Chapter 17,181

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Chapter 17,181. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.a. Trueb. False2. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income.a. Trueb. False3. Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. Robin earned net profit of$350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib mustreport Robin Corporation profit of $350,000 on his Federal income tax return.a. Trueb. False4. Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.a. Trueb. False5. Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of$25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the$25,000 of dividends as income.a. Trueb. False6. Eagle Company, a partnership, had a short-term capital loss of $10,000 during the year. Aaron, who owns 25% ofEagle, will report $2,500 of Eagles short term capital loss on his individual tax return.a. Trueb. False7. Don, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.a. Trueb. False8. Double taxation of corporate income results because dividend distributions are included in a shareholders grossincome but are not deductible by the corporation.a. Trueb. False9. Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.a. Trueb. False10. Thrush Corporation files Form 1120, which reports taxable income of $200,000. The corporations tax is $56,250.a. Trueb. False11. The corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.a. Trueb. False12. 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. Trueb. False13. Under the check the box Regulations, a two owner LLC that fails to elect to be to treated as a corporation willbe taxed as a sole proprietorship.a. Trueb. False14. A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.a. Trueb. False15. 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 $5 million or less for the most recent 3-year period), a C corporation can use the accrual method.a. Trueb. False16. On December 31, 2014, 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 13, 2015. Lavender can deduct the bonus in 2015, the year in which it is included in Barrys gross income.a. Trueb. False17. 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 x 15%).a. Trueb. False18. Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in thecurrent year. Albatross Corporations taxable income is $140,000.a. Trueb. False19. If a C corporation uses straight line depreciation on real estate ( 1250 property), no portion of a gain on the sale ofthe property will be recaptured as ordinary income.a. Trueb. False20. The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.a. Trueb. False21. Peach Corporation had $210,000 of 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.a. Trueb. False22. On December 19, 2014, 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 10, 2015, may be claimed as a deduction for tax year 2014.a. Trueb. False23. 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 5 years ago for $10,000. Orioles charitable contribution deduction is $30,000 (ignoring the taxable income limitation).a. Trueb. False24. 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).a. Trueb. False25. 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. Herons 2014 deduction is limited to $15,000 (10% of taxable income). The 2014 contribution must be applied first against the $15,000 limitation.a. Trueb. False26. For a corporation, the domestic production activities deduction is equal to 9% of the lesser of (1) qualified production activities income or (2) taxable income. However, the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.a. Trueb. False27. A corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years.a. Trueb. False28. 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, Azuls dividends received deduction is $21,000.a. Trueb. False29. Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.a. Trueb. False30. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.a. Trueb. False31. Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2014. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2014): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Hornbill Corporations current year deduction for organizational expenditures is $5,800.a. Trueb. False32. Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 isdeductible as startup expenditures on Lilacs tax return for the year in which it begins business.a. Trueb. False33. A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.a. Trueb. False34. Ed, an individual, incorporates two separate businesses that he owns by establishing two new C corporations. Each corporation generates taxable income of $50,000. As a general rule, each corporation will have a tax liability of$11,125.a. Trueb. False35. A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.a. Trueb. False36. A corporation must file a Federal income tax return even if it has no taxable income for the year.a. Trueb. False37. Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable incomereported on the corporations income tax return.a. Trueb. False38. 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.a. Trueb. False39. 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 corporations outstanding stock. The $50,000 bonus is paid to the president on February 2, 2015. For Flamingos 2014 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.a. Trueb. False40. Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.a. Trueb. False41. Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.a. Trueb. False42. A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).a. Trueb. False43. 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.a. Trueb. False