ACCT553

Week 5 Homework Solutions

_________________________________________________________
Chapter 14
1. Please explain how charitable contributions come into play in determining corporate taxable income. (5 points)
The deductibility is dependent upon (a) the type of property donated, (b) when it is donated, and (c) to whom it is
donated, and it is ultimately limited by the corporation's adjusted taxable income. The maximum amount
deductible by a corporation is 10% of its adjusted taxable income (14,345)

2. What happens to a loss on the corporate tax return (Form 1120)? Does it pass through to the shareholders? Is
it available for future or past periods? Please explain in detail. (5 points)
C corporation losses remain inside the C corporation and do not pass through to the individual shareholders.
Such loss is referred to as a net operating loss (NOL). A C corporation may carry back its NOL 2 years and
forward 20 years (14,335).

3. Please describe the purpose of Schedules M-1 and M-3. When is a Schedule M-3 required in lieu of a
Schedule M-1? (5 points)
Schedules M-1 and M-3 reconcile net income from the companys books (i.e., book income) to taxable income
(per tax return) by starting with book income and showing all the adjustments necessary to arrive at taxable
income. Some of these adjustments are temporary (will reverse over time), whereas others are permanent (never
allowed for tax purposes). This reconciliation is necessary because companies record certain income and
expense items in their books for financial recordkeeping purposes (i.e., for purposes of reporting company
performance to shareholders or for making management decisions) in a manner that is not consistent with income
tax laws. Schedule M-1 is required for corporations when total assets exceed $10 M (14,465).
Chapter 17
4. Please define and differentiate a spin-off, a split-off, and a split-up. (5 points)
A spin-off is the transfer of stock of a controlled corporation to shareholders.
A split-off is the same as a spin-off, except that one or more shareholders in the transferor corporation surrender
some or all of their stock in the transferor corporation.
A split-up is a transfer of all assets to two or more corporations followed by an exchange of stock, so that the
transferor is liquidated and the transferors former shareholders, in the aggregate, control the transferee
corporations (17,157).