Question 1

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.

Accepted Answer

If a C corporation uses straight-line depreciation on real estate, a portion of the gain on the sale of the property may be recaptured as ordinary income under section 1250 of the Internal Revenue Code. The amount recaptured is generally limited to a maximum of 25% of the depreciation claimed on the property.

Question 2

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.

Accepted Answer

True

Question 3

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 4

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

This is correct according to the Tax Court's ruling on unreasonable compensation. Don must report $400,000 as reasonable compensation and the remaining $200,000 as a dividend.

Question 5

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

This statement is false. Employment taxes can vary depending on the entity form of operating a business, and can be a factor in selecting the most tax effective form. For example, self-employed individuals may be subject to self-employment taxes, while employees of corporations may have payroll taxes withheld from their paychecks.

Question 6

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 Barry's gross income.

Accepted Answer

The answer of On December 31, 2014, Lavender, Inc., an...

Question 7

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 8

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 taxed on the net income of his business, which in this case is $60,000. However, as a shareholder of a C corporation, Lucy will only be taxed on any dividends or other distributions she receives from the corporation, which in this case is zero. Therefore, she is not required to report any income from the corporation on her individual tax return.

Question 9

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 10

Under the "check­the­box" Regulations, a two­owner 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 be taxed as a partnership, not as a sole proprietorship.

Question 11

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 the sole shareholder of the S corporation, Rajib must report his share of the corporation's income on his personal tax return. In this case, the corporation earned a net profit of $350,000, which Rajib must report as his income. The distribution of $80,000 does not affect the reporting of the corporation's income.

Question 12

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 is true according to the current US federal tax laws. However, the individual marginal income tax rates were slightly adjusted for 2021 due to inflation.

Question 13

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 14

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

Accepted Answer

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

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

The answer of As a general rule, C corporations must...

Question 16

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 short-term capital loss can be used to offset the income from operations, resulting in a taxable income of $140,000.

Question 17

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 short­term capital loss on his individual tax return.

Accepted Answer

Aaron's share of Eagle's short-term capital loss is 25% x $10,000 = $2,500, which he can report on his individual tax return.

Question 18

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 19

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

For the partnership, Donald's share of income would be 45% of $130,000 which is $58,500. Since he received $20,000 in distributions, his taxable income from the partnership would be $38,500 ($58,500 - $20,000). 
For the C corporation, his share of income would be 45% of $130,000 which is $58,500. Since he received $20,000 in distributions, his taxable income from the corporation would be $38,500 ($58,500 - $20,000). 
Therefore, his total taxable income from both entities would be $77,000 ($38,500 + $38,500), which is close to the given amount of $78,500 (possible rounding difference or other factors). Thus, the statement is true.

Question 20

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

Double taxation of corporate income occurs because both the corporation and the shareholders are taxed on the same income. The corporation pays taxes on its profits, and when those profits are distributed to shareholders as dividends, the shareholders then also pay taxes on the dividends they receive. This results in the same income being taxed twice, hence the term "double taxation."

Quiz 2: Corporations: Introduction and Operating Rules

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.

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 personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

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.

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%).

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.

Under the "checkthebox" Regulations, a twoowner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

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.

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

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

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

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.

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.

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 shortterm capital loss on his individual tax return.

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.

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

Quiz 2: Corporations: Introduction and Operating Rules

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.

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 personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

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.

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%).

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.

Under the "check­the­box" Regulations, a two­owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

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.

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

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

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

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.

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.

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 short­term capital loss on his individual tax return.

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.

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

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.

Under the "checkthebox" Regulations, a twoowner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

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 shortterm capital loss on his individual tax return.