Question 1

Rachel is the sole member of an LLC,and Jordan is the sole shareholder of a C corporation.Both businesses were started in the current year,and each business has a long-term capital gain of $10,000 for the year.Neither business made any distributions during the year.With respect to this information,which of the following statements is correct?
A)The C corporation receives a preferential tax rate on the LTCG of $10,000.
B)The LLC must pay corporate tax on taxable income of $10,000.
C)Jordan must report $10,000 of LTCG on his tax return.
D)Rachel must report $10,000 of LTCG on her tax return.
E)None of the above.

Accepted Answer

The LLC is a pass-through entity, which means that its income and losses are passed through to its owner(s). Therefore, Rachel must report the $10,000 of LTCG on her personal tax return. The C corporation, on the other hand, is subject to corporate tax rates on its taxable income, including the LTCG of $10,000. There is no preferential tax rate for LTCG for C corporations. Since Jordan is the sole shareholder of the C corporation, he does not personally report the corporation's income on his tax return. There is no information provided to suggest that the LLC must pay corporate tax on its taxable income.

Question 2

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2013.He also owns 60% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn.How much income must Bjorn report from these businesses?
A)$0 income from the S corporation and $30,000 income from the C corporation.
B)$30,000 income from the S corporation and $30,000 of dividend income from the C corporation.
C)$90,000 income from the S corporation and $0 income from the C corporation.
D)$90,000 income from the S corporation and $30,000 income from the C corporation.
E)None of the above.

Accepted Answer

Bjorn must report his share of the S corporation's income as his share of the business's taxable income, which is $150,000 x 60% = $90,000. The $30,000 distribution he received from the S corporation is tax-free, as it represents a return of capital. Bjorn must report the $30,000 in dividend income he received from the C corporation on his personal income tax return. Therefore, Bjorn must report $90,000 income from the S corporation and $30,000 income from the C corporation.

Question 3

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

Accepted Answer

According to the IRS, all domestic corporations (including S corporations) must file a federal income tax return whether or not they have taxable income.

Question 4

Flycatcher Corporation,a C corporation,has two equal individual shareholders,Nancy and Pasqual.In the current year,Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher,Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket.With respect to the current year,which of the following statements is incorrect?
A)Flycatcher cannot avoid the corporate tax altogether by paying out all $100,000 of net profit as dividends to the shareholders.
B)Nancy incurs income tax of $1,500 on her dividend income.
C)Pasqual incurs income tax of $1,500 on his dividend income.
D)Flycatcher pays corporate tax of $22,250.
E)None of the above.

Accepted Answer

The answer of Flycatcher Corporation,a C corporation,has two equal individual...

Question 5

Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in 2013.Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year.The corporation distributed $45,000 to Juanita,and the partnership distributed $45,000 to Carlos.Which of the following statements relating to 2013 is incorrect?
A)Juanita must report $120,000 of income from the corporation.
B)The corporation must pay corporate tax on $200,000 of income.
C)Carlos must report $120,000 of income from the partnership.
D)The partnership is not subject to a Federal entity-level income tax.
E)None of the above.

Accepted Answer

The answer of Juanita owns 60% of the stock in...

Question 6

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.

Accepted Answer

This is correct. Schedule M-2 is used to reconcile the beginning and ending balances of unappropriated retained earnings, which is a component of a corporation's equity section on its balance sheet.

Question 7

On December 31,2013,Flamingo,Inc.,a calendar year,accrual method C corporation,accrues a bonus of $50,000 to its president (a cash basis taxpayer),who owns 75% of the corporation's outstanding stock.The $50,000 bonus is paid to the president on February 1,2014.For Flamingo's 2013 Form 1120,the $50,000 bonus will be a subtraction item on Schedule M-1.

Accepted Answer

The $50,000 bonus is not deductible until it is paid in 2014, therefore it will not be a subtraction item on Schedule M-1 for the 2013 tax year.

Question 8

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?
A)If a limited liability company with more than one owner does not make an election,the entity is taxed as a corporation.
B)All 50 states have passed laws that allow LLCs.
C)An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D)If a limited liability company with one owner does not make an election,the entity is taxed as a sole proprietorship.
E)A limited liability company with one owner can elect to be taxed as a corporation.

Accepted Answer

The answer of Which of the following statements is incorrect...

Question 9

Jane transfers property (basis of $180,000 and fair market value of $500,000)to Green Corporation for 80% of its stock (worth $425,000)and a long-term note (worth $75,000),executed by Green Corporation and made payable to Jane.As a result of the transfer:
A)Jane recognizes no gain.
B)Jane recognizes a gain of $75,000.
C)Jane recognizes a gain of $270,000.
D)Jane recognizes a gain of $320,000.
E)None of the above.

Accepted Answer

The answer of Jane transfers property (basis of $180,000 and...

Question 10

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.

Accepted Answer

This statement is true. Schedule M-1 is a required form for corporations to reconcile the differences between financial accounting net income and taxable income reported on the tax return.

Question 11

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

Accepted Answer

According to the IRS, a large corporation is defined as a corporation that had an average taxable income of $1 million or more in any of the three preceding years for purposes of the estimated tax payment rules.

Question 12

Elk,a C corporation,has $370,000 operating income and $290,000 operating expenses during the year.In addition,Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss.Elk's taxable income is:
A)$63,000.
B)$73,000.
C)$80,000.
D)$90,000.
E)None of the above.

Accepted Answer

- First, we calculate Elk's net capital gain/loss: $10,000 - $17,000 = -$7,000 (since short-term capital losses can offset long-term capital gains)
- Next, we subtract the net capital gain/loss from the operating income: $370,000 - $290,000 - $7,000 = $73,000
- This $73,000 is Elk's taxable income, so the correct answer is choice C.

Question 13

Norma formed Hyacinth Enterprises,a proprietorship,in 2013.In its first year,Hyacinth had operating income of $400,000 and operating expenses of $240,000.In addition,Hyacinth had a long-term capital loss of $10,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $75,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2013?
A)Increases Norma's taxable income by $157,000 ($160,000 ordinary business income - $3,000 long-term capital loss).
B)Increases Norma's taxable income by $150,000 ($160,000 ordinary business income - $10,000 long-term capital loss).
C)Increases Norma's taxable income by $75,000.
D)Increases Norma's taxable income by $160,000.
E)None of the above.

Accepted Answer

Norma's taxable income increases by $157,000, which is the ordinary business income of $160,000 ($400,000 - $240,000) minus the allowable $3,000 deduction for the long-term capital loss. The withdrawal of $75,000 does not affect taxable income.

Question 14

Mitchell and Powell form Green Corporation.Mitchell transfers property (basis of $105,000 and fair market value of $90,000)while Powell transfers land (basis of $8,000 and fair market value of $75,000)and $15,000 of cash.Each receives 50% of Green Corporation's stock (total value of $180,000).As a result of these transfers:
A)Mitchell has a recognized loss of $15,000,and Powell has a recognized gain of $67,000.
B)Neither Mitchell nor Powell has any recognized gain or loss.
C)Mitchell has no recognized loss,but Powell has a recognized gain of $15,000.
D)Green Corporation will have a basis in the land of $23,000.
E)None of the above.

Accepted Answer

The answer of Mitchell and Powell form Green Corporation.Mitchell transfers...

Question 15

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.

Accepted Answer

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, not a subtraction item, because it increases taxable income relative to book income.

Question 16

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.

Accepted Answer

Schedule M-3 provides more detailed information about the differences between financial statements and tax returns, resulting in greater transparency.

Question 17

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

Accepted Answer

This is a correct statement. Subtraction items on Schedule M-1 are those items of income that are included in a company's financial statements (net income per books) but are not taxable income. Such items include tax-exempt income, certain expenses not deductible for tax purposes, etc.

Question 18

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Accepted Answer

The answer of A corporation with $5 million or more...

Question 19

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?
A)Rhea Corporation will pay tax on taxable income of $200,000.
B)Lucinda reports ordinary income of $50,000.
C)Lucinda reports ordinary income of $120,000.
D)Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.
E)None of the above.

Accepted Answer

The answer of Lucinda is a 60% shareholder in Rhea...

Question 20

Pablo,a sole proprietor,sold stock held as an investment for a $40,000 long-term capital gain.Pablo's marginal tax rate is 33%.Loon Corporation,a C corporation,sold stock held as an investment for a $40,000 long-term capital gain.Loon's marginal tax rate is 35%.What tax rates are applicable to these capital gains?
A)15% rate applies to Pablo and 35% rate applies to Loon.
B)15% rate applies to Loon and 33% rate applies to Pablo.
C)35% rate applies to Loon and 33% rate applies to Pablo.
D)15% rate applies to both Pablo and Loon.
E)None of the above.

Accepted Answer

The answer of Pablo,a sole proprietor,sold stock held as an...

Quiz 9: Corporations: Organization, capital Structure, and Operating Rules