Question 1

Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Accepted Answer

Employment taxes can vary depending on the entity form of operating a business, so they can impact the tax effectiveness of one form over another. For example, certain entity forms may have lower or higher payroll tax rates, or may be exempt from certain employment taxes altogether.

Question 2

Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Accepted Answer

As the sole shareholder of an S corporation, Rajib is required to include the corporation's net profit on his personal income tax return, regardless of whether he received any distributions from the corporation. In this case, Rajib received a distribution of $80,000, but he must still report the full $350,000 of net profit on his tax return.

Question 3

Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

Accepted Answer

False

Question 4

On December 31, 2015, Lavender, Inc., an accrual basis C corporation, accrues a $50,000 bonus to Barry, its vice president and a 40% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 14, 2016. Lavender can deduct the bonus in 2016, the year in which it is included in Barry's gross income.

Accepted Answer

The answer of On December 31, 2015, Lavender, Inc., an...

Question 5

If a C corporation uses straight-line depreciation on real estate (§ 1250 property), no portion of a gain on the sale of the property will be recaptured as ordinary income.

Accepted Answer

When a C corporation uses straight-line depreciation on real estate, a portion of the gain on the sale of the property will be recaptured as ordinary income under § 1250 of the IRS Code. This portion is generally the amount of depreciation claimed on the property, and it is taxed at a maximum rate of 25%.

Question 6

Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.

Accepted Answer

The answer of Jake, the sole shareholder of Peach Corporation,...

Question 7

A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

Accepted Answer

A personal service corporation can choose to use a fiscal year if it can establish a business purpose for doing so, although the default tax reporting period is the calendar year.

Question 8

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

Accepted Answer

The answer of Thrush Corporation files Form 1120, which reports...

Question 9

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

Accepted Answer

The answer of The passive loss rules apply to closely...

Question 10

Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation's taxable income is $140,000.

Accepted Answer

Only capital losses can offset capital gains and up to $3,000 of ordinary income. In this case, the short-term capital loss of $25,000 cannot offset the net income from operations of $140,000, so the taxable income remains at $140,000.

Question 11

Azure Corporation, a C corporation, had a long-term capital gain of $50,000 in the current year. The maximum amount of tax applicable to the capital gain is $7,500 ($50,000 × 15%).

Accepted Answer

C corporations do not benefit from the capital gains tax rates applicable to individuals and other non-corporate entities. Instead, any capital gains are taxed at the corporation's regular income tax rate.

Question 12

Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.

Accepted Answer

As a sole proprietor, Tomas reports the profit of his business on his individual tax return (Form 1040) using Schedule C. Therefore, he must report the $60,000 of profit as income on his individual tax return.

In the case of a C corporation, the corporation is a separate legal entity from the shareholders, and the corporation pays taxes on its profits. Shareholders do not directly report the corporation's income on their individual tax returns, unless they receive dividends or other distributions from the corporation. Since Lucy did not receive any distributions from the corporation in the current year, she does not need to report any income from the corporation on her individual tax return.

Question 13

Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income.

Accepted Answer

In a partnership, the entity itself does not pay income tax on its profits. Instead, the profits or losses are passed through to the partners, who report them on their individual tax returns.

Question 14

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Accepted Answer

A partner's distributive share of a partnership's losses reduces their individual taxable income. In this case, if Aaron owns 25% of Eagle, he will be allocated 25% of Eagle's short-term capital loss, which is $2,500. Therefore, he will report this amount on his individual tax return.

Question 15

Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

Accepted Answer

The answer of Donald owns a 45% interest in a...

Question 16

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.

Accepted Answer

Under the "check-the-box" Regulations, a two-owner LLC that fails to elect to be treated as a corporation will be taxed as a partnership, not a sole proprietorship.

Question 17

As a general rule, C corporations must use the cash method of accounting. However, under several exceptions to this rule (e.g., average annual gross receipts of $5 million or less for the most recent 3-year period), a C corporation can use the accrual method.

Accepted Answer

The answer of As a general rule, C corporations must...

Question 18

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Accepted Answer

Double taxation occurs because the corporation pays taxes on its profits, and then when those profits are distributed as dividends to shareholders, the dividends are also taxable income for the shareholders. However, the corporation cannot deduct the dividends as an expense on its own tax return.

Question 19

The corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.

Accepted Answer

This statement is true. The corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.

Question 20

Don, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Accepted Answer

This is correct. When the Tax Court determines that a portion of the salary paid to a shareholder-employee is unreasonable, that portion may be reclassified as a dividend. In this scenario, Don must report a salary of $400,000 (the reasonable portion) and a dividend of $200,000 (the unreasonable portion).

Quiz 2: Corporations: Introduction and Operating Rules