Exam 17: Corporations: Introduction and Operating Rules

The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.

Albatross,a C corporation,had $140,000 net income from operations and a $25,000 short-term capital loss in the current year.Albatross Corporation's taxable income is $140,000.

Don,the sole shareholder of Pastel Corporation (a C corporation),has the corporation pay him a salary of $600,000 in the current year.The Tax Court has held that $200,000 represents unreasonable compensation.Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

On December 31,2015,Lavender,Inc. ,an accrual basis C corporation,accrues a $50,000 bonus to Barry,its vice president and a 40% shareholder.Lavender pays the bonus to Barry,who is a cash basis taxpayer,on March 14,2016.Lavender can deduct the bonus in 2016,the year in which it is included in Barry's gross income.

If a C corporation uses straight-line depreciation on real estate (§ 1250 property),no portion of a gain on the sale of the property will be recaptured as ordinary income.

The corporate marginal income tax rates range from 15% to 39%,while the individual marginal income tax rates range from 10% to 39.6%.

Azure Corporation,a C corporation,had a long-term capital gain of $50,000 in the current year.The maximum amount of tax applicable to the capital gain is $7,500 ($50,000 × 15%).

Employment taxes apply to all entity forms of operating a business.As a result,employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

A personal service corporation must use a calendar year,and is not permitted to use a fiscal year.

Tomas owns a sole proprietorship,and Lucy is the sole shareholder of a C corporation.In the current year both businesses make a net profit of $60,000.Neither business distributes any funds to the owners in the year.For the current year,Tomas must report $60,000 of income on his individual tax return,but Lucy is not required to report any income from the corporation on her individual tax return.

Carol and Candace are equal partners in Peach Partnership.In the current year,Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner.Peach must pay tax on $75,000 of income.

Eagle Company,a partnership,had a short-term capital loss of $10,000 during the year.Aaron,who owns 25% of Eagle,will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Thrush Corporation files Form 1120,which reports taxable income of $200,000.The corporation's tax is $56,250.

Rajib is the sole shareholder of Robin Corporation,a calendar year S corporation.Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib.Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Jake,the sole shareholder of Peach Corporation,a C corporation,has the corporation pay him $100,000.For tax purposes,Jake would prefer to have the payment treated as dividend instead of salary.

Quail Corporation is a C corporation with net income of $125,000 during the current year.If Quail paid dividends of $25,000 to its shareholders,the corporation must pay tax on $100,000 of net income.Shareholders must report the $25,000 of dividends as income.

Under the "check-the-box" Regulations,a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

As a general rule,C corporations must use the cash method of accounting.However,under several exceptions to this rule (e.g. ,average annual gross receipts of $5 million or less for the most recent 3-year period),a C corporation can use the accrual method.

Donald owns a 45% interest in a partnership that earned $130,000 in the current year.He also owns 45% of the stock in a C corporation that earned $130,000 during the year.Donald received $20,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $78,500 of income on his individual income tax return for the year.