 Hello, and welcome to the session. This is Professor Fahad in which we would look at CPA exam questions, specifically on the regulation section. These topics could be also covered in an entity or corporate income tax course at a graduate or graduate level. Specifically, I'm gonna be focusing on C corporation, which is a major topic on the CPA exam. The way the CPA exam is set up, there are certain topics that you cannot take any chances on. In other words, you have to understand very well as corporation, C corporation partnership. In other words, if the AI CPA software on the exam day notices that you have a weakness in C-corp, more likely you will not pass the exam because that's a major topic. And I will talk about how I can help you overcome this difficulty. Linkedin is where you would need to connect with me if you haven't done so. Please subscribe to my YouTube channel. I have 1,700 plus accounting, auditing, tax, finance, hundreds of CPA questions and Excel tutorial. C corporation is covered heavily in my income tax course and my corporate income tax course. If you like my lectures, please like them, share them. If they benefit you, it means they might benefit other people. Share the wealth connect with me on Instagram. On my website, farhatlectures.com, you will find additional resources such as this corporate income tax course that's gonna help you with this topic to supplement your CPA exam. And I have dozens of accounting courses that's gonna help you increase your knowledge and understanding of the topic, which that's what's needed for the CPA exam plus practice questions. I strongly suggest you check out my website if you are looking to add 10 to 15 points to your CPA exam. So let's take a look at the first question. As I said, on the exam, you really have to know your material. You have to have a good understanding of the material. Sometime you might have to memorize certain things in other places you have to know it. Let's take a look at this question. And sometime they'll try to trick you. That's why understanding the material, you can answer any question that they throw at you. Life insurance premium paid by a corporation on behalf of its employee. So the corporation is spaying and the benefits are the employees. Are deductible for financial reporting purposes to arrive to book income, regardless of who the beneficiary of the policy is? Is this a correct statement? Or are not deductible for tax purposes if the corporation pays the premium on behalf of the employee and the employee can name the beneficiary of the policy? So here what they're asking you is, do you know how do we treat life insurance premium paid by a corporation? Listen to me carefully on behalf of the employee. Look, if the corporation incurring an expense on behalf of the employee, that expense is deductible. That expense is deductible. If you're paying on behalf of the employee, that expense is deductible. Therefore, I would say, A, one is correct, are deductible for financial reporting purposes to arrive to book income, regardless of who the beneficiary is. So as far as book income, it's deductible. Now, number two it says, are not deductible for tax purposes if the corporation pays the premium on behalf of the employees and the employee can name the beneficiary of the policy. Now we have to be very careful. So we already know that they are deductible for book income. If it's an expense, it's an expenditure, it's deductible. So we're going to keep A because A has one. We can take out B. We keep C because two could be right and we could eliminate D because we know one is correct. So now all what we have to do is to find out if this statement is correct. If this statement is correct, the answer is C. If this statement is not correct, the answer is A, which is one only. We have to read this very carefully. Are not deductible for tax purposes and the life insurance premium, we have to be careful about this because we know in certain circumstances, they're not deductible and they're not taxable. Why? Because when we receive, when we settle life insurance by law, it's not taxable. So life insurance premium, I'm sorry, life insurance proceeds. So if we receive life insurance proceeds, they are not taxable. That's what we know. And if something is not taxable, if something is not taxable, it's also not deductible. Simply put, if I'm not going to allow you to, I'm not going to tax you on it, I'm not going to give you a deduction. That's what the IRS is saying, but we have to read this problem very carefully. Are not deductible for tax purposes? If the corporation pays the premium, that's fine. On behalf of the employees, and the employee can name the beneficiary of the policy. That is true. When it's not deductible and not taxable, if the company is paying the premium and the company itself is the beneficiary, so the company gets the money. That's not the case here. Who's going to get the premium? The person, the individual, the employee, and the employee can name the beneficiary of the policy. So that's why that statement is not correct. If the proceeds were to go to the corporation, then the premium is not deductible and it's not taxable, but that's not the case here. Therefore, two is not a correct answer. The answer is A1. So you have to be careful. It's not deductible and not taxable if the corporation is paying that premium and the corporation is getting the proceeds. That's not the case. That's not the case here. Let's take a look at this question. Fast chip industries is a C-corp. How does fast chip ink treat net capital loss for federal income tax purposes? So on the exam, they cover a lot how the corporation treat capital losses. That's very important. Well, it's something you have to know. It's something you have to memorize. If we have capital losses, what can we do with capital losses? We can offset capital losses against capital gains. What if we have access capital losses? That's fine. We can carry it back three years and we can carry it forward five years. So you have to memorize. So this is a memorize and you could see this question on the exam itself. This question on the exam itself, okay? Now, here's what where students have a misunderstanding about this capital loss. Maybe I should keep it for the next question. No, it's okay. I'll explain it now. Some students, they know a little bit about capital losses. So they don't have the full picture. They would say it's deductible in full from the corporation ordinary income. So simply put, some students, they say, well, guess what? Ordinary income. Here's what you need to know that ordinary income and capital gain are treated the same for corporation. So be careful for corporation and specifically for C corporation. Whether you have ordinary income or capital gain, they're taxed at the same rate, okay? Which is different than individual, okay? So when the students think, well, ordinary income and capital gain, they're both taxed at the same rate, well, guess what? I can deduct, then I can deduct the capital losses against ordinary income. That's not true. Although they are taxed at the same rate, capital losses cannot offset, cannot offset ordinary income. That's what they cannot do, okay? So they are taxed at the same rate, but they cannot deduct it. Also, some students will choose A, and I'm gonna tell you why you will choose A and why it's wrong. And you have to be very careful. Deducted from the corporation ordinary income only to the extent of 3,000 per year. That is a true statement against ordinary income if we are talking about individual. If we're talking about a person, yes. For a corporation, that's not the case. For the corporation, you can take your losses, capital losses, offset capital gains, anything left. You can carry it back three years or carry it forward five years. Carry it forward 15 years is wrong. That's why this question is a little bit tricky. It's something that you have to memorize and understand because now you have to kind of differentiate. They expect you to differentiate how capital losses are treated for personal as well as corporations. So you have to know the difference between the two. And let's take a look at this question to reinforce what we just said. Bake corporation, a calendar year had the following capital gains and capital losses during year five. In addition, Bake realized taxable income of 56,000 from its regular business operation for calendar year five. What's the total taxable income? So they told you from operating the business they made 56,000 and they have a bunch of gains, short-term gains, long-term gains and short-term losses. Here's what you do, net them out. So this is a gain, a loss, a gain and a loss. And a loss. So basically gain and loss, they cancel each other. What we're left with is 2,500 gain. For corporation doesn't matter whether it's short-term or long-term. Here's what's gonna happen. We're gonna take this gain. And remember what I just said earlier. It's treated like ordinary income. So if we have ordinary income of 56,000, we're gonna add to it 2,500. Therefore, our taxable income is 58,500. This is our taxable income for year five. Let's take a look at this question. Which of the following costs incurred to organize a corporation are considered amortizable organizational expenditure? Here, what do you need to know? You need to know what are your organizational expenditure? Well, your organizational expenditure are legal and professional fees to incorporate your business. To incorporate your business. You have to be very careful. Professional fees, that sounds like right to issue a corporate stock. No, to issue a corporate stock that's not an organizational expense. Print and cost to issue corporate stock. That's also related to A, basically the same. If A is wrong, B is wrong. And when you're looking at this, you should be thinking basically issuing stocks and printing stocks are the same. So they cannot A and B because if it's A, it must be B. If it's B, it must be A. So that's why you could take out A and B. Legal fees for drafting the corporate charter. Yes, when you are drafting the corporate charter to incorporate, that's a legal fee. C is a good answer. Commission paid by the corporation to an underwriter? No, that's not the case. The legal and professional fees to incorporate, not to issue stocks, not for the underwriter to incorporate. Let's take a look at this question. And this question is important because it deals with the Schedule M1 and I have that Schedule M1 heavily covered on my website. In year four, Adam Corp in a cruel basis calendar year, C Corporation reported book income of 480,000. In that amount where rent expense of 5,000, municipal interest income, federal income tax, interest expense on the debt incurred to carry the interest fund. So let me show you how I like to show you Schedule M1. So basically they want you as what's the taxable? What's the U.S. Corporation income tax return? So we're gonna go from book to tax. So here we go. So for book, you have a total of 480,000. And what's included in this number is those items. Let me just show it to you here. Let me just, oh, okay. So we have 480,000, of which we have rent expense of 5,000 that was included. We have money bond of 50,000 that was included. We have federal tax that was deducted 170,000. And we have interest on money bond deducted of 2,000. So those were all factored into coming to this 480,000. Now the question is, now you're gonna go from 480,000, which is the book income. This is the, they're telling us here, it's the book income or gap income. This is book income. And we're gonna go to taxable income. Here, what we have to do. Well, when we go to taxable income, we have to look at these. Is rent expense okay? Can you deduct rent expense for tax purposes and book purposes? Yes, we don't have to do anything with rent expense. Money bond, we included 50,000 of money bond. Are these taxable? No, money bonds are not taxable. Therefore you have to deduct $50,000. So those money bonds, you have to take them out when it comes to tax purposes. So notice I took them out. Federal taxes, the word deductible to come up to 480. Are they deductible? Can you deduct your federal income tax? No, therefore you have to add them back since they are not deductible, you have to add them back. Interest on municipal bond, you are able to deduct to come up to 480. Are these interest expense on mini bond deductible? And the answer is no, therefore you have to add them back because you deduct them, but you cannot deduct them. Now what you do, you will take 480,000 and you deduct 50, add 170, add 2,000. You come up with 602,000. This is an important topic. This could be a simulation on the exam. You could have many questions about Schedule M1. Make sure you are familiar with it. Again, I'm gonna remind you, I do have an entity tax course that cover these topics and details on farhatlectures.com. And this is how I can help you succeed past the exam. And you will find hundreds, if not more than 1,000 tax and CPA questions on my website to help you pass. And one subscription gives you access to all my courses. So whether you are taking tax, audit, anything you have access to everything. Good luck, study hard and stay safe during those coronavirus.