Question 1

Nontax considerations in the selection of business form include limited liability,free transferability of ownership interests,continuity of life,and centralized management.

Accepted Answer

Nontax considerations in the selection of a business form do include limited liability, free transferability of ownership interests, continuity of life, and centralized management.

Question 2

Lou,an employee and sole shareholder of Amarillo Corporation,a C corporation,has the corporation pay him $175,000.Lou is in the 35% tax bracket.His income tax will be the same,regardless of whether Amarillo treats the payments as a dividend or as salary.

Accepted Answer

Lou must pay tax on his salary at his marginal rate of 35%,while dividends are generally taxed at a 15% rate.

Question 3

Herman and Henry are equal partners in Badger Enterprises,a calendar year partnership.During the year,Badger Enterprises had $305,000 gross income and $230,000 operating expenses.Badger distributed $20,000 to each of the partners. Herman and Henry each must report $37,500 of income from the partnership.

Accepted Answer

The partnership is not a taxpaying entity.Its profit (loss)and separate items flow through to the partners.The partnership's Form 1065 reports net profit of $75,000 ($305,000 income - $230,000 expenses).Herman and Henry both receive a Schedule K-1 reporting net profit of $37,500.Each partner reports net profit of $37,500 on his own return.

Question 4

Peach Corporation had $135,000 of active income,$180,000 of portfolio income,and a $155,000 passive loss during the year.If Peach is a closely held C corporation that is not a PSC,it can deduct the $155,000 passive loss.

Accepted Answer

If Peach is a closely held corporation,the passive loss is deductible to the extent of the corporation's active income,or $135,000.

Question 5

Compensation that is determined to be unreasonable is usually treated as a constructive dividend to the shareholder and is not deductible by the corporation.

Accepted Answer

Unreasonable compensation is treated as a constructive dividend to the shareholder and is not deductible by the corporation.

Question 6

The passive loss rules apply more favorably to closely held C corporations than to personal service corporations (PSCs).

Accepted Answer

The passive loss rules prohibit PSCs from offsetting passive losses against either active or portfolio income.Closely held corporations,however,may offset passive losses against active income.
A corporation is closely held if,at any time during the taxable year,more than 50% of the value of the corporation's outstanding stock is owned,directly or indirectly,by or for not more than five individuals.

Question 7

Robin is a 50% shareholder in Robin-Wren,an S corporation.Robin-Wren earned net income of $100,000 during the year,and Robin received a distribution of $35,000 from the corporation.Robin must report a $35,000 dividend on his individual Federal income tax return (Form 1040).

Accepted Answer

The shareholders of an S corporation report their shares of the entity's net income or loss,regardless of how much of the income was withdrawn from the corporation.Robin must report income of $50,000.

Question 8

Under the "check-the-box" Regulations,a single-member LLC that fails to elect to be to treated as a corporation will be taxed as a partnership.

Accepted Answer

Sole proprietorship,not corporation,is the default classification for a single-member LLC that does not elect to be treated as a corporation under the "check-the-box" Regulations.

Question 9

All corporations are allowed to choose a calendar year or a fiscal year for Federal tax reporting purposes.

Accepted Answer

There are limitations on the use of a fiscal year in the case of personal service corporations and S corporations. Such entities generally must use the calendar year as their reporting period,but several exceptions to this rule apply (e.g.,business purpose for fiscal year).

Question 10

The corporate marginal tax rates range from 10% to 35%,while the individual marginal tax rates range from 15% to 39%.

Accepted Answer

The opposite is the case: the corporate marginal tax rates range from 15% to 39%,and the individual marginal tax rates range from 10% to 35%.

Question 11

In 2008,Fox Corporation had taxable income of $100,000,which included a long-term capital gain of $30,000.The maximum amount of tax applicable to the capital gain is $4,500 ($30,000 * 15%).

Accepted Answer

While the maximum rate on long-term capital gains of individuals is limited to 15%,there is no maximum rate applicable to long-term capital gains of C corporations.

Question 12

Albatross,a C corporation,had $200,000 net income from operations and a $25,000 short-term capital loss in 2008.Albatross Corporation's taxable income is $200,000.

Accepted Answer

A corporation cannot deduct a net capital loss in the year incurred.For corporations,a net capital loss must be carried back three years or forward five years and be offset against capital gains in the carryback/forward years.

Question 13

In general,corporations that maintain inventory for sale to customers may use either the cash or accrual method of accounting for determining sales and cost of goods sold.

Accepted Answer

As a general rule,corporations that maintain inventory for sale to customers are required to use the accrual method of accounting for determining sales and cost of goods sold.The cash method may be used for other income and expense items.

Question 14

Quail Corporation is a C corporation with net income of $500,000 during 2008.If Quail paid dividends of $70,000 to its shareholders,the corporation must pay tax on $430,000 of net income.Shareholders must report the $70,000 of dividends as income.

Accepted Answer

Quail Corporation must pay tax on the $500,000 of corporate net income.Dividends paid are not deductible by the corporation.Shareholders must pay tax on the $70,000 of dividends received from the corporation.This is commonly referred to as double taxation.

Question 15

Coyote Enterprises,an S corporation,had a capital loss of $50,000 during the year.Gerald,who owns 40% of Coyote's stock,may report $20,000 of Coyote's capital loss on his individual Federal income tax return (Form 1040).

Accepted Answer

Capital losses of an S corporation pass through from the entity to the shareholders.

Question 16

An individual who owns a proprietorship must report profit from the proprietorship on his/her Federal income tax return.

Accepted Answer

A sole proprietorship is not a taxable entity separate from the individual who owns the proprietorship. The owner of a proprietorship reports transactions of the business on Schedule C of his or her individual tax return.

Question 17

On December 31,2008,Lavender,Inc.,an accrual basis C corporation,accrues a $90,000 bonus to Barry,its vice president and a 40% shareholder.Lavender pays the bonus to Barry,who is a cash basis taxpayer,on March 15,2009.Lavender can deduct the bonus in 2008.

Accepted Answer

Lavender is allowed a deduction in 2008 because Barry is not a related party (more than 50% shareholder).

Question 18

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

Accepted Answer

The tax is equal to $61,250 [($50,000 × 15%)+ ($25,000 × 25%)+ ($25,000 × 34%)+ ($100,000 × 39%)].

Question 19

Emma,the sole shareholder of Quail Corporation (a C corporation),has the corporation pay her a salary of $300,000 in 2008.The Tax Court has held that $80,000 represents unreasonable compensation.Assuming Emma is in the 35% bracket in 2008,the Tax Court's holding will reduce the total tax she pays in 2008.

Accepted Answer

To the extent a salary payment is not considered reasonable,the payment is treated as a dividend,which is generally taxed at a maximum rate of 15%.The Tax Court's holding saves Emma $16,000 [$80,000 F1F1F1S1F1F1F10 (35% - 15%)].

Question 20

Jeff owns a 30% interest in a partnership that earned $100,000 in the current year.He also owns 30% of the stock in a C corporation that earned $100,000 during the year.The corporation did not make any distributions,and the partnership distributed $20,000 to him.Jeff must report $30,000 of income on his individual tax return.

Accepted Answer

Jeff must report his $30,000 (30% F1F1F1S1F1F1F10 $100,000)share of the partnership's income on his individual tax return.The C corporation's income is not taxed to Jeff until it is distributed to him.The $20,000 partnership distribution does not affect his income.

Quiz 2: Corporations: Introduction and Operating Rules