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Exam 3: Corporations: Introduction and Operating Rules

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Question 41

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Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?

A) Eduardo must report $80,000 of income on his return.
B) Luis must report $80,000 of income on his return.
C) Eduardo's proprietorship is not required to pay income tax on $80,000.
D) Luis's corporation must pay income tax on $80,000.
E) None of these.

F) A) and E)
G) A) and D)

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Question 42

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In tax planning for charitable contributions, a current-year's contribution might have to be deferred to a later year in order to deduct a contribution carryover amount.

A) True
B) False

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Question 43

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Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2018 of $5,000. In 2019, Heron made a further charitable contribution of $20,000. Heron's 2019 deduction is limited to $15,000 10% of taxable income). The 2019 contribution must be applied first against the $15,000 limitation.

In 2019, Bluebird Corporation had net income from operations of $100,000. Further, Bluebird recognized a long-term capital gain of $30,000 and a short-term capital loss of $45,000. Which of the following statements is correct?

On December 31, 2019, 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 corporation's outstanding stock. The $50,000 bonus is paid to the president on February 4, 2020. For Flamingo's 2019 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

Opal Corporation, an accrual method, calendar year C corporation, was formed and began operations on July 1, 2019. The following expenses were incurred during the first tax year July 1 through December 31, 2019) of operations. $\begin{array}{lr}\text { Expenses of temporary directors and of organizational meetings } & \$ 8,000 \\\text { Fee paid to the state of incorporation } & 2,000 \\\text { Accounting services incident to organization } & 3,500 \\\text { Legal services for drafting the corporate charter and bylaws } & 4,300 \\\text { Expenses incident to the printing and sale of stock certificates } & 6,000\end{array}$ Assuming a § 248 election, what is Opal's deduction for organizational expenditures for 2019?

Owl Corporation a C corporation) , a retailer of children's apparel, made the following donations to qualified charitable organizations this year. How much qualifies for the charitable contribution deduction ignoring the taxable income limitation) ?

Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 the portion of the salary that is considered reasonable compensation).

Peach Corporation had $210,000 of net 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.

Briefly discuss the current-year requirements for the dividends received deduction.

Thrush Corporation, a calendar year C corporation, files its current year Form 1120, which reports taxable income of $200,000 for the year. The corporation's tax is $42,000.

Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current year. In addition, Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss. Elk's taxable income is:

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.

Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2019. Hornbill incurred the following expenses during its first year of operations May 1 - December 31, 2019): 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. Wanting to deduct as much as possible in the current year, Hornbill Corporation's 2019 deduction for organizational expenditures is $5,800.

In the current year, Red Corporation a calendar year C corporation) , which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct?

In working with Schedule M-2 analysis of unappropriated retained earnings per books) of Form 1120, which of the following is an addition to beginning retained earnings?

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.

What is the annual required estimated tax payment for a C corporation? What are the rules regarding payment of the estimated tax?

In each of the following independent situations, determine the C corporation's income tax liability. Assume that all corporations use a calendar year 2019. $\begin{array}{l}\begin{array} { l r } &\text { Taxable }\\& \underline { \text { Income } } \\\text { Violet Corporation } & \$ 63,000 \\\text { Indigo Corporation } & 180,000 \\\text { Orange Corporation } & 510,000 \\\text { Blue Corporation } & 11,100,000 \\\text { Green Corporation (personal service }& 225,000\\\text { corporation) } \end{array}\end{array}$

For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.