CPA Regulation (REG) : CPA Regulation (REG)
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #4 : Book/Tax Differences
Of the following items, which should be included on Schedule M1 of form 1120 to reconcile book income to taxable income?
Ending balance of retained earnings
Cash distributions to shareholders
Corporate bond interest
Premiums paid on key person life insurance policy
Premiums paid on key person life insurance policy
Of the following items, only premiums paid on key person’s life insurance policy is a difference between book and tax.
Example Question #1 : Book/Tax Differences
A C Corp had a beginning credit balance in its warranty reserve account of $120,000. During the year, it accrued estimated warranty expense of $16,000. At the end of the year, the Corp’s warranty reserve had a $90,000 credit balance. What amount of warranty expense should the C Corp deduct?
$16,000
$46,000
$14,000
$30,000
$46,000
Companies may only deduct the actual amount of cost incurred in meeting their warranty obligations. The actual cost incurred by the Corp in meeting its warranty obligation is calculated as $120,000 + $16,000 - $90,000 = $46,000.
Example Question #1 : Book/Tax Differences
Of the following items, which would result in a permanent book to tax difference as compared to a temporary?
Municipal bonds
Organizational cost deductions
Depreciation
LIFO accounting
Municipal bonds
Muni bonds are local government bonds which are tax-deductible for federal purposes. This income will never be taxed at the federal level, thus creating a permanent difference.
Example Question #181 : Cpa Regulation (Reg)
With regard to unrelated business income of an exempt organization, which one of the following statements is correct?
The tax on unrelated business income can be imposed even if the unrelated business activity is intermittent and is carried on once per year.
An exempt organization that earns any unrelated business income in excess of $100,000 during a particular year will lose its exempt status for that particular year.
An unrelated trade or business activity that results in a loss is excluded from the definition of unrelated business.
An exempt organization is not taxed on unrelated business income of less than $1,000.
An exempt organization is not taxed on unrelated business income of less than $1,000.
Unrelated business income (UBI) is tax exempt up to $1,000 (only UBI in excess of $1,000 is taxed). Any activity that would create UBI that results in a loss may be carried over like the NOL of any other organization. UBI does not have a specific limit above which tax exempt status is lost. Additionally, UBI relates to an ongoing business enterprise, and does not apply to one-time or intermittent activity.
Example Question #182 : Cpa Regulation (Reg)
The private foundation status of an exempt organization will terminate if it:
Does not distribute all of its net assets to one or more public charities.
Is a foreign corporation.
Becomes a public charity.
Is governed by a charter that limits the exempt purposes.
Becomes a public charity.
Termination of tax-exempt status for a private foundation may occur voluntarily or involuntarily. Involuntary termination occurs when a foundation becomes a public charity; an organization cannot be both. Involuntary termination may also occur if the IRS makes a determination to terminate tax exempt status of an organization due to repeated or willful violations of private foundation provisions.
Example Question #183 : Cpa Regulation (Reg)
Which of the following activities regularly conducted by a tax-exempt organization will result in unrelated business income?
I. Selling articles made by disabled persons as part of their rehabilitation, when the organization is involved exclusively in their rehabilitation.
II. Operating a grocery store almost fully staffed by emotionally disabled persons as part of a therapeutic program.
II only
Neither I nor II
I only
Both I and II
Neither I nor II
Unrelated business income (UBI) is an unrelated business that meets three criteria: 1) it is a trade or business; 2) it regularly carried on; and 3) is not substantially related to furthering the tax-exempt purpose of the organization. In both of the options given, the information indicates that these activities relate to a tax-exempt organization’s purpose (rehabilitation of disabled persons or therapy for emotionally disabled persons).
Example Question #184 : Cpa Regulation (Reg)
Of the following types of business, which may not qualify for a 501c3 exemption from federal income taxes?
A foundation
A partnership
A fund
Corporation
A partnership
Partnerships are not included in the tax exempt section of IRC Section 501c3 which provides for corporations, funds, and foundations to be organizations eligible for exemption from federal income taxes.
Example Question #185 : Cpa Regulation (Reg)
ABC Trust is an exempt organization that operates under a corporate charter granted by the state in which its principal office is located. ABC’s tax on unrelated business taxable income is:
Computed at rates applicable to trusts
Abated
Computed at corporate income tax rates
Credited against the tax on recognized gains
Computed at corporate income tax rates
ABC’s tax on unrelated business taxable income is computed at corporate income tax rates. Unless the organization is taxable as a trust, its UBTI is subject to regular corporate taxes.
Example Question #6 : Tax Exempt Organizations
Which of the following is the correct designation for an exempt organization?
100(b)(4)
501(c)(3)
Neither
Both
501(c)(3)
Under US Federal regulations, tax-exempt organizations are qualified under 501(c)(3).
Example Question #186 : Cpa Regulation (Reg)
Anne and Bart formed AB, LLC, a limited liability company, and elected to treat it as a partnership for tax purposes. Anne contributed $10,000 cash, and Bart contributed $5,000 cash, but Bart had a special skill that the partnership needed to be successful. The partnership agreement stated that Anne and Bart would both have a 50% interest in the LLC and that all profits and losses would be divided evenly between them. The LLC paid Bart $5,000 in year 1 for Bart's services to the partnership. The $5,000 would generally be reported to Bart as which of the following?
Wages.
Dividends.
Salary.
A guaranteed payment.
A guaranteed payment.
When a capital interest is acquired for services provided to a partnership, the interest is treated as ordinary income to the partner. Ordinary income to a partner is classified as guaranteed payments.
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