Question 1

Luis is the sole shareholder of Stork,Inc.,a C corporation,and Eduardo owns a sole proprietorship. Both businesses were started in 2008 and make a profit of $80,000 this year.Each owner withdraws $50,000 from his business during the year. Which of the following statements relating to 2008 is incorrect?

Accepted Answer

Luis must report dividend income of $50,000,and Stork must pay tax on $80,000. Eduardo must report net profit from his business of $80,000,but the proprietorship is not a taxable entity. Luis is not required to report income from the Stork until he receives a dividend.

Question 2

Penguin Corporation,a C corporation,has two equal shareholders,Bob and Leo.Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder.Before considering the dividend,Bob is in the 10% marginal tax bracket and Leo is in the 28% marginal tax bracket.Which of the following statements is incorrect?

Accepted Answer

To the extent Bob's dividend income would otherwise be taxed at 10% or 15%,the preferential rate on his dividend is 0%.Thus,Bob will not pay tax on some of his dividend income and,to that extent,not all $100,000 is subject to double taxation.

Question 3

Starling Corporation,a closely held personal service corporation,has $90,000 of active income,$54,000 of portfolio income,and a $135,000 loss from a passive activity.How much of the passive loss can Starling deduct?

Accepted Answer

Personal service corporations cannot offset passive losses against either active or portfolio income.

Question 4

Elk,a C corporation,has $400,000 operating income and $350,000 operating expenses during the year.In addition,Elk has a $30,000 long-term capital gain and a $52,000 short-term capital loss.Elk's taxable income is:

Accepted Answer

$400,000 (operating income)- $350,000 (operating expenses)+ $30,000 (LTCG)- $30,000 (STCL)= $50,000 taxable income.A corporation cannot deduct a net capital loss in the year incurred.The net loss ($22,000)can be carried back three years and offset against capital gain in the carryback years.If the capital loss is not used in the carryback,it can be carried forward five years.Capital gains of corporations are included in taxable income and are not subject to the favorable rates applicable to individuals.

Question 5

Bear Corporation has net short-term capital gains of $25,000 and net long-term capital losses of $170,000 during 2008.Bear Corporation had taxable income from other sources of $700,000.Prior years' transactions included the following:
Compute the amount of Bear's capital loss carryover to 2009.

Accepted Answer

11ea7f05_2e4c_7d47_92e1_052143f0ec0d_TB4123_00 
The net capital loss of $145,000 is not deductible on the 2008 return,but must be carried back to the three preceding years,applying it to 2005,2006,and 2007,in that order.The net capital loss is carried back or forward as short-term capital loss.
 11ea7f05_2e4c_7d48_92e1_cf17c71278f0_TB4123_00 Bear's capital loss carryover is $85,000 ($145,000 - $60,000),which may be carried over to 2009,2010,2011,2012,and 2013,in that order.

Question 6

Maize Corporation had $100,000 operating income and $40,000 operating expenses during the year.In addition,Maize had a $3,000 long-term capital gain and a $5,000 short-term capital loss.Compute Maize's taxable income for the year.

Accepted Answer

$100,000 operating income - $40,000 operating expenses + $3,000 LTCG - $3,000 STCL = $60,000 taxable income.The net capital loss of $2,000 ($3,000 LTCG - $5,000 STCL)cannot be deducted in the year incurred,but can be carried back 3 years and forward five years.

Question 7

Patrick,an attorney,is the sole shareholder of Gander Corporation.Gander is a PSC with a fiscal year ending October 31.The corporation paid Patrick a salary of $360,000 during its fiscal year ending October 31,2008.How much salary must Gander pay Patrick during the period November 1 through December 31,2008,to permit the corporation to continue to use its fiscal year without negative tax effects?

Accepted Answer

$60,000 ($360,000 F1F1F1S1F1F1F10 2/12).

Question 8

Falcon Corporation had gross receipts of $5 million in 2005,$6 million in 2006,and $3 million in 2007.Hawk Corporation,a PSC,had gross receipts of $4 million in 2005,$6 million in 2006,and $7 million in 2007.Which of the corporations will be allowed to use the cash method of accounting in 2008?

Accepted Answer

Hawk Corporation,a PSC,may use the cash method.Falcon Corporation can use the cash receipts method because it had average annual gross receipts of $5 million or less during the three preceding years.

Question 9

Jason,an architect,is the sole shareholder of Purple Corporation,a PSC.The corporation paid Jason a salary of $180,000 during its fiscal year ending October 31,2008.How much salary must Purple pay Jason during the period November 1 through December 31,2008,to permit the corporation to continue to use its fiscal year without negative tax effects?

Accepted Answer

The salary for the deferral period (November and December)must be at least proportionate to the employee's salary received for the fiscal year.The amount that Purple Corporation must pay Jason during the period November 1 through December 31,2008,to permit the continued use of its fiscal year without negative tax effects is $30,000 ($180,000 F1F1F1S1F1F1F10 2/12).

Question 10

Bjorn owns a 40% interest in an S corporation that earned $150,000 in 2008.He also owns 30% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $35,000 to Bjorn and the C corporation paid dividends of $35,000 to Bjorn.How much income must Bjorn report from these businesses?

Accepted Answer

Bjorn must report his $60,000 share ($150,000 F1F1F1S1F1F1F10 40%)of the S corporation's income on his individual tax return.He will report $35,000 of dividend income from the C corporation.

Question 11

Sage,Inc.,a closely held corporation that is not a PSC,has a $140,000 passive loss,$85,000 of active business income,and $35,000 of portfolio income.How much of the passive loss can Sage deduct?

Accepted Answer

As a closely held corporation,Sage may offset $85,000 of the $140,000 passive loss against the $85,000 of active business income,but may not offset the remaining $55,000 against portfolio income.

Question 12

FIN 48 provides that a tax position must be recognized when it has a "more-likely-than-not" probability of being sustained on examination. In this analysis,the statutes of limitation should be considered.

Accepted Answer

In determining the probability of a position being sustained on examination,the statutes of limitation should be taken into account. For example,a tax position which originally does not satisfy the "more-likely-than-not" threshold would satisfy the threshold when the statutes of limitation expire with respect to the return for which the position was claimed.

Question 13

Which of the following statements about a limited liability company is correct?

Accepted Answer

Statements a.,c.,and d.are incorrect.

Question 14

Geneva,a sole proprietor,sold one of her business assets for a $20,000 long-term capital gain.Geneva's marginal tax rate is 35%.Gulf,a C corporation,sold one of its assets for a $20,000 long-term capital gain.Gulf's marginal tax rate is 35%.What tax rates are applicable to these capital gains?

Accepted Answer

Geneva reports the long-term capital gain on her individual tax return,and it is subject to a maximum tax rate of 15%.Corporations do not receive special tax treatment for its long-term capital gain.Therefore,Gulf's gain will be taxed at 35%.

Question 15

Under FAS 109,a deferred tax asset results when the book (financial)basis of an item exceeds its tax basis (e.g.,MACRS over straight-line depreciation).

Accepted Answer

The definition provided is that of a deferred tax liability. A deferred tax asset results when the book (financial)basis of an item is less than its tax basis (e.g.,accrual for product warranty expense).

Question 16

Glen and Michael are equal partners in Trout Enterprises,a calendar year partnership.During the year,Trout Enterprises had gross income of $500,000 and operating expenses of $270,000.In addition,the partnership sold land that had been held for investment purposes for a long-term capital gain of $120,000.During the year,Glen withdrew $50,000 from the partnership,and Michael withdrew $75,000.Discuss the impact of this information on the taxable income of Trout,Glen,and Michael.

Accepted Answer

Trout,a 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 $230,000 ($500,000 income - $270,000 expenses).The partnership also reports the $120,000 long-term capital gain as a separately stated item on Form 1065.Glen and Michael both receive a Schedule K-1 reporting net profit of $115,000 and separately stated long-term capital gain of $60,000.Each partner reports net profit of $115,000 and long-term capital gain of $60,000 on his own return.The withdrawals do not affect taxable income for the partners but decrease their basis in the partnership.

Question 17

Norma formed Hyacinth Enterprises,a proprietorship,in 2008.In its first year,Hyacinth had operating income of $150,000 and operating expenses of $100,000.In addition,Hyacinth had a long-term capital loss of $4,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $25,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2008?

Accepted Answer

A proprietorship is not a separate taxable entity.As a proprietor,Norma reports profit or loss from Hyacinth on her individual return.Norma's taxable income for 2008 will be increased by $47,000 ($150,000 - $100,000 = $50,000 net profit - $3,000 long-term capital loss limit).The $25,000 she withdrew from Hyacinth has no effect on her taxable income.

Question 18

Rodney,the sole shareholder of a calendar year,accrual basis C corporation,loaned the corporation a substantial amount of money on January 1,2008.The corporation accrued $45,000 of interest expense on the loan on December 31,2008.It pays the interest to Rodney,a cash basis taxpayer,on April 1,2009.Under these facts:

Accepted Answer

A corporation that uses the accrual method cannot claim a deduction for an accrual owed to a related party until the recipient reports that amount as income.Rodney,a cash basis taxpayer,must report the income in the year he receives the payment from the corporation.

Question 19

Juan is the sole shareholder of an S corporation,and Diego owns a sole proprietorship.Both businesses,which were started in 2008,make a profit of $300,000 in 2008.Each owner withdraws $225,000 from his business during the year.Which of the following statements is correct?

Accepted Answer

Juan must report the profit of $300,000 for 2008 (but not as dividend income-see choice b.).The S corporation,which is a flow-through entity,is not required to pay tax on its $300,000 profit.Diego must report net profit from his business of $300,000 for 2008,but the proprietorship is not a taxable entity.

Question 20

Azul Corporation,a personal service corporation,had $450,000 of active income,$65,000 of portfolio income,and a $70,000 passive loss during the year.How much is Azul's taxable income?

Accepted Answer

A personal service corporation may not offset passive loss against active income or portfolio income.Thus,Azul's taxable income is $515,000 ($450,000 + $65,000).

Quiz 2: Corporations: Introduction and Operating Rules