Deck 2: Corporations: Introduction and Operating Rules

Question 1

Nontax considerations in the selection of business form include limited liability,free transferability of ownership interests,continuity of life,and centralized management.

Answer 1

True

Question 2

Lou,an employee and sole shareholder of Amarillo Corporation,a C corporation,has the corporation pay him $175,000.Lou is in the 35% tax bracket.His income tax will be the same,regardless of whether Amarillo treats the payments as a dividend or as salary.

Answer 2

False
Lou must pay tax on his salary at his marginal rate of 35%,while dividends are generally taxed at a 15% rate.

Question 3

Herman and Henry are equal partners in Badger Enterprises,a calendar year partnership.During the year,Badger Enterprises had $305,000 gross income and $230,000 operating expenses.Badger distributed $20,000 to each of the partners. Herman and Henry each must report $37,500 of income from the partnership.

Answer 3

True
The partnership is not a taxpaying entity.Its profit (loss)and separate items flow through to the partners.The partnership's Form 1065 reports net profit of $75,000 ($305,000 income - $230,000 expenses).Herman and Henry both receive a Schedule K-1 reporting net profit of $37,500.Each partner reports net profit of $37,500 on his own return.

Question 4

Peach Corporation had $135,000 of active income,$180,000 of portfolio income,and a $155,000 passive loss during the year.If Peach is a closely held C corporation that is not a PSC,it can deduct the $155,000 passive loss.

Question 5

Compensation that is determined to be unreasonable is usually treated as a constructive dividend to the shareholder and is not deductible by the corporation.

Question 6

The passive loss rules apply more favorably to closely held C corporations than to personal service corporations (PSCs).

Question 7

Robin is a 50% shareholder in Robin-Wren,an S corporation.Robin-Wren earned net income of $100,000 during the year,and Robin received a distribution of $35,000 from the corporation.Robin must report a $35,000 dividend on his individual Federal income tax return (Form 1040).

Question 8

Under the "check-the-box" Regulations,a single-member LLC that fails to elect to be to treated as a corporation will be taxed as a partnership.

Question 9

All corporations are allowed to choose a calendar year or a fiscal year for Federal tax reporting purposes.

Question 10

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

Question 11

In 2008,Fox Corporation had taxable income of $100,000,which included a long-term capital gain of $30,000.The maximum amount of tax applicable to the capital gain is $4,500 ($30,000 * 15%).

Question 12

Albatross,a C corporation,had $200,000 net income from operations and a $25,000 short-term capital loss in 2008.Albatross Corporation's taxable income is $200,000.

Question 13

In general,corporations that maintain inventory for sale to customers may use either the cash or accrual method of accounting for determining sales and cost of goods sold.

Question 14

Quail Corporation is a C corporation with net income of $500,000 during 2008.If Quail paid dividends of $70,000 to its shareholders,the corporation must pay tax on $430,000 of net income.Shareholders must report the $70,000 of dividends as income.

Question 15

Coyote Enterprises,an S corporation,had a capital loss of $50,000 during the year.Gerald,who owns 40% of Coyote's stock,may report $20,000 of Coyote's capital loss on his individual Federal income tax return (Form 1040).

Question 16

An individual who owns a proprietorship must report profit from the proprietorship on his/her Federal income tax return.

Question 17

On December 31,2008,Lavender,Inc.,an accrual basis C corporation,accrues a $90,000 bonus to Barry,its vice president and a 40% shareholder.Lavender pays the bonus to Barry,who is a cash basis taxpayer,on March 15,2009.Lavender can deduct the bonus in 2008.

Question 18

Thrush Corporation files Form 1120,which reports taxable income of $200,000.The corporation's tax is $56,250.

Question 19

Emma,the sole shareholder of Quail Corporation (a C corporation),has the corporation pay her a salary of $300,000 in 2008.The Tax Court has held that $80,000 represents unreasonable compensation.Assuming Emma is in the 35% bracket in 2008,the Tax Court's holding will reduce the total tax she pays in 2008.

Question 20

Jeff owns a 30% interest in a partnership that earned $100,000 in the current year.He also owns 30% of the stock in a C corporation that earned $100,000 during the year.The corporation did not make any distributions,and the partnership distributed $20,000 to him.Jeff must report $30,000 of income on his individual tax return.

Question 21

A corporation with no taxable income need not file a Form 1120.

Question 22

A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

Question 23

No dividends received deduction is allowed unless the corporation has held the stock for more than 60 days.

Question 24

Ed,an individual,incorporates two separate businesses that he owns by establishing two new corporations.Each corporation generates taxable income of $50,000.Each corporation will have a tax liability of $7,500.

Question 25

Macayo,Inc.,received $800,000 life insurance proceeds on the death of its president.The $800,000 will be an addition item on Macayo's Schedule M-1.

Question 26

On April 8,2008,Oriole Corporation donated a painting worth $150,000 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 $75,000.Oriole's charitable contribution deduction is $150,000 (ignoring the taxable income limitation).

Question 27

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

Question 28

Bass Corporation received a dividend of $80,000 from Trout Corporation.Bass owns 15% of the Trout Corporation stock.Assuming it is not subject to the taxable income limitation,Bass's dividends received deduction is $64,000.

Question 29

Zircon Corporation donated scientific property worth $350,000 to City University (a qualified charitable organization)to be used in research.The basis of the property was $100,000,and Zircon had held it for ten months as inventory.Zircon Corporation may deduct $225,000 as a charitable contribution (ignoring the taxable income limitation).

Question 30

Aqua,Inc.,paid $15,000 interest on a loan to purchase tax-exempt bonds.The $15,000 is a subtraction on Aqua's Schedule M-1.

Question 31

For a corporation,the domestic production activities deduction is equal to 6% of the lower of (1)qualified production activities income or (2)taxable income. However,the deduction cannot exceed the W-2 wages related to qualified production activities income.

Question 32

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

Question 33

A cash basis corporation that incurs (but does not pay)qualifying organizational expenditures in its first year of operations may include such expenses in the 180-month amortization period.

Question 34

Egret Corporation,a calendar year taxpayer,had an excess charitable contribution for 2007 of $10,000.In 2008,it made a further charitable contribution of $14,000.Its 2008 deduction is limited to $16,000.In applying the 10% limitation,the $10,000 carryover must be used after the current year contribution.

Question 35

On December 30,2008,Debbie,a sole proprietor,pledged to make a $10,000 charitable contribution on or before January 15,2009.Green Corporation,an accrual basis corporation,made a similar pledge on the same date,and the contribution was authorized by Green's board of directors.Debbie and Green Corporation,both calendar year taxpayers,can deduct these contributions in 2008.

Question 36

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.

Question 37

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

Question 38

Bluebird Corporation received a $200,000 dividend from Canary Corporation.Bluebird,which owns 80% of Canary Corporation,may take a dividends received deduction of $200,000.

Question 39

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

Question 40

A corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years.

Question 41

Luis is the sole shareholder of Stork,Inc.,a C corporation,and Eduardo owns a sole proprietorship. Both businesses were started in 2008 and make a profit of $80,000 this year.Each owner withdraws $50,000 from his business during the year. Which of the following statements relating to 2008 is incorrect?

A)Eduardo must report $80,000 of net profit on his individual return.
B)Luis must report dividend income of $80,000.
C)Eduardo's proprietorship is not subject to an entity (separate) level income tax.
D)Stork Corporation must pay tax on $80,000.
E)None of the above.

Question 42

Penguin Corporation,a C corporation,has two equal shareholders,Bob and Leo.Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder.Before considering the dividend,Bob is in the 10% marginal tax bracket and Leo is in the 28% marginal tax bracket.Which of the following statements is incorrect?

A)$100,000 will be subject to double taxation.
B)Penguin could have avoided paying corporate tax if, instead of paying a dividend, it had paid Bob and Leo a salary of $50,000 each (assuming a $50,000 salary for each is reasonable).
C)A preferential tax rate will apply to the dividend income of both Bob and Leo.
D)If Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less Federal income tax on his salary than Leo would have paid on his salary.
E)None of the above.

Question 43

Starling Corporation,a closely held personal service corporation,has $90,000 of active income,$54,000 of portfolio income,and a $135,000 loss from a passive activity.How much of the passive loss can Starling deduct?

A)$0.
B)$54,000.
C)$90,000.
D)135,000.
E)None of the above.

Question 44

Elk,a C corporation,has $400,000 operating income and $350,000 operating expenses during the year.In addition,Elk has a $30,000 long-term capital gain and a $52,000 short-term capital loss.Elk's taxable income is:

A)($2,000).
B)$28,000.
C)$50,000.
D)$80,000.
E)None of the above.

Question 45

Bear Corporation has net short-term capital gains of $25,000 and net long-term capital losses of $170,000 during 2008.Bear Corporation had taxable income from other sources of $700,000.Prior years' transactions included the following:
Compute the amount of Bear's capital loss carryover to 2009.

A)$0.
B)$30,000.
C)$85,000.
D)$145,000.
E)None of the above.

Question 46

Maize Corporation had $100,000 operating income and $40,000 operating expenses during the year.In addition,Maize had a $3,000 long-term capital gain and a $5,000 short-term capital loss.Compute Maize's taxable income for the year.

A)$60,000.
B)$108,000.
C)$109,000.
D)$111,000.
E)None of the above.

Question 47

Patrick,an attorney,is the sole shareholder of Gander Corporation.Gander is a PSC with a fiscal year ending October 31.The corporation paid Patrick a salary of $360,000 during its fiscal year ending October 31,2008.How much salary must Gander pay Patrick during the period November 1 through December 31,2008,to permit the corporation to continue to use its fiscal year without negative tax effects?

A)$0.
B)$30,000.
C)$60,000.
D)$120,000.
E)None of the above.

Question 48

Falcon Corporation had gross receipts of $5 million in 2005,$6 million in 2006,and $3 million in 2007.Hawk Corporation,a PSC,had gross receipts of $4 million in 2005,$6 million in 2006,and $7 million in 2007.Which of the corporations will be allowed to use the cash method of accounting in 2008?

A)Falcon Corporation only.
B)Hawk Corporation only.
C)Both Falcon Corporation and Hawk Corporation.
D)Neither Falcon Corporation nor Hawk Corporation.
E)None of the above.

Question 49

Jason,an architect,is the sole shareholder of Purple Corporation,a PSC.The corporation paid Jason a salary of $180,000 during its fiscal year ending October 31,2008.How much salary must Purple pay Jason during the period November 1 through December 31,2008,to permit the corporation to continue to use its fiscal year without negative tax effects?

A)$0.
B)$20,000.
C)$30,000.
D)$60,000.
E)None of the above.

Question 50

Bjorn owns a 40% interest in an S corporation that earned $150,000 in 2008.He also owns 30% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $35,000 to Bjorn and the C corporation paid dividends of $35,000 to Bjorn.How much income must Bjorn report from these businesses?

A)$0 income from the S corporation and $0 income from the C corporation.
B)$35,000 income from the S corporation and $35,000 income from the C corporation.
C)$60,000 income from the S corporation and $35,000 of dividend income from the C corporation.
D)$60,000 income from the S corporation and $0 income from the C corporation.
E)None of the above.

Question 51

Sage,Inc.,a closely held corporation that is not a PSC,has a $140,000 passive loss,$85,000 of active business income,and $35,000 of portfolio income.How much of the passive loss can Sage deduct?

A)$0.
B)$85,000.
C)$120,000.
D)$140,000.
E)None of the above.

Question 52

FIN 48 provides that a tax position must be recognized when it has a "more-likely-than-not" probability of being sustained on examination. In this analysis,the statutes of limitation should be considered.

Question 53

Which of the following statements about a limited liability company is correct?

A)A limited liability company with more than one owner can elect to be classified as either a partnership or a proprietorship.
B)A limited liability company with only one owner can elect to be classified as either a proprietorship or a corporation.
C)If a limited liability company does not make an election under the "check-the-box" regulations, multi-owner entities are classified as corporations.
D)If a limited liability company does not make an election under the "check-the-box" regulations, single-person entities are classified as corporations.
E)None of the above.

Question 54

Geneva,a sole proprietor,sold one of her business assets for a $20,000 long-term capital gain.Geneva's marginal tax rate is 35%.Gulf,a C corporation,sold one of its assets for a $20,000 long-term capital gain.Gulf's marginal tax rate is 35%.What tax rates are applicable to these capital gains?

A)15% rate applies to both Geneva and Gulf.
B)15% rate applies to Geneva and 35% rate applies to Gulf.
C)15% rate applies to Gulf and 35% rate applies to Geneva.
D)35% rate applies to both Geneva and Gulf.
E)None of the above.

Question 55

Under FAS 109,a deferred tax asset results when the book (financial)basis of an item exceeds its tax basis (e.g.,MACRS over straight-line depreciation).

Question 56

Glen and Michael are equal partners in Trout Enterprises,a calendar year partnership.During the year,Trout Enterprises had gross income of $500,000 and operating expenses of $270,000.In addition,the partnership sold land that had been held for investment purposes for a long-term capital gain of $120,000.During the year,Glen withdrew $50,000 from the partnership,and Michael withdrew $75,000.Discuss the impact of this information on the taxable income of Trout,Glen,and Michael.

A)Trout has $0 taxable income, Glen's taxable income increases by $50,000, and Michael's taxable income increases by $75,000.
B)Trout has $230,000 taxable income, Glen's taxable income increases by $50,000, and Michael's taxable income increases by $75,000.
C)Trout has $0 taxable income, Glen's taxable income increases by $175,000, and Michael's taxable income increases by $175,000.
D)Trout has $0 taxable income, Glen's taxable income increases by $115,000, and Michael's taxable income increases by $115,000.
E)None of the above.

Question 57

Norma formed Hyacinth Enterprises,a proprietorship,in 2008.In its first year,Hyacinth had operating income of $150,000 and operating expenses of $100,000.In addition,Hyacinth had a long-term capital loss of $4,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $25,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2008?

A)Increases Norma's taxable income by $25,000.
B)Increases Norma's taxable income by $21,000 ($25,000 income - $4,000 long-term capital loss).
C)Increases Norma's taxable income by $47,000 ($50,000 income - $3,000 long-term capital loss).
D)Increases Norma's taxable income by $50,000.
E)None of the above.

Question 58

Rodney,the sole shareholder of a calendar year,accrual basis C corporation,loaned the corporation a substantial amount of money on January 1,2008.The corporation accrued $45,000 of interest expense on the loan on December 31,2008.It pays the interest to Rodney,a cash basis taxpayer,on April 1,2009.Under these facts:

A)The corporation will be allowed to deduct the interest expense in 2008 and Rodney will be required to report the interest income in 2009.
B)The corporation will be allowed to deduct the interest expense in 2009 and Rodney will be required to report the interest income in 2009.
C)The corporation will be allowed to deduct the interest expense in 2009 and Rodney will be required to report the interest income in 2008.
D)The corporation will be allowed to deduct the interest expense in 2008 and Rodney will be required to report the interest income in 2008.
E)None of the above.

Question 59

Juan is the sole shareholder of an S corporation,and Diego owns a sole proprietorship.Both businesses,which were started in 2008,make a profit of $300,000 in 2008.Each owner withdraws $225,000 from his business during the year.Which of the following statements is correct?

A)Diego must report net profit from his business of $300,000 for 2008.
B)Juan must report dividend income of $300,000 for 2008.
C)Diego's proprietorship is required to pay tax on the $300,000 profit for 2008.
D)Juan's S corporation must pay tax on $300,000 for 2008.
E)None of the above.

Question 60

Azul Corporation,a personal service corporation,had $450,000 of active income,$65,000 of portfolio income,and a $70,000 passive loss during the year.How much is Azul's taxable income?

A)$380,000.
B)$445,000.
C)$450,000.
D)$515,000.
E)None of the above.

Question 61

Ostrich Corporation has net short-term capital gains of $50,000 and net long-term capital losses of $280,000 during 2008.Ostrich had taxable income from other sources of $1 million.Prior years' transactions included the following:

a.How are the capital gains and losses treated on Ostrich's 2008 tax return?
b.Determine the amount of the 2008 capital loss that is carried back to each of the previous years.
c.Compute the amount of capital loss carryover, if any, and indicate the years to which the loss may be carried.
d.If Ostrich were a proprietorship, how would Ellen, the owner, report these transactions on her 2008 tax return?

Question 62

Maroon Company had $100,000 net profit from operations in 2008 and paid Bobbie,its sole shareholder,a dividend of $77,750 ($100,000 net profit - $22,250 corporate tax).Assume that Bobbie is in the 35% marginal tax bracket.Would Bobbie's tax situation be better or worse if Maroon Company were a proprietorship and Bobbie withdrew $77,750 from the business during the year? Explain.

Question 63

During 2008,Violet Corporation (a calendar year taxpayer)had the following income and expenses:

In addition to the above,Violet had a domestic production activities deduction of $3,000,and a charitable contribution carryover (originating in 2004)of $6,000.

A)What is Violet's charitable contribution deduction for 2008?
B)If any of Violet's charitable contributions are not deductible in 2008, how is such excess treated?

Question 64

Fender Corporation was organized in 2006 and had profits in 2006 and 2007.The corporation had an NOL in 2008.The corporation should elect to forgo carrying the NOL back:

A)If tax rates in the preceding years were low and if higher tax rates are expected in the future.
B)If tax rates in the preceding years were high and if lower tax rates are expected in the future.
C)If all of the NOL cannot be used in the carryback years.
D)If it cannot accurately predict future tax rates.
E)None of the above.

Question 65

Redwood,Inc.,a closely held personal service corporation,has a $240,000 passive loss from a rental activity,$135,000 of active business income,and $105,000 of portfolio income.How much of the passive loss can Redwood deduct?

A)$0.
B)$105,000.
C)$135,000.
D)$240,000.
E)None of the above.

Question 66

Red Corporation,which owns stock in Blue Corporation,had net operating income of $400,000 for the year.Blue pays Red a dividend of $60,000.Red takes a dividends received deduction of $48,000.Which of the following statements is correct?

A)Red owns less than 20% of Blue Corporation.
B)Red owns 20% or more, but less than 80% of Blue Corporation.
C)Red owns 80% of Blue Corporation.
D)Red owns 80% or more of Blue Corporation.
E)None of the above.

Question 67

Copper Corporation owns stock in Bronze Corporation and has net operating income of $600,000 for the year.Bronze Corporation pays Copper a dividend of $200,000.What amount of dividends received deduction may Copper claim if it owns 95% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income)?

A)$0.
B)$140,000.
C)$160,000.
D)$190,000.
E)None of the above.

Question 68

Rhino,Inc.,a calendar year C corporation,had the following income and expenses in 2008:

How much is Rhino's charitable contribution deduction for 2008?

A)$24,200.
B)$24,600.
C)$26,000.
D)$34,000.
E)None of the above.

Question 69

Orange Corporation owns stock in White Corporation and has net operating income of $800,000 for the year.White Corporation pays Orange a dividend of $300,000.What amount of dividends received deduction may Orange claim if it owns 18% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

A)$0.
B)$210,000.
C)$240,000.
D)$300,000.
E)None of the above.

Question 70

Eagle Corporation owns stock in Hawk Corporation and has taxable income of $233,000 for the year before considering the dividends received deduction.Hawk Corporation pays Eagle a dividend of $300,000,which was considered in calculating the $233,000.What amount of dividends received deduction may Eagle claim if it owns 25% of Hawk's stock?

A)$0.
B)$186,400.
C)$240,000.
D)$300,000.
E)None of the above.

Question 71

Beige Company has approximately $400,000 in net income in 2008 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:
a.Janet operates Beige Company as a proprietorship.
b.Janet incorporates Beige Company and pays herself a salary of $100,000 and no dividend.
c.Janet incorporates the company and pays herself a $100,000 salary and a dividend of $199,750 ($300,000 - $100,250 corporate income tax).
d.Janet incorporates the company and pays herself a salary of $400,000.

Question 72

Beth and Debbie are equal owners in Muskrat Enterprises,a calendar year business.During the year,Muskrat had $1 million of gross income and $600,000 of operating expenses.In addition,it sold land that had been held as an investment for a long-term capital gain of $120,000.During the year,Beth and Debbie each received a distribution of $80,000 from Muskrat.Discuss the tax impact of these transactions on the parties involved if Muskrat is:

A)A partnership.
B)An S corporation.
C)A C corporation.

Question 73

Saguaro Corporation,a cash basis and calendar year taxpayer,was formed and began operations on August 1,2008.Saguaro incurred the following expenses during its first year of operations (August 1-December 31,2008):
If Saguaro Corporation makes a timely election under § 248 to amortize qualifying organizational expenses,how much may the corporation deduct for tax year 2008?

A)$4,078.
B)$5,000.
C)$6,314.
D)$6,458.
E)None of the above.

Question 74

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

A)The highest corporate marginal tax rate is 39%.
B)Taxable income of a personal service corporation is taxed at a flat rate of 35%.
C)A tax return must be filed whether or not the corporation has taxable income.
D)Similar to individuals, the marginal tax rate brackets for corporations are adjusted for inflation.
E)None of the above.

Question 75

Hippo,Inc.,a calendar year C corporation,manufactures golf gloves.For 2008,Hippo had taxable income of $200,000,qualified domestic production activities income of $250,000,and W-2 wages related to qualified production activities income of $23,000.Hippo's domestic production activities deduction for 2008 is:

A)$11,500.
B)$12,000.
C)$15,000.
D)$23,000.
E)None of the above.

Question 76

Wallaby,Inc.,a calendar year C corporation,had the following income and expenses in 2008:

A)How much is Wallaby, Inc.'s charitable contribution deduction for 2008?
B)What happens to the portion of the contribution not deductible in 2008?

Question 77

Grocer Services Corporation (a calendar year taxpayer),a wholesale distributor of food,made the following donations to qualified charitable organizations during the year:

How much qualifies for the charitable contribution deduction?

A)$21,800.
B)$24,840.
C)$24,100.
D)$22,450.
E)None of the above.

Question 78

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

A)The alternative minimum tax does not apply.
B)Large corporations are subject to special rules regarding estimated tax payments.
C)The due date for a corporate income tax return (ignoring extensions) is the fifteenth day of the fourth month following the close of the corporation's tax year.
D)In general, the required annual payment for corporate estimated taxes is 90% of the corporation's final tax for the current year.
E)None of the above.

Question 79

Shaw,an architect,is the sole shareholder of Shaw Corporation,a professional association.The corporation paid Shaw a salary of $360,000 during its fiscal year ending September 30,2008.

A)How much salary must Shaw Corporation pay Shaw during the period October 1 through December 31, 2008, to enable the corporation to continue to use its fiscal year without negative tax effects?
B)If Shaw Corporation had net profit of $150,000 for the year ending September 30, 2008, what is its tax liability?

Question 80

During 2008,Sparrow Corporation,a calendar year C corporation,had operating income of $425,000,operating expenses of $210,000,a short-term capital loss of $45,000,and a long-term capital gain of $125,000.How much is Sparrow's tax liability for 2008?

A)$67,100.
B)$79,100.
C)$98,300.
D)$103,250.
E)None of the above.