McGraw-Hill's Taxation of Business Entities, 2012e

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Unformatted text preview: Chapter 05 - Corporate Operations Chapter 5 Corporate Operations SOLUTIONS MANUAL Discussion Questions: 1. [LO 1] In general terms, identify the similarities and differences between the corporate taxable income formula and the individual taxable income formula. Similarities: Both start with the gross income (income after exclusions) for the taxable year. Both formulas reduce gross income by deductions to determine taxable income. Both formulas apply tax rates to taxable income to determine the tax liability. Finally, both formulas reduce the tax liability by credits and tax payments to determine taxes due or the refund. Both formulas include are allowed to take deductions for business expenses to come to taxable income. Differences: Individuals distinguish deductions between for and from AGI deductions and they report adjusted gross income. Corporations don’t distinguish deduction types and don’t report adjusted gross income. This means corporations don’t itemize deductions nor do they deduct standard deductions. Finally, unlike individuals corporations don’t deduct personal exemptions. 2. [LO 1] Is a corporation’s choice of its tax year independent from its year-end for financial accounting purposes? No. The tax year must be the same year as it uses for financial accounting. 3. [LO 1] Can taxable corporations use the cash method of accounting? Explain. The three types of overall accounting methods which are available to corporations are accrual, cash, and hybrid. Generally, corporations must use the accrual method of accounting unless it is a small corporation (average gross receipts for the past 3 years are $5 million or less). For tax purposes, corporations with average gross receipts for the past three years of $5 million or less may use the cash method of accounting. Corporations that have not been in existence for at least three years may compute their average gross receipts over the period they have been in existence to determine if they are allowed to use the cash method of accounting. 4. [LO 2] Briefly describe the process of computing a corporation’s taxable income assuming the corporation must use GAAP to determine its book income. How might the process differ for corporations not required to use GAAP for book purposes? To compute taxable income a corporation will start with book income and make book to tax adjustments for items that are accounted for differently for book and tax purposes. 5-1 Chapter 05 - Corporate Operations The end result is taxable income. In contrast, a corporation that is not required to (and chooses not to) use GAAP for tax purposes could use tax accounting methods to determine book and tax income. In these situations, the corporations would not report any book-tax differences....
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This note was uploaded on 10/11/2011 for the course ACCT 757 taught by Professor Mandelkorn during the Summer '11 term at CUNY Queens.

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Chap005SM - Chapter 05 - Corporate Operations Chapter 5...

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