Exam 2: Corporations: Introduction and Operating Rules

Charles is a 45% shareholder and the president of Chinook,Inc.The board of directors of Chinook has decided to pay him a $50,000 bonus for the year based on outstanding performance.The directors want to pay the $50,000 as salary,but Charles would prefer to have it paid as a dividend.Discuss.

Sage,Inc.,a closely held corporation that is not a PSC,has a $140,000 passive loss,$85,000 of active business income,and $35,000 of portfolio income.How much of the passive loss can Sage deduct?

Jason,an architect,is the sole shareholder of Purple Corporation,a PSC.The corporation paid Jason a salary of $180,000 during its fiscal year ending October 31,2008.How much salary must Purple pay Jason during the period November 1 through December 31,2008,to permit the corporation to continue to use its fiscal year without negative tax effects?

Ed,an individual,incorporates two separate businesses that he owns by establishing two new corporations.Each corporation generates taxable income of $50,000.Each corporation will have a tax liability of $7,500.

Nontax considerations in the selection of business form include limited liability,free transferability of ownership interests,continuity of life,and centralized management.

In general,corporations that maintain inventory for sale to customers may use either the cash or accrual method of accounting for determining sales and cost of goods sold.

Under FIN 48,an entity must evaluate tax positions taken to determine whether the positions satisfy the more-likely-than-not threshold required for recognition of related tax benefits. Provide at least four examples of "tax positions" that an entity must evaluate under FIN 48.

On December 30,2008,Debbie,a sole proprietor,pledged to make a $10,000 charitable contribution on or before January 15,2009.Green Corporation,an accrual basis corporation,made a similar pledge on the same date,and the contribution was authorized by Green's board of directors.Debbie and Green Corporation,both calendar year taxpayers,can deduct these contributions in 2008.

Starling Corporation,a closely held personal service corporation,has $90,000 of active income,$54,000 of portfolio income,and a $135,000 loss from a passive activity.How much of the passive loss can Starling deduct?

Coyote Enterprises,an S corporation,had a capital loss of $50,000 during the year.Gerald,who owns 40% of Coyote's stock,may report $20,000 of Coyote's capital loss on his individual Federal income tax return (Form 1040).

Geneva,a sole proprietor,sold one of her business assets for a $20,000 long-term capital gain.Geneva's marginal tax rate is 35%.Gulf,a C corporation,sold one of its assets for a $20,000 long-term capital gain.Gulf's marginal tax rate is 35%.What tax rates are applicable to these capital gains?

Jeff owns a 30% interest in a partnership that earned $100,000 in the current year.He also owns 30% of the stock in a C corporation that earned $100,000 during the year.The corporation did not make any distributions,and the partnership distributed $20,000 to him.Jeff must report $30,000 of income on his individual tax return.

Canary Corporation,which sustained a $5,000 net short-term capital loss during the year,will enter $5,000 as an addition on Schedule M-1.

A corporation that is not required to file Schedule M-3 is permitted to file a Schedule M-3 voluntarily.

Maroon Company had $100,000 net profit from operations in 2008 and paid Bobbie,its sole shareholder,a dividend of $77,750 ($100,000 net profit - $22,250 corporate tax).Assume that Bobbie is in the 35% marginal tax bracket.Would Bobbie's tax situation be better or worse if Maroon Company were a proprietorship and Bobbie withdrew $77,750 from the business during the year? Explain.

In 2008,Fox Corporation had taxable income of $100,000,which included a long-term capital gain of $30,000.The maximum amount of tax applicable to the capital gain is $4,500 ($30,000 * 15%).

A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

FAS 109 prescribes the rules regarding the determination of current income tax expense for income statement presentation and deferred taxes for balance sheet presentation. Briefly describe how current income tax expense for book purposes is determined under FAS 109.

Fender Corporation was organized in 2006 and had profits in 2006 and 2007.The corporation had an NOL in 2008.The corporation should elect to forgo carrying the NOL back:

All corporations are allowed to choose a calendar year or a fiscal year for Federal tax reporting purposes.