Question 1

Violet, Inc., a closely held corporation (not a PSC), has $55,000 of passive activity loss, $80,000 of net active income, and $20,000 of portfolio income. How much is Violet's taxable income for the current year?

Accepted Answer

Violet's taxable income is $45,000. The passive activity loss is not deductible against the net active income or portfolio income. The portfolio income is not included in the calculation of taxable income.

Question 2

Plum Corporation (a C corporation and a computer manufacturer) donated 100 laptop computers to a local university (a qualified educational organization) this year. The computers were constructed by Plum earlier this year, and the university will use the computers for research and research training. Plum's basis in the computers is $35,000, and their fair market value is $120,000. What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation)?

Accepted Answer

The answer of Plum Corporation (a C corporation and a...

Question 3

In the current year, Red Corporation (a calendar year C 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 $20,000. Which of the following statements is correct?

Accepted Answer

The answer of In the current year, Red Corporation (a...

Question 4

Grebe Corporation, a closely held corporation that is not a PSC, had $75,000 of net active income, $60,000 of portfolio income, and a $105,000 passive activity loss during the year. How much of the passive activity loss can Grebe deduct in the current year?

Accepted Answer

The answer of Grebe Corporation, a closely held corporation that...

Question 5

Grackle Corporation, a personal service corporation, had $230,000 of net active income, $40,000 of portfolio income and a $250,000 passive activity loss during the year. How much is Grackle's taxable income?

Accepted Answer

Grackle Corporation's taxable income is calculated by adding net active income and portfolio income, then subtracting the passive activity loss. However, passive activity losses cannot offset active or portfolio income for a personal service corporation. Therefore, taxable income is $230,000 (net active income) + $40,000 (portfolio income) = $270,000.

Question 6

Beige Corporation, a C corporation, purchases a warehouse on August 1, 2003, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 12, 2019, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty?

Accepted Answer

The answer of Beige Corporation, a C corporation, purchases a...

Question 7

Kingbird Corporation (a calendar year C corporation) reports the following income and expenses this year: $\begin{array}{lr}
\text { Income from operations } & \$ 200,000 \
\text { Expenses from operations } & 140,000 \
\text { Dividends received (15\% ownership) } & 15,000
\end{array}$ On October 1, Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash (not included in any of the above items). Determine Kingbird's charitable contribution deduction.

Accepted Answer

The answer of Kingbird Corporation (a calendar year C corporation)...

Question 8

Owl Corporation (a C corporation), a retailer of children's apparel, made the following donations to qualified charitable organizations this year.  How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation)?

Accepted Answer

The answer of Owl Corporation (a C corporation), a retailer...

Question 9

Wanda is the Chief Executive Officer of Pink corporation, a publicly traded, calendar year C corporation. For the current year, Wanda's compensation package consists of: $\begin{array}{lr}
\text { Cash compensation } & \$ 2,500,000 \
\text { Nontaxable fringe benefits } & 250,000 \
\text { Taxable fringe benefits } & 150,000 \
\text { Bonus tied to company performance } & 2,000,000
\end{array}$ How much of Wanda's compensation is deductible by Pink Corporation?

Accepted Answer

The answer of Wanda is the Chief Executive Officer of...

Question 10

Which of the following statements is incorrect regarding the taxation of C corporations for tax years beginning after 2017?

Accepted Answer

The incorrect statement is that NOLs (Net Operating Losses) are subject to a 2-year carryback and 20-year carryforward period. For tax years beginning after 2017, the Tax Cuts and Jobs Act eliminated the 2-year carryback option for most NOLs and allowed an indefinite carryforward period, subject to a limitation of 80% of taxable income for losses arising in tax years beginning after December 31, 2017.

Question 11

Copper Corporation, a calendar year C corporation, owns stock in Bronze Corporation and has net operating income of $900,000 for the current year. Bronze Corporation pays Copper a dividend of $150,000. What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (and the two corporations are members of the same affiliated group)? (Assume Copper's dividends received deduction is not limited by its taxable income.)

Accepted Answer

Since Copper Corporation owns 85% of Bronze Corporation and they are members of the same affiliated group, Copper is eligible to claim a 100% dividends received deduction for the $150,000 dividend received from Bronze.

Question 12

Orange Corporation, a calendar year C corporation, owns stock in White Corporation and has net operating income of $400,000 for the current year. White Corporation pays Orange a dividend of $60,000. What amount of dividends received deduction may Orange claim if it owns 45% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

Accepted Answer

The answer of Orange Corporation, a calendar year C corporation,...

Question 13

Eagle Corporation, a calendar year C corporation, owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In the current year, Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?
"1) Multiply the dividends received by the deduction percentage ($130,000 × 50% =
$65,000)."
2) Multiply the taxable income before the dividends received deduction by the deduction percentage ($100,000 × 50% = $50,000).
"3) Limit the deduction to the lesser of step 1 or step 2, unless subtracting the amount derived in step 1 ($65,000) from taxable income before the dividends received
Deduction ($100,000) generates an NOL ($100,000 - $65,000 = $35,000 taxable income). If so, use the amount derived in step 1 ($65,000). In this case, the NOL exception to the taxable income limitation does not apply, and the deduction equals
$50,000."

Accepted Answer

The correct amount of dividends received deduction that Eagle Corporation may claim is $50,000. This is because the deduction is limited to the lesser of the calculated deduction ($65,000) or the taxable income before the deduction ($100,000), which, when applying the 50% dividends received deduction rate for a corporation owning less than 20% of another corporation, results in $50,000.

Question 14

Which of the following statements is incorrect regarding the dividends received deduction?

Accepted Answer

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

Question 15

For tax years ending after 2017, which of the following statements is incorrect with respect to the treatment of a net operating loss by a calendar year C corporation?

Accepted Answer

The Tax Cuts and Jobs Act (TCJA) of 2017 changed the rules for net operating losses (NOLs) for tax years ending after 2017. It eliminated the two-year carryback option for most businesses but allowed for an indefinite carryforward period, replacing the previous 20-year limit.

Question 16

Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)

Accepted Answer

White Corporation's taxable income is calculated as operating income ($320,000) minus operating expenses ($150,000) and minus Nancy's salary ($100,000), resulting in $70,000 of taxable income. The corporate tax rate is 21%, so White pays $14,700 in corporate income tax ($70,000 * 21%). The after-tax income available for distribution as dividends is $55,300 ($70,000 - $14,700). Nancy pays tax on her salary at the 32% rate, which is $32,000 ($100,000 * 32%), and she also pays tax on the dividends received. Assuming the qualified dividends rate of 15% for her tax bracket, she pays an additional $8,295 in tax on the dividends ($55,300 * 15%). The total combined income tax paid by White and Nancy is the sum of corporate tax ($14,700), tax on salary ($32,000), and tax on dividends ($8,295), which equals $54,995.

Question 17

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2019. The following expenses were incurred during the first tax year (April 1 through December 31, 2019) of operations. $\begin{array}{lr}\text { Expenses of temporary directors and of organizational meetings }&\$27,000\
\text { Fee paid to the state of incorporation } & 1,000 \
\text { Accounting services incident to organization } & 15,500 \
\text { Legal services for drafting the corporate charter and bylaws } & 9,500 \
\text { Expenses incident to the printing and sale of stock certificates } & 6,000
\end{array}$ Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2019?

Accepted Answer

The answer of Emerald Corporation, a calendar year C corporation,...

Question 18

Woodchuck, Inc., a closely held personal service corporation, has $115,000 of net active income, $40,000 of portfolio income, and $135,000 of passive activity loss. What is Woodchuck's taxable income for the current year?

Accepted Answer

The answer of Woodchuck, Inc., a closely held personal service...

Question 19

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow's income tax liability for the year?

Accepted Answer

Sparrow Corporation's taxable income is $160,000 ($425,000 - $280,000 + $25,000 - $10,000). The corporate tax rate is 21%, so the tax liability is $33,600 ($160,000 * 21%).

Question 20

In the current year, Crimson, Inc., a calendar C corporation, has income from operations of $180,000 and operating deductions of $225,000. Crimson also had $30,000 of dividends from a 15% stock ownership in a domestic corporation. Which of the following statements is correct with respect to Crimson for the current year?

Accepted Answer

Crimson's dividends received deduction is $15,000 because they can deduct 50% of the $30,000 dividends received from a domestic corporation in which they own less than 20% of the stock.

Quiz 17: Corporations: Introduction and Operating Rules

Violet, Inc., a closely held corporation (not a PSC) , has $55,000 of passive activity loss, $80,000 of net active income, and $20,000 of portfolio income. How much is Violet's taxable income for the current year?

In the current year, Red Corporation (a calendar year C 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 $20,000. Which of the following statements is correct?