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Exam 3: Corporations: Introduction and Operating Rules

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Question 1

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

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In general, a C corporation must adopt the accrual method of accounting. However, there are several exceptions to this rule, and the following C corporations can use the cash method of accounting: • Corporations engaged in the trade or business of farming or timber. • Qualified personal service corporations. • Corporations with average annual gross receipts of $25 million or less for the previous 3-year period. There is a limitation on the use of the cash method by otherwise qualifying corporations that maintain inventories. In general, these corporations must use the accrual method in determining sales and cost of goods sold. However, corporations with average annual gross receipts of $25 million or less for the most recent 3-year period are generally not subject to the limitation. Accrual method corporations are subject to a limitation on the deductibility of an accrued expenditure attributable to a cash method related party e.g., a more-than- 50% shareholder). In such cases, the corporation's deduction for the expenditure is deferred until the recipient includes the amount in income.

Question 2

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Sunset Corporation a C corporation) had operating income of $200,000 and operating expenses of $175,000. In addition, Sunset had a $30,000 long-term capital gain, a $52,000 short-term capital loss, and $5,000 tax-exempt interest income. What is Sunset Corporation's taxable income for the year?

A) $0
B) $3,000
C) $22,000
D) $30,000
E) None of these.

F) B) and E)
G) C) and D)

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Question 3

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During the current year, 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 income tax liability for the year?

Grackle Corporation, a personal service corporation, had $230,000 of net active income, $40,000 of portfolio income and a $250,000 passive activity loss during the year. How much is Grackle's taxable income?

Violet, Inc., a closely held corporation not a PSC) , has $55,000 of passive activity loss, $80,000 of net active income, and $20,000 of portfolio income. How much is Violet's taxable income for the current year?

For purposes of the accumulated earnings tax, earnings can be accumulated for reasonable needs of the business. List several examples of what is included and several examples of what is not included in the reasonable needs of the business.

Almond Corporation, a calendar year C corporation, had taxable income of $900,000, $1.1 million, and $1.2 million for 2017, 2018, and 2019, respectively. Almond's taxable income is $2 million for 2020. Compute the minimum estimated tax payments for 2020 for Almond Corporation.

Briefly describe the charitable contribution deduction rules applicable to C corporations.

Carrot Corporation, a C corporation, has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2019. Carrot Corporation had taxable income from other sources of $720,000. Prior years' transactions included the following: $\begin{array} { l l r } 2015 & \text { Net long-term capital gain } & \$ 150,000 \\2016 & \text { Net short-term capital gain } & 60,000 \\2017 & \text { Net short-term capital gain } & 45,000 \\2018 & \text { Net long-term capital gain } & 35,000\end{array}$ Compute the amount of Carrot's capital loss carryover to 2020.

For tax years ending after 2017, which of the following statements is incorrect with respect to the treatment of a net operating loss by a calendar year C corporation?

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

Patrick, an attorney, is the sole shareholder of Gander Corporation, a C corporation. Gander is a personal service corporation with a fiscal year ending November 30 pursuant to a § 444 election) . The corporation paid Patrick a salary of $180,000 during its fiscal year ending November 30, 2019. How much salary must Gander pay Patrick during the period December 1 through December 31, 2019, to permit the corporation to continue to use its fiscal year without negative tax effects?

Which of the following statements is incorrect regarding the dividends received deduction?

In the current year, Crimson, Inc., a calendar C corporation, has income from operations of $180,000 and operating deductions of $225,000. Crimson also had $30,000 of dividends from a 15% stock ownership in a domestic corporation. Which of the following statements is correct with respect to Crimson for the current year?

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.

During the current year, Jay Corporation, a calendar year personal service C corporation, had operating income of $300,000, operating expenses of $200,000, a short-term capital gain of $5,000, and a long-term capital loss of $35,000. How much is Jay's income tax liability for the year?

As a general rule, C corporations must use the cash method of accounting. However, under several exceptions to this rulee.g., average annual gross receipts of $25 million or less for the most recent 3-year period), a C corporation can use the accrual method.

Which of the following statements is incorrect regarding the taxation of C corporations for tax years beginning after 2017?

Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation. Canary owns 18% of the Stork Corporation stock. Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.

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.