Question 1

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 $25 million or less for the most recent 3-year period), a C corporation can use the accrual method.

Accepted Answer

C corporations are generally allowed to use either the cash or accrual method of accounting, but there are specific circumstances, such as having average annual gross receipts of more than $25 million for the most recent 3-year period, that may require the use of the accrual method. The statement incorrectly suggests that the cash method is the default with limited exceptions for the accrual method.

Question 2

If a C corporation uses straight-line depreciation on real estate (§ 1250 property), no portion of a recognized gain on the sale of the property will be recaptured as ordinary income.

Accepted Answer

For § 1250 property (real estate), straight-line depreciation does not result in ordinary income recapture upon sale. However, any depreciation claimed in excess of straight-line (if allowed in certain cases) would be recaptured as ordinary income. Since the question specifies straight-line depreciation, the implication that no portion would be recaptured as ordinary income is incorrect because it ignores the potential for excess depreciation recapture. Additionally, § 1250 recapture rules generally convert what would be capital gain into ordinary income to the extent of depreciation allowed or allowable, but this primarily applies to depreciation methods that accelerate depreciation beyond straight-line. The question's phrasing might lead to confusion by suggesting that straight-line depreciation on § 1250 property avoids recapture entirely, which misrepresents the nuanced application of recapture rules.

Question 3

For tax years beginning before 2018, the corporate marginal income tax rates ranged from 15% to 39%, while the individual marginal income tax rates ranged from 10% to 39.6%.

Accepted Answer

This is a factual statement about the marginal income tax rates for corporations and individuals before 2018.

Question 4

Thrush Corporation, a calendar year C corporation, files it's 2018 Form 1120, which reports taxable income of $200,000 for the year. The corporation's tax is $61,250.

Accepted Answer

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

Question 5

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

Accepted Answer

The answer of The passive loss rules apply to closely...

Question 6

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 7

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 offset the net income from operations, resulting in taxable income being equal to $140,000.

Question 8

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

Accepted Answer

The dividends received deduction (DRD) is allowed even if a corporation has a net operating loss (NOL) for the current taxable year. The limitation affects the amount of DRD that can be used to reduce taxable income, not the allowance of the deduction itself.

Question 9

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting five years ago for $10,000. Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Accepted Answer

This is true based on the information given. When Oriole Corporation donated the painting to a qualified public charity, the charitable contribution deduction would be the fair market value of the painting at the time of the donation, which in this case is $30,000. The fact that Oriole purchased the painting for $10,000 five years ago is not relevant for the purposes of determining the charitable contribution deduction.

Question 10

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

Employment taxes can have different impacts on the tax effectiveness of different entity forms, so they are not a neutral factor in selecting the most tax effective form of operating a business. For example, sole proprietorships and partnerships are subject to self-employment taxes, while S corporations and limited liability companies (LLCs) may avoid some employment taxes by paying owners reasonable salaries and taking distributions instead of additional salaries. Therefore, employment taxes should be considered carefully when choosing the entity form for a business.

Question 11

Peach Corporation had $210,000 of net active income, $45,000 of portfolio income, and a $230,000 passive loss during the current year. If Peach is a closely held C corporation that is not a PSC, it can deduct $210,000 of the passive loss in the year.

Accepted Answer

Closely held C corporations that are not PSCs can deduct up to $250,000 of passive losses against active or portfolio income. Since Peach Corporation had $210,000 of net active income and $45,000 of portfolio income, it can use up to $210,000 of its passive loss to offset its income.

Question 12

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2017 of $5,000. In 2018, Heron made a further charitable contribution of $20,000. Heron's 2018 deduction is limited to $15,000 (10% of taxable income). The 2018 contribution must be applied first against the $15,000 limitation.

Accepted Answer

This is true as per the rules for excess charitable contributions. Any excess contribution from the previous year should be deducted first before applying the current year's contribution to the limitation. Therefore, the 2018 contribution will be reduced to $5,000 (i.e., $20,000 - $15,000), and the remaining $5,000 will carry forward to the next tax year.

Question 13

In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation. Azul owns 25% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

Accepted Answer

The dividends received deduction for a corporation owning between 20% - 80% of another corporation's stock is 80% of the dividend received. Therefore, Azul's dividends received deduction would be 80% x $30,000 = $24,000. However, the deductible amount is subject to the taxable income limitation, which means that it cannot exceed 50% of Azul's taxable income. Since the question states that Azul is not subject to the limitation, the full $24,000 deduction would be allowed.

Question 14

The $1 million limitation on the deduction of executive compensation applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and Board of Directors.

Accepted Answer

The $1 million limitation applies to the principal executive officer, principal financial officer, and the three other highest-paid executive officers, but not to the Board of Directors.

Question 15

In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

Accepted Answer

Since the property was held as inventory and for less than a year (short-term capital gain property), Crow Corporation can only deduct the property's basis, which is $30,000, not its fair market value.

Question 16

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

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 17

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 18

A corporate net operating loss arising in 2018 for a calendar year C corporation can be carried back 2 years and forward 20 years to offset taxable income for those years.

Accepted Answer

The answer of A corporate net operating loss arising in...

Question 19

On December 20, 2018, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April 11, 2019, may be claimed as a deduction for tax year 2018.

Accepted Answer

For accrual basis taxpayers, charitable contributions can be deducted in the year they are authorized if they are paid by the 15th day of the third month after the end of that year, which is March 15. However, since the payment was made on April 11, 2019, it cannot be deducted for the 2018 tax year.

Question 20

On December 31, 2018, 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, 2019. Lavender can deduct the bonus in 2019, the year in which it is included in Barry's gross income.

Accepted Answer

The answer of On December 31, 2018, Lavender, Inc., an...

Quiz 17: Corporations: Introduction and Operating Rules