations are never required to file in a state where they do not have physical presence.
Answer: b) If the corporation has “economic nexus” in the state based on economic activities such as sales.
Which of the following states does not impose a state income tax on corporations?
a) California
b) Texas
c) New York
d) Illinois
Answer: b) Texas
Which of the following is true about the “federal tax consolidation” rules for corporations?
a) Corporations can elect to file as a single group for federal tax purposes to offset income and losses.
b) Consolidated tax returns are only available for multinational corporations.
c) Only small businesses are eligible for federal tax consolidation.
d) Corporations must file individual tax returns for each subsidiary, even if they are in the same corporate group.
Answer: a) Corporations can elect to file as a single group for federal tax purposes to offset income and losses.
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