Exam 2: Corporations: Introduction and Operating Rules

Luis is the sole shareholder of Stork,Inc.,a C corporation,and Eduardo owns a sole proprietorship. Both businesses were started in 2008 and make a profit of $80,000 this year.Each owner withdraws $50,000 from his business during the year. Which of the following statements relating to 2008 is incorrect?

During 2008,Sparrow Corporation,a calendar year C corporation,had operating income of $425,000,operating expenses of $210,000,a short-term capital loss of $45,000,and a long-term capital gain of $125,000.How much is Sparrow's tax liability for 2008?

Bass Corporation received a dividend of $80,000 from Trout Corporation.Bass owns 15% of the Trout Corporation stock.Assuming it is not subject to the taxable income limitation,Bass's dividends received deduction is $64,000.

Hippo,Inc.,a calendar year C corporation,manufactures golf gloves.For 2008,Hippo had taxable income of $200,000,qualified domestic production activities income of $250,000,and W-2 wages related to qualified production activities income of $23,000.Hippo's domestic production activities deduction for 2008 is:

Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1:

Bear Corporation has net short-term capital gains of $25,000 and net long-term capital losses of $170,000 during 2008.Bear Corporation had taxable income from other sources of $700,000.Prior years' transactions included the following: Compute the amount of Bear's capital loss carryover to 2009.

Cecelia is the sole shareholder of Aqua Corporation,a newly formed C corporation.Joyce is the sole shareholder of Teal Corporation,a newly formed C corporation that is classified as a PSC.Both Cecelia and Joyce plan to have their corporations elect a March 31 fiscal year.Will the IRS treat both corporations alike with respect to the fiscal year election? Explain.

On April 8,2008,Oriole Corporation donated a painting worth $150,000 to the Texas Art Museum,a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $75,000.Oriole's charitable contribution deduction is $150,000 (ignoring the taxable income limitation).

During the year,Platinum Corporation (a calendar year taxpayer)has the following transactions: a.Platinum owns 18% of Brass Corporation's stock. What is Platinum's taxable income (loss) for the year? b.What is the dividends received deduction if Platinum owned 75% of Brass Corporation's stock?

Nicole owns and operates a sole proprietorship.She is considering incorporating the business as a C corporation and has asked you to explain how a corporate tax return differs from the return for a sole proprietorship.In addition,she has asked you to explain the nontax factors that she should consider in deciding whether to incorporate her business.

For a corporation,the domestic production activities deduction is equal to 6% of the lower of (1)qualified production activities income or (2)taxable income. However,the deduction cannot exceed the W-2 wages related to qualified production activities income.

Maize Corporation had $100,000 operating income and $40,000 operating expenses during the year.In addition,Maize had a $3,000 long-term capital gain and a $5,000 short-term capital loss.Compute Maize's taxable income for the year.

C corporations can elect fiscal years that are different from those of their shareholders,but personal service corporations (PSCs)are subject to substantial restrictions in the choice of a fiscal year.Why are the fiscal year choices of PSCs limited?

Discuss the purpose of Schedule M-1.Give an example of one addition and one subtraction that could be reported on Schedule M-1.

Grocer Services Corporation (a calendar year taxpayer),a wholesale distributor of food,made the following donations to qualified charitable organizations during the year: How much qualifies for the charitable contribution deduction?

Azul Corporation,a personal service corporation,had $450,000 of active income,$65,000 of portfolio income,and a $70,000 passive loss during the year.How much is Azul's taxable income?

Beth and Debbie are equal owners in Muskrat Enterprises,a calendar year business.During the year,Muskrat had $1 million of gross income and $600,000 of operating expenses.In addition,it sold land that had been held as an investment for a long-term capital gain of $120,000.During the year,Beth and Debbie each received a distribution of $80,000 from Muskrat.Discuss the tax impact of these transactions on the parties involved if Muskrat is: A)A partnership. B)An S corporation. C)A C corporation.

On December 31,2008,Lavender,Inc.,an accrual basis C corporation,accrues a $90,000 bonus to Barry,its vice president and a 40% shareholder.Lavender pays the bonus to Barry,who is a cash basis taxpayer,on March 15,2009.Lavender can deduct the bonus in 2008.

Which of the following statements is correct regarding the taxation of C corporations?

Serena,a cash basis taxpayer,owns 60% of the stock of Lark Corporation,a calendar year,accrual basis corporation.On December 31,2008,Lark accrues a salary of $30,000 to Serena,but the payment is not made until 2009. a.When does Serena report the salary as income, and when does Lark deduct the salary expense? b.How would your answer change if Serena were a 25% shareholder?