Exam 17: Corporations: Introduction and Operating Rules

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Carrot Corporation,a C corporation,has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2017.Carrot Corporation had taxable income from other sources of $720,000.Prior years' transactions included the following: Compute the amount of Carrot's capital loss carryover to 2018.

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

In the current year,Plum Corporation,a computer manufacturer,donated 100 laptop computers to a local university (a qualified educational organization).The computers were constructed by Plum earlier this year,and the university will use the computers for research and research training.Plum's basis in the computers is $35,000,and their fair market value is $120,000.What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation)?

On December 31,2017,Peregrine Corporation,an accrual method,calendar year taxpayer,accrued a performance bonus of $100,000 to Charles,a cash basis,calendar year taxpayer.Charles is president and sole shareholder of the corporation.When can Peregrine deduct the bonus?

Canary Corporation,an accrual method C corporation,uses the calendar year for tax purposes.Leticia,a cash method taxpayer,is both a shareholder of Canary and the corporation's CFO.On December 31,2017,Canary has accrued a $75,000 bonus to Leticia.Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations. a.​Leticia owns 35% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 2, 2018. b.​Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on May 4, 2018. c.​Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on April 12, 2018.

A corporation must file a Federal income tax return even if it has no taxable income for the year.

Hornbill Corporation,a cash basis and calendar year C corporation,was formed and began operations on May 1,2017.Hornbill incurred the following expenses during its first year of operations (May 1 - December 31,2017): temporary directors meeting expenses of $10,500,state of incorporation fee of $5,000,stock certificate printing expenses of $1,200,and legal fees for drafting corporate charter and bylaws of $7,500.Hornbill Corporation's 2017 deduction for organizational expenditures is $5,800.

In the current year,Oriole Corporation donated a painting worth $30,000 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 $10,000.Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

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.

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 $75,000 bonus for the year based on her outstanding performance.The directors want to pay the $75,000 as salary,but Nancy would prefer to have it paid as a dividend.If Robin Corporation is in the 34% marginal tax bracket and Nancy is in the 33% 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.)

Eagle Corporation owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction.Hawk Corporation pays Eagle a dividend of $130,000,which was considered in calculating the $100,000.What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?

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.

In the current year,Crow Corporation,a C corporation,donated scientific property (basis of $30,000,fair market value of $50,000) to State University,a qualified charitable organization,to be used in research.Crow had held the property for four months as inventory.Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

Amber Company has $100,000 in net income in the current year before deducting any compensation or other payment to its sole owner,Alfredo.Assume that Alfredo is in the 33% marginal tax bracket.Discuss the tax aspects of each of the following independent situations.(Assume that any salaries are reasonable in amount and ignore any employment tax considerations.) a.Alfredo operates Amber Company as a proprietorship. b.Alfredo incorporates Amber Company and pays himself no salary and no dividend. c.​Alfredo incorporates Amber Company and pays himself a $50,000 salary and a dividend of $42,500 ($50,000 - $7,500 corporate income tax).

For purposes of the estimated tax payment rules,a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

Emerald Corporation,a calendar year C corporation,was formed and began operations on April 1,2017.The following expenses were incurred during the first tax year (April 1 through December 31,2017) of operations. ​ Assuming a § 248 election,what is the Emerald's deduction for organizational expenditures for 2017?

Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year.Bronze Corporation pays Copper a dividend of $150,000.What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income)?

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

Heron Corporation,a calendar year C corporation,had an excess charitable contribution for 2016 of $5,000.In 2017,Heron made a further charitable contribution of $20,000.Heron's 2017 deduction is limited to $15,000 (10% of taxable income).The 2017 contribution must be applied first against the $15,000 limitation.