Question 1

For the current year, Birch Corporation, a C corporation, reports taxable income of $400,000 before paying salary to its sole shareholder Elaine. Elaine's marginal tax rate on ordinary income is 33 percent and 15 percent on dividend income. If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation, what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35 percent and it always distributes all after-tax earnings to Elaine.

Accepted Answer

The answer of For the current year, Birch Corporation, a...

Question 2

Nancy purchased a building and then leased the building to ZML. Nancy is the sole shareholder of ZML. She leased the building to ZML for $2,500 per month. However, the IRS determined that the fair market value of the lease payment should only be $1,500 per month. How would the lease payment be treated with respect to both Nancy and ZML?

Accepted Answer

The answer of Nancy purchased a building and then leased...

Question 3

Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year: Trevor Inc.'s pre-tax income $= \$ 16,000$
Trevor Corp's marginal tax rate $= \mathbf { 3 5 \% }$
Percentage of after-tax earnings retained by Trevor Corp $= 0 \%$ (i.e., all after-tax earnings distributed)
Rodger's dividend tax rate $= \mathbf { 5 } \%$ Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

Accepted Answer

The answer of Rodger owns 100% of the shares in...

Question 4

In its first year of existence Aspen Corp. (a C corporation) reported a loss for tax purposes of $50,000. In year 2, it reports a $30,000 loss. For year 3, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3? Consult the corporate tax rate table provided to calculate your answer.

Accepted Answer

The answer of In its first year of existence Aspen...

Question 5

Tuttle Corporation (a C corporation) projects that it will have taxable income for the year of $300,000 before incurring any interest expense. Assume Tuttle's tax rate is 35 percent.
a. What is the amount of the combined corporate and shareholder level tax on the $300,000 of pre-interest expense earnings if Ruth, Tuttle's sole shareholder, lends Tuttle Corporation $100,000 at the beginning of the year, Tuttle pays Ruth $10,000 of interest on the loan (interest is considered to be reasonable), and Tuttle distributes all of its after-tax earnings to Ruth? Assume her ordinary marginal rate is 33 percent and dividend tax rate is 15 percent.
b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $8,000. What is the amount of the combined corporate and shareholder level tax on Tuttle Corporation's pre-interest expense earnings?

Accepted Answer

The answer of Tuttle Corporation (a C corporation) projects that...

Question 6

Jamal Corporation, a C corporation, projects that it will have taxable income of $500,000 before incurring any lease expenses. Jamal's tax rate is 34 percent. Ali, Jamal's sole shareholder, has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income. Jamal always distributes all of its after-tax earnings to Ali.
a. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp. distributes all of its after-tax earnings to its sole shareholder Ali?
b. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal leases equipment from Ali at a cost of $120,000 for the year?
c. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp. leases equipment from Ali at a cost of $120,000 for the year but the IRS determines that the fair market value of the lease payments is $80,000?

Accepted Answer

The answer of Jamal Corporation, a C corporation, projects that...

Question 7

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?

Accepted Answer

The answer of In its first year of existence, BYC...

Question 8

Cali Corp. (a C corporation) projects that it will have taxable income of $250,000 for the year before paying any fringe benefits. Stacey, Cali's sole shareholder, has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income. Assume Cali's tax rate is 34 percent.
a. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 of pre-benefit income if Cali Corp. does not pay out any fringe benefits and distributes all of its after-tax earnings to Stacey?
b. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 of pre-benefit income if Cali Corp. pays Stacey's adoption expenses of $50,000 and the payment is considered to be a qualified fringe benefit? Cali Corp. distributes all of its after-tax earnings to Stacey.
c. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 of pre-benefit income if Cali Corp. pays Stacey's adoption expenses of $50,000 and the payment is considered to be a nonqualified fringe benefit? Cali Corp. distributes all of its after-tax earnings to Stacey.

Accepted Answer

The answer of Cali Corp. (a C corporation) projects that...

Question 9

For the current year, Creative Designs Inc., a C corporation, reports taxable income of $300,000 before paying salary to Ben the sole shareholder of Creative Designs Inc. (CD). Ben's marginal tax rate on ordinary income is 28 percent and 15 percent on dividend income. Assume CD's tax rate is 39 percent.
a. How much total income tax will Creative Designs and Ben pay on the $300,000 taxable income for the year if CD doesn't pay any salary to Ben and instead distributes all of its after-tax income to Ben as a dividend?
b. How much total income tax will Creative Designs and Ben pay on the $300,000 of income if CD pays Ben a salary of $100,000 and distributes its remaining after-tax earnings to Ben as a dividend?
c. Compare your answer in part a with your answer to part b. Explain why these numbers are different.

Accepted Answer

The answer of For the current year, Creative Designs Inc.,...

Question 10

Corporation A owns 10% of CorporationC. The marginal tax rate on non-dividend income for both A and C is 34%. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income and distributes the remainder proportionately to its shareholders as a dividend. In addition, Corporation A owns 20% of partnership P that earns $500 million in the current year. Given this fact pattern, answer the following questions:
a. How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend assuming Corporation A is eligible for the 70 percent dividends received deduction?
 $\begin{array}{|l|c|l|}
\hline
{\text { Description }} & \text { Amount } & {\text { Explanation }} \
\hline \begin{array}{l}
\text { (1) Dividend from } \
\text { Corporation C }
\end{array} & \$ 13,200,000 & \begin{array}{l}
\$ 200,000,000 \times(1-.34) \times \
10 \%
\end{array} \
\hline \begin{array}{l}
\text { (2) Tax on dividend from } \
\text { Corporation C }
\end{array} & \$ 1,346,400 & (1) \times 34 \% \times 30 \% \
\hline \begin{array}{l}
\text { (3) Cash remaining after } \
\text { tax on dividend }
\end{array} & \$ 11,853,600 & (1)-(2) \
\hline
\end{array}$ $$\begin{array} { | l | c | c | } 
\hline { \text { Description } } & \text { Amount } & \text { Explanation } \
\hline \begin{array} { l } 
\text { (1) Cash received from } \
\text { Partnership P }
\end{array} & \mathbf { \$ 1 0 0 , 0 0 0 , 0 0 0 } & \mathbf { \$ 5 0 0 , 0 0 0 , 0 0 0 } \times \mathbf { 2 0 } \% \
\hline \begin{array} { l } 
\text { (2) Tax on share of income } \
\text { from Partnership P }
\end{array} & \mathbf { \$ 3 4 , 0 0 0 , 0 0 0 } & ( 1 ) \times \mathbf { 3 4 \% } \
\hline \begin{array} { l } 
\text { (3) Cash remaining from } \
\text { distribution after taxes }
\end{array} & \mathbf { \$ 6 6 , 0 0 0 , 0 0 0 } & ( 1 ) - ( 2 ) \
\hline
\end{array}$$ $$\begin{array} { | l | c | c | } 
\hline { \text { Description } } & \text { Amount } & \text { Explanation } \
\hline \begin{array} { l } 
\text { (1) Dividend from } \
\text { Corporation C }
\end{array} & \mathbf { \$ 13,200,000 } & \mathbf { \$ 2 0 0 , 0 0 0 , 0 0 0 } \times   (1-34)\times \mathbf { 1 0 } \% \
\hline \begin{array} { l } 
\text { (2) Tax on dividend from } \
\text { Corporation C }
\end{array} & \mathbf { \$ 1 , 98 0 , 0 0 0 } & ( 1 ) \times \mathbf { 15 \% } \
\hline \begin{array} { l } 
\text { (3) Cash remaining after } \
\text { tax on dividend}
\end{array} & \mathbf { \$ 11 , 22 0 , 0 0 0 } & ( 1 ) - ( 2 ) \
\hline
\end{array}$$

Accepted Answer

The answer of Corporation A owns 10% of CorporationC. The...

Quiz 15: Entities Overview

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?