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Exam 2: Corporations: Introduction and Operating Rules

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Question 1

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Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in 2012.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 2012 is incorrect?

A) Juanita must report $120,000 of income from the corporation.
B) The corporation must pay corporate tax on $200,000 of income.
C) Carlos must report $120,000 of income from the partnership.
D) The partnership is not subject to a Federal entity-level income tax.
E) None of the above.

F) A) and E)
G) A) and C)

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A

Question 2

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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.

A) True
B) False

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Question 3

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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.

Tonya,an actuary,is the sole shareholder of Shrike Corporation,a professional corporation.The corporation paid Tonya a salary of $360,000 during its fiscal year ending September 30,2012.

Mallard Corporation,a C corporation that is not a PSC,incorporated in December 2012 and expects to have substantial organizational expenditures.Discuss tax planning strategies that Mallard should consider in order to maximize the deduction for organizational expenditures.

During the current year,Quartz Corporation (a calendar year C corporation)has the following transactions: Quartz owns 15% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss)for the year?

Amber Company has $400,000 in net income in 2012 before deducting any compensation or other payment to its sole owner,Alfredo.Assume that Alfredo is in the 35% marginal tax bracket.Discuss the tax aspects of each of the following independent arrangements.(Assume that any salaries are reasonable in amount and ignore any employment tax considerations. )

During 2012,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 2012?

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.

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.

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

The due date (not including extensions)for filing a 2012 Federal income tax return for a calendar year C corporation (Form 1120)is April 15,2013.

Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1:

Red Corporation,which owns stock in Blue Corporation,had net operating income of $200,000 for the year.Blue pays Red a dividend of $40,000.Red takes a dividends received deduction of $28,000.Which of the following statements is correct?

Jessica,a cash basis individual,is a 60% shareholder of Crow Corporation,a regular corporation.On January 1,2012,Jessica loaned Crow $300,000,with the principal due in 5 years and 6% interest due each January 1.Crow,an accrual method,calendar year taxpayer,accrued $18,000 of interest expense on the loan on December 31,2012,and paid the $18,000 to Jessica on January 1,2013.How much is Crow's deduction for interest on this loan for 2012? Would your answer change if Jessica was a 25% shareholder of Crow?

Canary Corporation,an accrual method C corporation,uses the calendar year for tax purposes.Leticia,a cash method taxpayer,is both a shareholder of Canary and the corporation's CFO.On December 31,2012,Canary has accrued a $75,000 bonus to Leticia.Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations.

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2012.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?

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Copper Corporation,a C corporation,had gross receipts of $5 million in 2009,$6 million in 2010,and $3 million in 2011.Gold Corporation,a personal service corporation (PSC) ,had gross receipts of $4 million in 2009,$7 million in 2010,and $5 million in 2011.Which of the corporations will be allowed to use the cash method of accounting in 2012?