Question 1

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

Accepted Answer

True

Question 2

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

The short-term capital loss can be used to offset the net income from operations, resulting in a taxable income of $140,000.

Question 3

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

Per the Tax Court ruling, only $400,000 of Don's salary is considered reasonable compensation, while the remaining $200,000 is seen as a disguised dividend. Therefore, he must report $400,000 as salary and $200,000 as a dividend on his individual tax return.

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

Under the accrual method, Lavender, Inc. can deduct the bonus in the year it was accrued (2015) because it was paid within 2.5 months after the end of the tax year, not in 2016 when Barry includes it in his income.

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

If 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 Internal Revenue Code. The amount of recapture depends on the depreciation claimed on the property. Therefore, some portion of the gain will be subject to ordinary income tax rates, and some portion will be subject to capital gains tax rates.

Question 6

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 is true. The marginal income tax rates for corporations range from 15% to 39%, while for individuals they range from 10% to 39.6%.

Question 7

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 8

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

Although employment taxes apply to all entity forms, they can have different rates and requirements. Therefore, choosing the most tax effective form of operating a business may involve considering employment taxes as a factor. For example, a sole proprietorship does not have to pay employment taxes on its owner, while a corporation must pay employment taxes on its employees and officers.

Question 9

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 10

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 is personally responsible for all income and taxes related to his business. Therefore, he must report the net profit of $60,000 on his individual tax return. However, as a shareholder of a C corporation, Lucy is not responsible for reporting the corporation's income on her individual tax return unless the corporation distributes funds to her in the form of dividends or salaries. Since the corporation did not distribute any funds to Lucy in the current year, she is not required to report any income from the corporation on her individual tax return.

Question 11

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 12

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

Aaron's share of the partnership's short-term capital loss is calculated as 25% of $10,000, which is $2,500. Therefore, he will report this amount on his individual tax return.

Question 13

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 of corporate income occurs because both the corporation and its shareholders are taxed on the same income. The corporation pays taxes on its profits, and the shareholders also pay taxes on the dividends they receive from the corporation. Dividend distributions are included in the shareholders' gross income and taxed at their individual tax rates, but are not deductible by the corporation as a business expense.

Question 14

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 taxable...

Question 15

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 includes his share of the corporation's income, deductions, and credits on his personal tax return. Therefore, he must report Robin Corporation's net profit of $350,000 on his Federal income tax return, even though he only received a distribution of $80,000.

Question 16

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

Dividends are generally taxed at a lower rate than salary income, which is subject to ordinary income tax rates and payroll taxes.

Question 17

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

The answer of Quail Corporation is a C corporation with...

Question 18

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 19

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 use...

Question 20

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...

Quiz 17: Corporations: Introduction and Operating Rules