Exam 2: Corporations: Introduction and Operating Rules

Ed,an individual,incorporates two separate businesses that he owns by establishing two new corporations.Each corporation generates taxable income of $90,000.Each corporation will have a tax liability of $26,725.

Beige Corporation,a C corporation,purchases a warehouse on December 4,2001,for $500,000.Straight-line depreciation is taken in the amount of $104,701 before the property is sold on February 8,2010,for $600,000.What is the amount and character of the gain recognized by Beige on the sale of the realty?

Ted is the sole shareholder of a C corporation,and Sue owns a sole proprietorship.Both businesses were started in 2010,and each business sustained a $5,000 net capital loss for the year.Which of the following statements is correct?

An expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1.

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?

Corporate taxpayers have a few advantages over individual taxpayers with respect to charitable contribution deductions.Briefly describe the differences in tax treatment of charitable contributions that favor corporate taxpayers.

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

Owl Corporation,a C corporation,recognizes a gain on the sale of a § 1250 asset in the current year.Owl had used the straight-line method for depreciating the realty.Some of Owl's gain on the sale of the realty will be treated as depreciation recapture (ordinary income).

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

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.

There is no Federal income tax assessed on partnerships (including those formed as LLCs)or S corporations.Since all states follow the Federal approach as to entity taxation,state income taxation is a neutral factor in the selection of an entity form.

Describe the Federal tax treatment of entities formed as limited liability companies.

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

Rodney,the sole shareholder of a calendar year,accrual basis C corporation,loaned the corporation a substantial amount of money on January 1,2010.The corporation accrued $25,000 of interest expense on the loan on December 31,2010.It pays the interest to Rodney,a cash basis taxpayer,on February 1,2011.Under these facts:

Osprey Company had a net loss of $200,000 from merchandising operations in 2010,its first year of operations.Mary,the sole owner of Osprey,works full time in the business.She has a large amount of income from other sources and is in the 35% marginal tax bracket irrespective of Osprey.Considering this information,compare the affect of Osprey's loss to Mary under the various types of entity forms discussed in the chapter.

No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days.

Jason,an architect,is the sole shareholder of Purple Corporation,a personal service corporation.The corporation paid Jason a salary of $120,000 during its fiscal year ending November 30,2010.How much salary must Purple pay Jason during the period December 1 through December 31,2010,to permit the corporation to continue to use its fiscal year without negative tax effects?

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

Azul Corporation,a personal service corporation,had $300,000 of active income,$40,000 of portfolio income,and a $190,000 passive loss during the year.How much is Azul's taxable income?