Exam 17: Corporations: Introduction and Operating Rules

Norma formed Hyacinth Enterprises, a proprietorship, in 2012.In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000.In addition, Hyacinth had a long-term capital loss of $10,000.Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2012?

Erin Corporation, a personal service corporation, had $230,000 of active income, $40,000 of portfolio income, and a $250,000 passive loss during the year. How much is Erin's taxable income?

During the current year, Quartz Corporation (a calendar year C corporation) has the following transactions: Quartz owns 15% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss) for the year?

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is an addition on Schedule M-1?

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.

In the current year, Plum Corporation, a computer manufacturer, donated 100 laptop computers to a local school district (a qualified educational organization). The computers were constructed by Plum earlier this year, and the school district allocated the computers among its various schools where they will be used for educational purposes. Plum's basis in the computers is $50,000, and their fair market value is $120,000. What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation)?

Orange Corporation owns stock in White Corporation and has net operating income of $400,000 for the year.White Corporation pays Orange a dividend of $60,000.What amount of dividends received deduction may Orange claim if it owns 15% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

A calendar year C corporation can receive an automatic 6-month extension to file its 2012 corporate return (Form 1120) by filing Form 7004 by March 15, 2013.

Compare the taxation of C corporations with that of individual taxpayers. Provide several examples of similarities and differences in your discussion.

The corporate marginal income tax rates range from 10% to 35%, while the individual marginal income tax rates range from 15% to 39%.

A taxpayer is considering the formation of a business that would derive some amounts of tax-exempt interest, qualified dividends, and capital gains. Explain how these income categories would be reported and taxed under the various types of entity forms discussed in the chapter. Consider the tax implications both to the entities and to their owners.

On December 31, 2012, Lavender, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 70% shareholder.Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2013.Lavender can deduct the bonus in 2013, the year in which it is included in Barry's gross income.

Flycatcher Corporation, a C corporation, has two equal individual shareholders, Nancy and Pasqual. In the current year, Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder. Regardless of any tax consequences resulting from their interests in Flycatcher, Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket. With respect to the current year, which of the following statements is incorrect?

Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?

Nancy is a 40% shareholder and president of Robin Corporation, a regular corporation. The board of directors of Robin has decided to pay Nancy a $175,000 bonus for the year based on her outstanding performance. The directors want to pay the $175,000 as salary, but Nancy would prefer to have it paid as a dividend. If both Robin Corporation and Nancy are in a 35% marginal tax bracket irrespective of the treatment of the bonus, discuss which form of payment would be most beneficial for each party. (Ignore any employment tax considerations.)

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

Donald owns a 60% interest in a partnership that earned $230,000 in the current year. He also owns 60% of the stock in a C corporation that earned $230,000 during the year. Donald received $50,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $188,000 of income on his individual income tax return for the year.

During the current year, Shrike Company had $220,000 net profit from operations. Carlos, the sole owner of Shrike, is in the 35% marginal tax bracket.Determine the combined tax burden for Shrike and Carlos under the following two independent situations. (Ignore any employment taxes.)

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.