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Exam 2: Corporations: Introduction and Operating Rules

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Question 21

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Briefly describe the accounting methods available for adoption by a C corporation.

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In general, a C corporation must adopt t...

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Question 22

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A corporation must file a Federal income tax return even if it has no taxable income for the year.

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Question 23

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What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?

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).

Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2014, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2014, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 3, 2015, compute Ivory Corporation's 2014 deduction for the above amounts.

Rachel is the sole member of an LLC, and Jordan is the sole shareholder of a C corporation. Both businesses were started in the current year, and each business has a long-term capital gain of $10,000 for the year. Neither business made any distributions during the year. With respect to this information, which of the following statements is correct?

Ostrich, a C corporation, has a net short-term capital gain of $20,000 and a net long-term capital loss of $90,000 during 2014. Ostrich also has taxable income from other sources of $1 million. Prior years' transactions included the following: a. How are the capital gains and losses treated on Ostrich's 2014 tax return? b. Determine the amount of the 2014 net capital loss that is carried back to each of the previous years. c. Compute the amount of capital loss carryover, if any, and indicate the years to which the loss may be carried. d. If Ostrich were a proprietorship, how would Ellen, the owner, report these transactions on her 2014 tax return?

Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in 2013. Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year. The corporation distributed $45,000 to Juanita, and the partnership distributed $45,000 to Carlos. Which of the following statements relating to 2013 is incorrect?

A corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years.

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

The corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.

Explain the rules regarding the accounting periods available to corporate taxpayers.

Grackle Corporation, a personal service corporation, had $230,000 of net active income, $40,000 of portfolio income, and a $250,000 passive activity loss during the year. How much is Grackle's taxable income?

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2013. He also owns 60% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn. How much income must Bjorn report from these businesses?

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2013 of $5,000. In 2014, Heron made a further charitable contribution of $20,000. Heron's 2014 deduction is limited to $15,000 (10% of taxable income). The 2014 contribution must be applied first against the $15,000 limitation.

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

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

On December 31, 2014, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer), who owns 75% of the corporation's outstanding stock. The $50,000 bonus is paid to the president on February 2, 2015. For Flamingo's 2014 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow's tax liability for the year?