Question 1

Donald owns a 60% interest in a partnership that earned $230,000 in the current year. He also owns 60% of the stock in a C corporation that earned $230,000 during the year. Donald received $50,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $188,000 of income on his individual income tax return for the year.

Accepted Answer

To calculate Donald's total income, we need to start with the total earnings of both entities:

- Partnership earnings: $230,000 
- C corporation earnings: $230,000

Donald owns a 60% interest in both entities, so his share of the earnings is:

- Partnership earnings: 60% x $230,000 = $138,000 
- C corporation earnings: 60% x $230,000 = $138,000

His total earnings from both entities is therefore:

$138,000 + $138,000 = $276,000

However, Donald also received $50,000 in distributions from each entity, which are not taxable as income. To adjust for this, we subtract the total distributions ($100,000) from his total earnings:

$276,000 - $100,000 = $176,000

This is not the final answer, though. Since Donald owns a share of a C corporation, he may be subject to double taxation: the corporation pays taxes on its earnings, and then Donald pays taxes again on any dividends he receives. To account for this, we need to calculate the taxes paid by the C corporation:

- C corporation earnings: $230,000 
- C corporation taxes (assuming a 21% rate): $230,000 x 21% = $48,300 
- C corporation after-tax earnings: $230,000 - $48,300 = $181,700

Donald's share of the after-tax earnings is:

60% x $181,700 = $109,020

Adding this to his earnings from the partnership (which is not subject to double taxation) gives us:

$109,020 + $138,000 = $247,020

Finally, we subtract the distributions again to get Donald's taxable income for the year:

$247,020 - $100,000 = $147,020

This is still not the final answer, though. Since the C corporation has already paid taxes on its earnings, Donald may be eligible for a credit for those taxes on his personal tax return. Assuming the tax credit is equal to the amount of taxes paid by the corporation ($48,300), we subtract that from his taxable income to get the final answer:

$147,020 - $48,300 = $98,720

This is less than the $188,000 listed in the answer choices, which suggests a mistake has been made. However, without more information about the sources of income and deductions for Donald, it's impossible to say for sure what the correct answer should be.

Question 2

The corporate marginal tax rates range from 10% to 39%, while the individual marginal tax rates range from 15% to 35%.

Accepted Answer

This is true. The corporate marginal tax rates are generally lower than the individual rates and can vary from one jurisdiction to another. In the USA, for example, the corporate marginal tax rate ranges from 10% to 39%, while the individual marginal tax rate ranges from 15% to 35%.

Question 3

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the 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

Partnerships pass through their losses to their partners, who then report their share of the loss on their individual tax returns. Since Aaron owns 25% of Eagle, he will report 25% of the partnership's short-term capital loss, which is $2,500 (25% of $10,000).

Question 4

Albatross, a C corporation, had $125,000 net income from operations and a $10,000 short-term capital loss in 2011. Albatross Corporation's taxable income is $115,000.

Accepted Answer

The answer of Albatross, a C corporation, had $125,000 net...

Question 5

Rose is a 50% partner in Wren Partnership. During the year, Wren earned net profit of $100,000 ($210,000 gross income - $110,000 operating expenses) and distributed $20,000 to each partner. Rose must report Wren Partnership profit of $20,000 on her Federal income tax return.

Accepted Answer

The answer of Rose is a 50% partner in Wren...

Question 6

Quail Corporation is a C corporation with net income of $300,000 during 2011. If Quail paid dividends of $50,000 to its shareholders, the corporation must pay tax on $300,000 of net income. Shareholders must report the $50,000 of dividends as income.

Accepted Answer

C corporations are separate tax-paying entities, meaning they pay income tax on their net income. Dividends paid to shareholders are not deductible expenses for the corporation, so they are paid out of after-tax income. This means that the corporation must pay tax on all of its net income, regardless of whether it distributes any of it as dividends. Shareholders must also report any dividend income they receive on their personal tax returns.

Question 7

Thrush Corporation files Form 1120, which reports taxable income of $110,000. The corporation's tax is $26,150.

Accepted Answer

Based on the information given, the tax calculated for Thrush Corporation is consistent with the 2019 tax rate for corporations with taxable income between $50,000 and $75,000, which is 22%. 22% of $110,000 is $24,200. Therefore, the given tax amount of $26,150 is reasonable.

Question 8

Under the "check-the-box" Regulations, a single-member 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 single-member LLC that does not elect to be treated as a corporation will be taxed as a sole proprietorship.

Question 9

There is no Federal income tax assessed on partnerships (including those formed as LLCs) or S corporations. Since all states follow the Federal approach as to entity taxation, state income taxation is a neutral factor in the selection of an entity form.

Accepted Answer

While it is true that partnerships and S corporations are not subject to Federal income tax, many states do not follow the same approach and may require these entities to pay state income tax. Therefore, state income taxation can be a relevant factor in the selection of an entity form.

Question 10

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 11

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 not deductible by the corporation, and when they are included in a shareholder's gross income, they are subject to taxation again. This results in double taxation of corporate income.

Question 12

A calendar year C corporation with average annual gross receipts of $5 million or less must use the cash method of accounting.

Accepted Answer

The answer of A calendar year C corporation with average...

Question 13

Unlike individual taxpayers, corporate taxpayers do not receive a preferential tax rate with respect to long-term capital gains.

Accepted Answer

This statement is true. Corporate taxpayers do not receive a preferential tax rate for long-term capital gains, unlike individual taxpayers who may receive a reduced tax rate on long-term capital gains.

Question 14

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 salary instead of dividend.

Accepted Answer

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

Question 15

Katherine, the sole shareholder of Purple Corporation, a calendar year C corporation, has the corporation pay her a salary of $450,000 in the current year. The Tax Court has held that $150,000 represents unreasonable compensation. Purple Corporation's taxable income is unaffected by the Tax Court's determination.

Accepted Answer

The answer of Katherine, the sole shareholder of Purple Corporation,...

Question 16

Olga's proprietorship earned a net profit of $95,000 during the year and she withdrew $70,000 of this profit. Olga must report $70,000 net income from the proprietorship on her individual income tax return (Form 1040).

Accepted Answer

Net income from a proprietorship is the amount left over after all expenses and withdrawals have been made, and is reported on the owner's individual income tax return. In this case, Olga withdrew $70,000 of the $95,000 net profit, meaning that her net income from the proprietorship is only $25,000 ($95,000 - $70,000). Olga must report this $25,000 net income on her individual income tax return.

Question 17

Owl Corporation, a C corporation, recognizes a gain on the sale of a § 1250 asset in the current year. Owl had used the straight-line method for depreciating the realty. Some of Owl's gain on the sale of the realty will be treated as depreciation recapture (ordinary income).

Accepted Answer

When a C corporation sells a § 1250 asset (real property), a portion of the gain may be treated as depreciation recapture and taxed as ordinary income rather than capital gains. This is because the depreciation deductions taken on the asset during its use reduce its cost basis and increase the amount of gain subject to recapture upon sale.

Question 18

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 must report Robin Corporation profit of $350,000 on his Federal income tax return.

Accepted Answer

As a sole shareholder of an S corporation, Rajib is required to report the corporation's income and losses on his personal income tax return. Therefore, he must report the net profit of $350,000 earned by Robin Corporation on his Federal income tax return. The distribution of $80,000 is not taxable income to Rajib since it represents a return of his investment in the corporation.

Question 19

On December 31, 2011, Lavender, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 70% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2012. Lavender can deduct the bonus in 2012, the year in which it is included in Barry's gross income.

Accepted Answer

This is because Lavender, Inc. is an accrual basis C corporation, and the bonus was accrued in 2011. Even though the payment was made in 2012, the bonus can still be deducted in 2012, the year in which it is included in Barry's gross income, as per the matching principle of accrual accounting.

Question 20

As a general rule, a personal service corporation (PSC) must use a calendar year as its accounting period.

Accepted Answer

According to the IRS, a personal service corporation must adopt a calendar year as its tax year unless it has a business purpose that requires a different tax year.

Quiz 2: Corporations: Introduction and Operating Rules