Exam 17: Corporations: Introduction and Operating Rules

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation.During the year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000.In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000.During the year, Rhea Corporation distributed $50,000 to Lucinda.With respect to this information, which of the following statements is correct?

Copper Corporation, a C corporation, had gross receipts of $5 million in 2009, $6 million in 2010, and $3 million in 2011.Gold Corporation, a personal service corporation (PSC), had gross receipts of $4 million in 2009, $7 million in 2010, and $5 million in 2011.Which of the corporations will be allowed to use the cash method of accounting in 2012?

Briefly describe the charitable contribution deduction rules applicable to C corporations.

Katherine, the sole shareholder of Purple Corporation, a calendar year C corporation, has the corporation pay her a salary of $450,000 in the current year. The Tax Court has held that $150,000 represents unreasonable compensation. Purple Corporation's taxable income is unaffected by the Tax Court's determination.

Luis is the sole shareholder of a C corporation, and Eduardo owns a sole proprietorship. Both businesses were started in 2012, and each business has a long-term capital gain of $20,000 for the year. Neither business made any distributions during the year. With respect to this information, which of the following statements is incorrect?

Mallard Corporation, a C corporation that is not a PSC, incorporated in December 2012 and expects to have substantial organizational expenditures. Discuss tax planning strategies that Mallard should consider in order to maximize the deduction for organizational expenditures.

In the current year, Amber, Inc., a calendar C corporation, has income from operations of $200,000 and operating deductions of $225,000. Amber also had $30,000 of dividends from a 25% stock ownership in a domestic corporation. Which of the following statements is incorrect with respect to Amber's net operating loss deduction?

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.

Amber Company has $400,000 in net income in 2012 before deducting any compensation or other payment to its sole owner, Alfredo. Assume that Alfredo is in the 35% marginal tax bracket. Discuss the tax aspects of each of the following independent arrangements. (Assume that any salaries are reasonable in amount and ignore any employment tax considerations.)

For a corporation in 2012, the domestic production activities deduction is equal to 9% of the higher of (1) qualified production activities income or (2) taxable income. However, the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

During the current year, Violet, Inc., a closely held corporation (not a PSC), has $130,000 of passive loss, $90,000 of active business income, and $70,000 of portfolio income. How much is Violet's taxable income for the current year?

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

What is the annual required estimated tax payment for a C corporation? What are the rules regarding payment of the estimated tax?

Robin Corporation, a calendar year C corporation, had taxable income of $1.9 million, $1.2 million, and $900,000 for 2009, 2010, and 2011, respectively.Robin has taxable income of $1.5 million for 2012. The minimum 2012 estimated tax installment payments for Robin are:

Jessica, a cash basis individual, is a 60% shareholder of Crow Corporation, a regular corporation. On January 1, 2012, Jessica loaned Crow $300,000, with the principal due in 5 years and 6% interest due each January 1. Crow, an accrual method, calendar year taxpayer, accrued $18,000 of interest expense on the loan on December 31, 2012, and paid the $18,000 to Jessica on January 1, 2013. How much is Crow's deduction for interest on this loan for 2012? Would your answer change if Jessica was a 25% shareholder of Crow?

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2011 of $5,000. In 2012, Heron made a further charitable contribution of $20,000. Heron's 2012 deduction is limited to $15,000 (10% of taxable income). The current year's contribution must be applied first against the $15,000 limitation.

Explain the rules regarding the accounting periods available to corporate taxpayers.

Bear Corporation has a net short-term capital gain of $35,000 and a net long-term capital loss of $200,000 during 2012.Bear Corporation has taxable income from other sources of $600,000.Prior years' transactions included the following: Compute the amount of Bear's capital loss carryover to 2013.

What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?