Question 1

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

Accepted Answer

Dividend distributions are taxed at both the corporate level and the individual level, resulting in double taxation. This is because the corporation cannot deduct the dividends as an expense, while the individual shareholder must include them as part of their gross income for tax purposes.

Question 2

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.

Accepted Answer

As a sole proprietor, Tomas is required to report the net profit of his business on his individual tax return. However, as the sole shareholder of a C corporation, Lucy is not required to report the corporation's net profit on her individual tax return unless it is distributed to her as a dividend. Since neither business distributed any funds to the owners in the current year, Lucy does not have to report any income from the corporation on her individual tax return.

Question 3

On December 31,2017,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 14,2018.Lavender can deduct the bonus in 2018,the year in which it is included in Barry's gross income.

Accepted Answer

False

Question 4

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

While employment taxes apply to all entity forms, they may be more burdensome for certain forms, such as sole proprietorships and partnerships, compared to others like corporations. Therefore, employment taxes can be a factor in selecting the most tax effective form of operating a business.

Question 5

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

When straight-line depreciation is used on real estate, a portion of the recognized gain on the sale of the property may be recaptured as ordinary income under Section 1250 of the Internal Revenue Code. This recapture is calculated as the excess of the depreciation allowed or allowable on the property over the depreciation that would have been allowable under the straight-line method. Therefore, some portion of the gain may still be subject to recapture as ordinary income.

Question 6

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.

Accepted Answer

The answer of Quail Corporation is a C corporation with...

Question 7

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

Accepted Answer

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

Question 8

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.

Accepted Answer

The answer of Donald owns a 45% interest in a...

Question 9

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

Accepted Answer

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

Question 10

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.

Accepted Answer

In a partnership, the entity itself does not pay income tax on its profits. Instead, the profits or losses are passed through to the partners, who report them on their individual tax returns.

Question 11

Jake,the sole shareholder of Peach Corporation,a C corporation,has the corporation pay him $100,000.For income tax purposes,Jake would prefer to have the payment treated as dividend instead of salary.

Accepted Answer

The answer of Jake,the sole shareholder of Peach Corporation,a C...

Question 12

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.

Accepted Answer

Since $200,000 is determined to be unreasonable compensation, Don cannot take that as a salary but instead must take it as a dividend. Therefore, he must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Question 13

Rajib is the sole shareholder of Robin Corporation,a calendar year S corporation.In the current year,Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib.Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Accepted Answer

As the sole shareholder of a calendar year S corporation, Rajib must report the corporation's profit on his individual tax return, even if the corporation makes distributions to him during the year. Therefore, Rajib must report Robin Corporation's net profit of $350,000 on his Federal income tax return.

Question 14

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

Under the "check-the-box" regulations, a two-owner LLC that fails to elect to be treated as a corporation will default to being taxed as a partnership, not a sole proprietorship.

Question 15

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.

Accepted Answer

C corporations are generally required to use the accrual method of accounting, but there are exceptions that allow them to use the cash method, such as having average annual gross receipts of $25 million or less for the most recent 3-year period.

Question 16

Eagle Company,a partnership,had a short-term capital loss of $10,000 during the current year.Aaron,who owns 25% of Eagle,will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Accepted Answer

As Aaron owns 25% of Eagle, he is entitled to report 25% of Eagle's short-term capital loss on his individual tax return. Therefore, he will report $2,500 ($10,000 x 0.25) of Eagle's short-term capital loss on his individual tax return.

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

Thrush Corporation files Form 1120,which reports taxable income of $200,000 in the current year.The corporation's tax is $56,250.

Accepted Answer

The answer of Thrush Corporation files Form 1120,which reports taxable...

Question 19

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 20

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 answer of Albatross,a C corporation,had $140,000 net income from...

Quiz 17: Corporations: Introduction and Operating Rules