Exam 17: Corporations: Introduction and Operating Rules

A corporation may elect to amortize startup expenditures over the 60-month period beginning with the month in which the corporation begins business.

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 a subtraction on Schedule M-1.

Jessica,a cash basis individual,is the sole shareholder of Crow Corporation,a regular corporation.On January 1,2010,Jessica loaned Crow $500,000,with the principal due in 10 years and 10% interest due each January 1.Crow,an accrual method,calendar year taxpayer,accrued $50,000 of interest expense on the loan on December 31,2010,and paid the $50,000 to Jessica on January 1,2011.How much is Crow's deduction for interest on this loan for 2010? Would your answer change if Jessica was a 45% shareholder of Crow?

Eagle Company,a partnership,had a long-term capital gain of $15,000 during the year.Aaron,who owns 40% of Eagle,must report $6,000 of Eagle's long-term capital gain on his individual tax return.

The dividends received deduction may be subject to a limitation based on a percentage of taxable income computed without regard to the NOL deduction,the domestic production activities deduction,the dividends received deduction,and any capital loss carryback to the current tax year.

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

Beige Company has approximately $250,000 in net income in 2010 before deducting any compensation or other payment to its sole owner,Janet (who is single).Assume that Janet is in the 35% marginal tax bracket.Discuss the tax aspects of each of the following arrangements.(Ignore any employment tax considerations. )

Generally,corporations with no taxable income must file a Form 1120.

A personal service corporation with taxable income of $150,000 will have a tax liability of $52,500.

Norma formed Hyacinth Enterprises,a proprietorship,in 2010.In its first year,Hyacinth had operating income of $200,000 and operating expenses of $100,000.In addition,Hyacinth had a long-term capital loss of $9,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $50,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2010?

Geneva,a sole proprietor,sold one of her business assets for a $5,000 long-term capital gain.Geneva's marginal tax rate is 25%.Gulf,a C corporation,sold one of its assets for a $5,000 long-term capital gain.Gulf's marginal tax rate is 25%.What tax rates are applicable to these capital gains?

Red Corporation,which owns stock in Blue Corporation,had net operating income of $200,000 for the year.Blue pays Red a dividend of $40,000.Red takes a dividends received deduction of $28,000.Which of the following statements is correct?

Briefly describe the accounting methods available for adoption by a C corporation.

Glen and Michael are equal partners in Trout Enterprises,a calendar year partnership.During the year,Trout Enterprises had gross income of $400,000 and operating expenses of $220,000.In addition,the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000.During the year,Glen withdrew $60,000 from the partnership,and Michael withdrew $60,000.Discuss the impact of this information on the taxable income of Trout,Glen,and Michael.

In the current year,Amber,Inc. ,a calendar C corporation,has income from operations of $400,000 and operating deductions of $535,000.Amber also had $50,000 of dividends from a 10% stock ownership in a domestic corporation.Which of the following statements is incorrect with respect to Amber's net operating loss deduction?

On December 31,2010,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?

Quail Corporation is a C corporation with net income of $300,000 during 2010.If Quail paid dividends of $50,000 to its shareholders,the corporation must pay tax on $300,000 of net income.Shareholders must report the $50,000 of dividends as income.

Black Corporation,an accrual basis taxpayer,was formed and began operations on February 1,2010.During its first year of operations (February 1 - December 31,2010),Black incurred the following expenses: fee paid to state of incorporation of $1,000,accounting and legal services incident to organization of $7,000,and expenses related to the printing and sale of stock certificates of $9,000.Black has $17,000 of qualified organizational expenditures that it may elect to amortize.

Generally,corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years.

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