taxation exam chapter 10 &11

Test Bank Chapter 10, page 1

Chapter 10 Sole Proprietorships, Partnerships, LLCs, and S Corporations

Chapter 10 Sole Proprietorships, Partnerships, LLCs, and S Corporations Answer Key

True / False Questions

1. Haddie's Hats is a regular corporation. The business must file an income tax return each year to report its taxable income or loss and pay any related taxes. TRUE

Difficulty: EasyLearning Objective: 1

2. A partnership is an unincorporated business activity owned by at least two taxpayers. TRUE


3. A corporate shareholder usually cannot be held personally liable for the debts arising from the corporate business. TRUE

Difficulty: MediumLearning Objective: 1

4. Gabriel operates his business as a sole proprietorship. This year the business incurred an operating loss. The loss can be used to offset other income he earned during the year. TRUE



5. Mr. Dilly has expenses relating to a qualifying home office of $14,320. The taxable income generated by the business before any deduction of home office expenses was $13,700. His allowable home office deduction is $14,320. FALSE


6. Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments. FALSE


7. Matthew earned $150,000 in wages during 2010. FICA taxes withheld by his employer would have been $11,160. FALSE

The social security portion of the payroll tax applies only to the first $106,800 at the rate of 6.2%.


8. The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year. FALSE



9. Businesses are required by law to withhold federal income tax from the compensation paid to their employees. TRUE


10. Partners may deduct on their individual income tax returns an amount equal to 100% of self-employment tax paid. FALSE


11. Limited partners are prohibited by state law from becoming actively involved in the day-to-day operations of the partnership. TRUE


12. All owners of a general partnership have unlimited personal liability for the debts of the entity. TRUE


13. The allocations made to a partner are reported on a Schedule K-1 and are referred to as his or her distributive share of partnership items. TRUE



14. Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year. TRUE


15. A guaranteed payment may be designed to compensate a partner for personal services rendered to the partnership. TRUE


16. Partners receiving guaranteed payments are not required to pay self-employment tax on such payments. FALSE


17. On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable. FALSE



18. A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest. TRUE


19. A partner's distributive share of partnership nondeductible expenses does not decrease his or her tax basis in the partnership interest. FALSE


20. A partner's tax basis in his or her partnership interest is decreased by partnership distributions. TRUE


21. Carter's share of a partnership's operating loss is $17,200. His tax basis in his partnership interest before any adjustment for this loss is $26,000. Carter may deduct the full loss on his individual tax return. TRUE



22. John's share of partnership loss was $60,000. He had only enough tax basis to deduct $34,000 of the loss. He may deduct the remaining loss against other income in the following year, regardless of what happens in the partnership. FALSE


23. A limited liability company with more than one member is generally considered a partnership for federal tax purposes. TRUE


24. A limited liability company that has only one member is generally treated as a disregarded entity for federal tax purposes. TRUE


25. A limited liability company is always taxed as a partnership, regardless of the number of its members. FALSE


26. A major advantage of an S corporation is the ability to specially allocate losses to specific members of the company. FALSE



27. Corporations cannot be shareholders in an S corporation. TRUE


28. If a business is formed as an S corporation, its income may be subject to double taxation. FALSE


29. Tax savings achieved by operating a business through a pass-through entity, rather than as a C corporation, is an example of entity variable tax planning. TRUE

Difficulty: MediumLearning Objective: 3Learning Objective: 7

30. The earnings of a C corporation are taxed only at the shareholder level. FALSE


31. The shareholders of an S corporation must pay self-employment tax on their share of the corporation's ordinary income. FALSE



32. A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis. TRUE


33. A shareholder in an S corporation includes in tax basis his or her share of the corporation's liabilities. FALSE


Multiple Choice Questions

34. Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on: A. Schedule C, Statement of Profit or Loss From BusinessB. The first page of Form 1040 as other incomeC. A separate tax return prepared for the business operationD. Schedule E, Statement of Rent and Royalty Income



35. Aaron James has a qualifying home office. The office is 500 square feed and the entire house is 2,500 square feet. Use the following information to determine her allowable home office deduction:

A. $5,240B. $4,140C. $4,260D. $21,800

($12,000 + $4,000 + $2,500 + $2,200) * 20% = $4,140. $4,140 + $1,100 deprecation = $5,240



36. Rebecca has a qualifying home office. The room is 600 square feet and the entire house is 3,000 square feet. Use the following information to determine her allowable home office deduction:

A. $3,300 home office deductionB. $16,500 home office deductionC. $3,500 home office deductionD. $4,100 home office deduction

$10,000 +$3,300 + $2,000 +$1,200 = $16,500. $16,500 * 20% = $3,300. $3,300 + $800 depreciation = $4,100; however, there is only $3,500 of income to offset the home office deduction.

Difficulty: DifficultLearning Objective: 1

37. Which of the following statements regarding sole proprietorships is false? A. A sole proprietorship has no legal identity separate from that of its owner.B. Sole proprietorships are the most common form of business entity in the U.S.C. The cash flow generated by a sole proprietorship belongs to the owner.D. The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.



38. Which of the following statements regarding the home office deduction is true? A. In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers.B. A home office deduction is not allowed for using the home office for administrative or management activities only.C. The home office deduction is limited to the taxable income of the business before the deduction.D. A depreciation deduction is not allowed for a home office.


39. During 2010, Scott Howell received a salary of $125,000. The social security base amount for 2010 was $106,800. How much payroll tax should have been withheld from Scott's salary for 2010? A. $0B. $6,622C. $9,563D. $8,435

$125,000 * 1.45% = $1,813 Medicare + $106,800 * 6.2% = $6,622 Social Security. Total = $8,435.


40. Kelly received a $60,000 salary during 2010. Her federal income tax withholding rate was 20%, and the Social Security base amount for 2010 was $106,800. What is the total amount that her employer should have withheld in 2010? A. $16,590B. $15,720C. $15,979D. $6,849

($60,000 * 20%) + ($60,000 * 7.65%)



41. Sue's net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year? A. $25,736B. $30,000C. $29,536D. None of the above

x - $4,500 - 7.65% * x = $23,205, so solving for x, 92.35% * x = $27,705, x = $30,000


42. During the year, Elena had $10,000 taxable income before considering the following:

What is her taxable income? A. $34,500B. $24,500C. $30,752D. $32,626

$10,000 + $24,500 - (50% * $3,748)



43. In 2010, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true? A. Mike does not owe any self-employment tax because his salary exceeded the 2010 base amount ($106,800) for federal employment tax.B. Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 earnings from his small business.C. Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business.D. Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business.


44. Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? A. $50,000 ordinary incomeB. $50,000 ordinary business income and $22,000 guaranteed paymentC. $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gainD. All income reported on a general partner's Schedule K-1 are subject to self-employment tax


45. Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax? A. None of the items are subject to SE tax because Debbie is a limited partner.B. $19,000 ordinary business incomeC. $19,000 ordinary business income and $2,000 long-term capital gainD. All income reported on a partner's Schedule K-1 are subject to self-employment tax.



46. Which of the following statements about partnerships is false? A. A partnership is a legal entity that may enter into valid contracts.B. Partnerships are unincorporated entities.C. Only individuals may be partners in a partnership.D. Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax.


47. Which of the following statements concerning partnerships is false? A. A properly-drafted partnership agreement is crucial.B. A general partner's basis in a partnership includes his share of partnership debt.C. Limited partnerships must have at least one general partner.D. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.


48. William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income? A. $3,300 net capital gain; $12,000 deductible net Section 1231 lossB. $4,500 net capital gain; $12,000 deductible net Section 1231 lossC. $4,500 net capital gain; $15,000 deductible net Section 1231 lossD. $3,300 net capital gain; -0- deductible net Section 1231 loss



49. Alice is a partner in Axel Partnership. Her share of the partnership's 2010 ordinary business income was $100,000. She received a $60,000 cash distribution from the partnership on December 1, 2010. Assuming that Alice's marginal tax rate is 35%, calculate her after-tax cash flow from the partnership in 2010. A. $65,000B. $39,000C. $60,000D. $25,000

$60,000 cash received - $35,000 tax ($100,000 * 35%)


50. Hay, Straw and Clover formed the HSC Partnership, agreeing to share profits and losses equally. Clover will manage the business for which he will receive a guaranteed payment of $30,000 per year. Cash receipts and disbursements for the year were as follows:

What is Clover's share of the partnership's ordinary income and guaranteed payment? A. Ordinary income, $30,000; Guaranteed payment, $10,000B. Ordinary income, $20,000; Guaranteed payment, $10,000C. Ordinary income, $30,000; Guaranteed payment, $30,000D. Ordinary income, $20,000; Guaranteed payment, $30,000

Ordinary income is $60,000 ($90,000 - $30,000). Clover is allocated 1/3 of the ordinary income and all of the guaranteed payment.



51. Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense:

Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated. A. Ordinary income, $126,000; long-term capital gain is separately statedB. Ordinary income, $120,000; interest income and long-term capital gain are separately statedC. Ordinary income, $136,000; nothing is separately statedD. Ordinary income, $195,000; interest income, long-term capital gain, and salary costs are separately stated

Ordinary income = $500,000 - $250,000 - $75,000 - $55,000




Waters distributed $25,000 to each of its shareholders during the year. If Mia has no other sources of income, what is her gross income for the year? A. $63,000B. $60,000C. $68.000D. $97,500

50% * ($120,000 ordinary income + $6,000 interest income + $10,000 capital gain)


53. Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate? A. Martha must pay income tax on $141,200 and self-employment tax on $48,000.B. Martha must pay income tax on $141,200 and self-employment tax on $93,200.C. Martha must pay both income tax and self-employment tax on $141,200.D. Martha must pay income tax on $48,000 and self-employment tax on $93,200.




Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year. A. $93,000B. $118,000C. $50,000D. $85,000

$50,000 + $60,000 + $3,000 + $5,000 - $25,000


55. Bernard and Leon formed a partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Bernard's tax basis in his partnership interest? A. $1,200,000B. $600,000C. $800,000D. $1,400,000

$600,000 + ($800,000 * 75%)



56. Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest? A. $500,000B. $1,200,000C. $850,000D. $650,000


57. Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest? A. $500,000B. $1,200,000C. $850,000D. $650,000


58. Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest? A. $500,000B. $1,200,000C. $850,000D. $650,000



59. Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest? A. $500,000B. $850,000C. $650,000D. $300,000


60. Jackie contributed $60,000 in cash to a partnership for a 50% interest. This year, the partnership earned $200,000 ordinary business income, made a $20,000 contribution to the United Way, and distributed $25,000 cash to Jackie. Her tax basis in the partnership at year end is: A. $110,000B. $85,000C. $125,000D. $215,000

$60,000 + ($200,000 * .50) - ($20,000 * .5) - $25,000



61. Mutt and Jeff are general partners in M&J Partnership and share profits and losses equally. Partnership operations for the current tax year were:

Mutt's tax basis in his partnership interest at the beginning of the current year was $12,000. What is his basis at the beginning of next year? A. $25,000B. $37,000C. $13,000D. $27,000

$12,000 beginning basis + 50% * ($100,000 + $10,000 - $60,000) = $37,000


62. At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash. Compute Paulina's gain or loss on the sale of her partnership interest. A. $3,000 lossB. $8,000 lossC. $2,000 gainD. $0 gain or loss

Her basis prior to the sale is $30,000 = $25,000 + $10,000 - $5,000. Her amount realized on the sale is $32,000 = $22,000 cash + $10,000 relief of liabilities



63. Gavin's owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following:

Calculate Gavin's tax basis in his partnership interest at the end of the year? A. $85,000B. $95,000C. $75,000D. $65,000

$20,000 + $60,000 + $5,000 increase in share of debt


64. Which of the following statements regarding a partner's tax basis in a partnership interest is true? A. Partnership tax basis is increased annually by cash distributions from the partnership.B. Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses.C. Partnership tax basis is reduced by the partner's share of nontaxable partnership income.D. Partnership tax basis becomes negative if allocable losses exceed basis.



65. Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following:

Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How much of the ordinary loss may he deduct on his Form 1040? A. $11,700B. $14,000C. $10,200D. $13,300

$15,400 - $5,800 + $2,100 + $1,600 = 13,300 basis for loss limitation


66. Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax year showed the following:

Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct because of the basis limitation. What is his tax basis in his partnership interest at the end of the current tax year? A. $41,000B. $32,500C. $39,500D. $34,000

Carryforward loss $(7,000) + $41,000 - $1,500 = $32,500



67. Orange, Inc. is a calendar year partnership with the following current year information:

On January 1, John James bought 50% general interest in Orange, Inc for $30,000. How much of the operating loss may John deduct on his Form 1040? A. $60,000B. $30,000C. $40,000D. $50,000

For a general partner, tax basis includes a pro rata share of all debt. Therefore, John gets basis for his cash and 50% of the debt.


68. Which of the following statements regarding the basis limitation on deduction of partnership losses is false? A. If a partner's share of partnership losses exceeds the partner's tax basis in the partnership interest, the excess is not deductible in the current year.B. Partnership losses that are not deductible due to the basis limitation can be carried forward indefinitely.C. Partners can increase tax basis in their partnership interest only by making additional capital contributions.D. If a partnership becomes profitable in the future, the partner's share of such future income will create basis against which loss carryforwards can be deducted.



69. Funky Chicken is a calendar year general partnership with the following current year information:

On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the partnership $20,000. How much of the operating loss may Cross deduct currently? A. $57,000B. $80,000C. $65,000D. $75,000

For a general partner, tax basis includes a pro rata share of all debt. Therefore, June gets basis for her cash and 60% of the debt.


70. Which of the following statements regarding limited liability companies is false? A. Every member of an LLC has limited liability for the LLC's debts.B. An LLC with only one member is generally treated as a corporation for income tax purposes.C. An LLC with more than one member is generally treated as a partnership for income tax purposes.D. State laws do not limit the number of members or the type of entity that can be a member in an LLC.



71. Which of the following statements regarding limited liability companies is true? A. Just like an S corporation, an LLC member's share of ordinary income is not subject to self-employment taxes.B. Just like an S corporation, an LLC is restricted to 100 members.C. Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved.D. Just like a limited partnership, only LLC members who are not actively involved in the entity's business activities have limited liability for the LLC's debts.


72. Which of the following statements regarding S corporations is true? A. An S corporation may have no more than 50 shareholders.B. Any individual, estate, corporation, or trust may be an S corporation shareholder.C. An S corporation may have only one class of stock.D. An S corporation shareholder's allocable share of ordinary income is subject to self-employment tax.


73. XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false? A. All of the corporation's shareholders must consent to make an S election.B. If a shareholder in an S corporation sells his shares of stock to a nonresident alien, the election will terminate.C. If an S corporation loses its election, the shareholders cannot make a new election for five years without IRS consent.D. All of the shareholders must consent to voluntarily terminating an S election.



74. Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders: A. Grant and Amy must each be allocated $50,000 of the operating loss.B. If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant.C. Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss.D. The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.


75. Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. Which of the following statements accurately describes the tax consequences of these withdrawals? A. The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments.B. The withdrawals are considered taxable dividends to Loretta.C. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would increase taxable income for both Loretta and the S corporation.D. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would not change taxable income for Loretta and reduce taxable income of the S corporation.

Loretta would report salary income and an equal reduction in ordinary income from the S corporation, with a zero net effect on her taxable income.



76. Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization? A. No payroll taxes will be owed as a result of the audit.B. Loretta and Country Collectibles will each be liable for unpaid payroll taxes in the amount of $5,738 as a result of the audit.C. Only Loretta will be liable for unpaid payroll taxes as a result of the audit.D. Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit.


77. Cactus Company is a calendar year S corporation with the following current year information:

On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the operating loss may John deduct on his Form 1040? A. $60,000B. $30,000C. $40,000D. $50,000

S corporation debt is included in tax basis only if loaned directly by the shareholder. So John's basis equals the cash invested.



78. Funky Chicken is a calendar year S corporation with the following current year information:

On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? A. $57,000B. $80,000C. $65,000D. $75,000

S corporation debt is included in basis only if loaned directly by the shareholder. So June gets the full $20,000 she loaned as basis, but none of the bank loan.


79. On January 1, Leon purchased a 10% stock interest in an S corporation for $30,000. He also loaned the S corporation $5,000 in exchange for a written promissory note. The S corporation generated a $330,000 operating loss for the year. Leon deducted his 10% share of the loss, reducing his tax basis in his stock to zero, and his tax basis in the note to $2,000. The following year, the S corporation repaid the note before Leon restored his basis in the note. What are the consequences of the loan repayment to Leon? A. $3,000 capital gainB. $3,000 ordinary incomeC. $2,000 capital gainD. $2,000 ordinary income



80. In applying the basis limitation on the deduction of S corporation losses, which of the following statements is true? A. The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, is computed in the same manner as a partner's basis in a partnership interest.B. A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder.C. If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that obligation is considered ordinary income.D. All of the above statements are false.


81. On January 1, 2010, Conrad Nelson contributed $15,000 cash in exchange for 50 shares of stock in Sterling Inc., an S corporation. Sterling employs Conrad as its director of marketing. Conrad's 2010 salary was $70,000 and his pro rata share of Sterling's 2010 ordinary business income was $16,800. During the year, Conrad received a $9,000 cash distribution with respect to his Sterling stock. Compute Conrad's basis in his Sterling stock on January 1, 2011. A. $15,000B. $22,800C. $31,800D. $92,800



82. On January 1, 2010, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2010 ordinary business loss was $34,100, and she received no cash distributions during the year. Which of the following statements is accurate? A. Laura can deduct $30,000 of the loss in 2010. On January 1, 2011, the basis in her Suki stock is zero, and the basis in her Suki note is $8,500.B. Laura can deduct $34,100 of the loss in 2010. On January 1, 2011, the basis in her Suki stock is $4,400, and the basis in her Suki note is zero.C. Laura can deduct $34,100 of the loss in 2010. On January 1, 2011, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400D. None of the above is accurate.


Application Problems


83. In 2010, William Wallace's sole proprietorship, Western Wear Apparel, generated $140,769 Schedule C net profit ($130,000 net earnings from self-employment). In addition, William recognized a $25,000 Section 1231 gain on a sale of land formerly used by the business as a parking lot. The business checking account earned $250 interest income. a. Which of these income items are subject to self-employment tax?b. Compute Williams' 2010 self-employment tax, assuming he has no other earned income.c. Compute the total increase in William's 2010 taxable income attributable to his business.

Only the $130,000 net earnings from self-employment is subject to SE tax. Since this profit exceeds the 2010 Social Security wage base of $106,800, his self-employment tax is $17,013 ($106,800 * 12.4%) + $3,770 ($130,000 * 2.9%) = $17,013. William's taxable income from his business activities is:

Difficulty: DifficultLearning Objective: 1Learning Objective: 2

84. Adam and Barbara formed a partnership to construct an apartment building. Adam contributed $500,000 cash and Barbara contributed land ($500,000 FMV and $250,000 basis) in exchange for a 50 percent interest in AB Partnership. Immediately after its formation, the partnership borrowed $600,000 from a local bank to begin construction. Compute each partner's initial basis in their partnership interest, assuming that: a. Adam and Barbara are both general partners.b. Adam is a limited partner and Barbara is a general partner.

If both are general partners, Adam's initial basis is $800,000 = $500,000 cash contributed + 50% * $600,000 debt; Barbara's initial basis is $550,000 = $250,000 basis of land contributed + 50% * $600,000 debt. If Adam is a limited partner and Barbara is a general partner, Adam's initial basis is $500,000 = cash contributed; Barbara's initial basis is $850,000 = $250,000 basis of land contributed + 100% * $600,000 debt.



85. Bevo Partnership had the following financial activity for the year:

Compute Bevo's ordinary business income for the year and indicate which items must be separately stated.

Ordinary business income: $280,000 = $860,000 - $390,000 - $180,000 - 50% * $20,000. Separately stated items: Section 1231 gain, $5,000; nondeductible expenses, $10,000; distributions $75,000.


86. Refer to the facts in the preceding problem. Ted is a 20 percent general partner in Bevo. a. Compute Ted's share of partnership ordinary income and separately stated items.b. If Ted's adjusted basis in his Bevo interest was $30,000 at the beginning of the year, compute his adjusted basis at the end of the year. Assume that Bevo's debt did not change during the year.c. How would your basis computation change if Bevo's debt at the end of the year as $50,000 less than its debt at the beginning of the year?

Ted's share of: partnership ordinary income, $56,000; Section 1231 gain, $1,000; nondeductible expenses, $2,000; distributions, $15,000. Ted's basis at the end of the year (with no change in debt): $60,000 = $30,000 + $56,000 + $1,000 - $2,000 - $15,000. If debt declines, Ted's basis drops to $50,000 = $186,000 - 20% * $50,000 debt decrease.



87. At the beginning of 2010, Quentin purchased a 25 percent general partner interest in Maxim Partnership for $30,000. Quentin's 2010 Schedule K-1 reported that his share of Maxim's debt at year-end was $20,000 and his share of ordinary loss was $42,000. On January 1, 2011, Quentin sold his interest to another partner for $5,000 cash. a. How much of his share of Maxim's loss can Quentin deduct on his 2010 return?b. Compute Quentin's recognized gain on sale of his Maxim interest.

Quentin can deduct the full amount of the loss. His ending basis in his partnership interest is $8,000 = $30,000 + $20,000 - $42,000. Quentin's gain on sale of his interest is $17,000 = ($5,000 + $20,000 debt relief) amount realized - $8,000 basis.

Chapter 11 The Corporate Taxpayer Answer Key

True / False Questions

1. In terms of dispersal of ownership, corporations are classified as either closely held or publicly held. TRUE


2. The corporate characteristic of limited liability is more important to the shareholders than the characteristic of centralized management. TRUE


3. The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement. TRUE



4. The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket. TRUE



5. At least three corporations are required to form an affiliated group. FALSE


6. An affiliated group consists of a parent company that directly owns 80% of at least one subsidiary corporation plus all other subsidiaries that are 80% owned within the group. TRUE


7. The corporate characteristic of free transferability exists if the corporate stock is subject to a buy-sell agreement. FALSE


8. A nonprofit corporation may incur a federal income tax if it has unrelated business income. TRUE


9. Eagle, Inc. made a contribution to the Boy Scouts of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000. FALSE



10. Bisou Inc. made a $48,200 contribution to charity this year. Only $39,000 of the contribution was deductible. Bisou can carry the $9,200 nondeductible contribution back three years and forward five years. FALSE


11. A nondeductible charitable contribution is a permanent book/tax difference. FALSE


12. Dividends received deductions generally are not allowed for dividends from foreign corporations. TRUE


13. The dividends-received deduction is equal to 80% of any dividends received by a corporate taxpayer. FALSE



14. Donatoni Corporation owns 40% of Market, Inc. voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $21,000 dividends-received deduction. FALSE

Given 40% ownership, the DRD is 80% * $30,000 = $24,000.


15. Rogers, Inc. owns 12% of Lampe Corporation's voting common stock. During the current year, Rogers generated $50,000 operating income and received $8,000 dividends from Lampe. Only $1,600 of the dividend is taxable. FALSE

Rogers owns 12%, thus the DRD = 70% of $8,000. Taxed on $8,000 - $5,600, or $2,400.


16. The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income. TRUE


17. The Schedule M-3 reconciliation requires less detailed information than the M-1 reconciliation. FALSE



18. Hearth, Inc. reported $30,000 of depreciation expense on its financial statements. For federal income tax purposes, it deducted depreciation of $35,000. This book/tax difference would result in an increase to net income per books on the Schedule M-1 or M-3. FALSE


19. For a consolidated group of corporations, Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group. TRUE


20. The taxable income earned by a personal service corporation is taxed at a flat rate of 35%. TRUE


21. The rate schedule for determining the regular tax liability of a corporation includes rates ranging from 15% to 39%. TRUE



22. Corporations with taxable incomes in excess of $18,333,333 have a 35% marginal tax rate and a 35% average tax rate. TRUE


23. Generally, the corporate income tax is computed on a proportionate rate schedule. FALSE


24. A corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit. FALSE


25. For a corporate taxpayer in the 34% marginal tax bracket, a $20,000 tax credit is equivalent to a $58,824 tax deduction. TRUE

$20,000 divided by 34% = $58,824


26. Most tax credits for which a corporate taxpayer would be eligible are nonrefundable. TRUE



27. Angel Corporation's current-year regular tax liability is $40,000. Angel is eligible for a general business credit of $45,000. The corporation will receive a $5,000 refund of federal income tax. FALSE


28. The domestic production activities deduction is computed as a percentage of the greater of taxable income or net income from qualified production activities. FALSE


29. The domestic production activities deduction is a permanent book/tax difference. TRUE


30. The corporate alternative minimum tax is designed to insure that corporations with substantial economic income will pay their fair share of the federal tax burden. TRUE


31. AMT adjustments can only increase a corporation's alternative minimum taxable income. FALSE



32. If a corporation's depreciation expense for regular tax purposes is $32,000 and its depreciation expense for alternative minimum tax purposes is $28,000, such corporation will have a negative (decrease) depreciation adjustment for alternative minimum taxable income. FALSE


33. The corporate alternative minimum tax rate is 26% of AMTI in excess of the AMT exemption. FALSE


34. A corporation's minimum tax credit can reduce the corporation's future regular tax liability if regular tax liability exceeds tentative minimum tax in that year. TRUE


35. Corporations are required to pay their federal tax liability in four quarterly estimated tax installments. TRUE


36. A corporation that is unable to meet its original filing deadline may obtain an automatic twelve-month extension of the time to file its federal income tax return. FALSE



37. Corporations with more than $1 million taxable income must pay 100% of their current federal income tax liability in the form of quarterly estimate payments to avoid an underpayment penalty. TRUE


38. Corporations report their taxable income and calculate the federal income tax on Form 1040. FALSE


39. Frazier, Inc. paid a $150,000 cash dividend to its shareholders. The corporation cannot deduct this payment on its corporate income tax return. TRUE


40. A significant advantage of issuing stock instead of debt is that payment of dividends is discretionary. TRUE


41. The burden of corporate taxation is often borne by corporate shareholders, customers, employees, and suppliers. TRUE



42. Corporations are rarely targeted in political debates over taxation. FALSE


Multiple Choice Questions

43. Which of the following is a primary legal characteristics of the corporate form of business? A. The management of the business is centered in a Board of Directors elected by the shareholders.B. A shareholder must seek permission to sell his stock.C. The life of the corporation will terminate when a majority of the shareholders die or cease to exist.D. A shareholder is personally liable for the debts of the corporation.


44. Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? A. Fleet, Pete, and Zete are an affiliated group.B. Fleet and Zete are an affiliated group.C. Fleet and Pete are an affiliated group.D. There is no affiliated group here.



45. Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. and 90% of the stock of Stock ownership of Bete, Inc. Bete owns 5% of the stock of Pete and 5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? A. Fleet, Zete, Pete, and Bete are an affiliated group.B. Fleet and Zete are an affiliated group.C. Fleet and Pete are an affiliated group.D. Fleet, Pete, and Bete are an affiliated group.


46. The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the outstanding stock of Tire Corporation, a German company. Wheel and Tire each own 50 percent of the outstanding stock of Bumper, Inc., a U.S. company. Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation, a U.S. company. Which of these corporations form an affiliated group eligible to file a consolidated tax return? A. Wheel, Axle, Tire, Bumper, and Trunk are an affiliated group.B. Wheel, Axle, and Tire are an affiliated group.C. Wheel and Axle are an affiliated group.D. Wheel, Axle, and Trunk are an affiliated group.



47. New York, Inc. owns 100% of Brooklyn, Inc. and Queens, Inc. Taxable income for the three corporations for their first year was as follows:

Which of the following statements is false? A. Consolidated taxable income is $769,000.B. If a consolidated return is filed, Queens, Inc. will receive immediate tax benefit from its operating loss.C. If Brooklyn, Inc. is a foreign corporation, it could be part of a consolidated return.D. The corporations are not required to file a consolidated tax return if they are an affiliated group; however, they may elect to do so.


48. Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year:

Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return: A. $400,000B. $395,000C. $410,000D. $500,000

$500,000 - $100,000 + ($7,000 - $5,000) + ($3,000 - $7,000)Wave's capital loss can be deducted against Surf's capital gain. The consolidated Section 1231 loss is fully deductible.



49. Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true? A. The income from the collection and distribution of food and the income from grocery store are taxable.B. No income from either of the activities is taxable.C. Only the income from the collection and distribution of food is taxable.D. Only the income from the grocery store is taxable.


50. In its first taxable year, Platform, Inc. generated a $200,000 net operating loss and made a $10,000 cash donation to a local charity. In its second year, Platform generated $350,000 operating income and made a $20,000 donation to the same charity. Compute Platform's taxable income for its second year. A. $120,000B. $135,000C. $320,000D. $130,000

Charitable contribution limitation is 10% of taxable income before NOL carryforward, $350,000 * 10% = $35,000; therefore, no limit. Taxable income = $350,000 - $200,000 - $10,000 - $20,000.


51. Loda Inc. made an $8,300 nondeductible charitable contribution and a $2,000 nondeductible political contribution this year. Which of the following statements is true? A. Both nondeductible contributions are permanent book/tax differences.B. Both nondeductible contributions are temporary book/tax differences.C. The nondeductible charitable contribution is a temporary book/tax difference. The nondeductible political contribution is a permanent book/tax difference.D. The nondeductible charitable contribution is a permanent book/tax difference. The nondeductible political contribution is a temporary book/tax difference.



52. Brace, Inc. owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is: A. $53,000B. $58.000C. $50,000D. $52,000

Brace is entitled to a 100% DRD.


53. Westside, Inc. owns 15% of Innsbrook's common stock. This year, Westside generated $50,000 operating income and received $20,000 dividends from Innsbrook. Westside's taxable income is: A. $56,000B. $66,000C. $50,000D. $54,000

Westside is entitled to a 70% DRD, so income is $70,000 - $14,000 DRD.



54. Thunder, Inc. has invested in the stock of several corporations and has $500,000 operating income before dividends.

Calculate Thunder's dividends-received deduction and taxable income: A. DRD, $203,300; taxable income, $296,700B. DRD, $169,640; taxable income, $533,660C. DRD, $183,640; taxable income, $519,660D. DRD $169,640; taxable income, $330,360


55. Which of the following statements regarding the tax treatment of corporate dividends is true? A. All shareholders receiving dividend payments from U.S. corporations are entitled to a dividends-received deduction.B. Dividends received from foreign corporations are eligible for the dividends-received deduction.C. Corporations are entitled to deduct dividend payments to shareholders in calculating corporate taxable income.D. Dividend payments between members of an affiliated group of corporations filing a consolidated return are tax exempt.



56. Sonic Corporation has a 35% marginal tax rate and received $10,000 of dividends from Roller, Inc., a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is: A. 35%B. 24.5%C. 10.5%D. None of the above

Because of the 70% DRD, Sonic's taxable income includes only $3,000 of the $10,000 Roller dividend. The tax on $3,000 is $1,050, and $1,050/$10,000 equals a 10.5% effective tax rate.


57. A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income? A. Schedule M-1B. Schedule M-2C. Schedule M-3D. Schedule M-4


58. Poppy's book income of $739,300 includes a net long-term capital loss of $42,000 and federal income tax expense of $170,000. Based only on these items, Poppy's taxable income is: A. $739,300B. $951,300C. $909,300D. $781,300

$739,300 + $42,000 + $170,000



59. Mandrake, Inc. has book income of $569,300. Its income includes a $50,700 bad debt expense, determined by the allowance method. Actual write offs this year were $48,000. Based only on this information, compute Mandrake's taxable income. A. $569,300B. $572,000C. $566,600D. $528,600

$569,300 + $50,700 - $48,000


60. Palm Corporation has book income of $424,000. Book income reflects $200,000 income tax expense and $55,000 depreciation expense. Tax depreciation expense computed under MACRS is $65,000. Palm received $25,000 of prepaid rent not included in book income. Based only on these items, compute Palm's taxable income. A. $639,000B. $609,000C. $659,000D. $589,000

$424,000 + $200,000 - $10,000 + $25,000


61. Honu, Inc. has book income of $1,200,000. Book income includes $620,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of meals and entertainment expense. Based only on these items, compute Honu's taxable income. A. $1,820,000B. $1,905,000C. $1,960,000D. $1,885,000

$1,200,000 + $620,000 - $10,000 + 50% * $150,000



62. Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of equipment. Based only on these items, compute Airfreight's taxable income. A. $370,000B. $395,000C. $345,000D. $420,000


63. Slipper Corporation has book income of $500,000. Book income includes a $50,000 gain on the sale of equipment. The equipment originally cost $110,000 and was sold for $75,000. Accumulated book depreciation was $85,000; accumulated MACRS deprecation was $90,000. Based only on these items, compute Slipper's taxable income. A. $505,000B. $495,000C. $555,000D. $445,000

Tax gain is $55,000 = $75,000 - ($110,000 - $90,000). Tax gain is $5,000 more than book gain, so taxable income = $500,000 + $5,000.


64. Which of the following statements regarding Schedule M-3 is false? A. The IRS developed Schedule M-3 with the goal of increasing transparency between reported net income for financial accounting purposes and reported net income for tax purposes.B. Schedule M-3 reports the temporary versus permanent characterization of book-tax differences.C. Part I of Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.D. Schedule M-3 replaces Schedule M-1 for all tax years beginning after December 31, 2004.



65. Which of the following statements regarding Schedule M-1 is true? A. The corporate dividends-received deduction is reported on Line 8 of Schedule M-1.B. A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1.C. Line 2 of schedule M-1 should reflect the corporation's actual federal income tax liability for the current year.D. A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would not report that gain on Schedule M-1.


66. TasteCo, Inc. reported $210,500 of taxable income this year. What is its regular tax liability? A. $82,095B. $65,345C. $73,675D. $71,570

Students will need a corporate tax rate schedule


67. John's, Inc. manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000? A. $14,000,000B. $13,600,000C. $15,600,000D. $16,000,000

Students will need a corporate tax rate schedule



68. Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability is $450,000. No estimated tax payments have been made. Which of the following statements is true? A. The corporation should receive a tax refund for the current year.B. The portion of the rehabilitation credit that cannot be used this year will be lost.C. The credit would have been higher if the company had restored a certified historic structure.D. The credit is available for restoration of a building that is at least ten years old.


69. Which of the following statements regarding the domestic production activities deduction is false? A. The deduction is equivalent to a reduced tax rate on income from any qualified activity.B. The amount of the deduction allowed for any tax year cannot exceed 50% of the total compensation paid to the corporation's U.S. workforce.C. The deduction equals a percentage of the lesser of the corporation's net income from qualified activities or its taxable income before the deduction.D. The deduction is only available for U.S. taxpayers engaged in manufacturing activities.


70. Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2009, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its allowable 2009 domestic production activities deduction is: A. $120,000B. $60,000C. $126,000D. $335,000

6% * $2,000,000(lesser of $2,000,000 or $2,100,000), which is not greater than 50% * $670,000



71. Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2009, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its 2009 taxable income is: A. $1,880,000B. $1,980,000C. $1,320,000D. $1,974,000

$2,100,000 - $120,000 domestic production activities deduction


72. Morton Inc. is a Kansas corporation engaged exclusively in domestic manufacturing. In 2009, it earned $500,000 of qualified production income, which also equals its taxable income before the domestic manufacturing deduction. It paid compensation of $200,000 to its workforce. Calculate Morton's 2009 domestic production activities deduction and taxable income: A. Deduction $30,000; taxable income $470,000B. Deduction $15,000; taxable income $485,000C. Deduction $0; taxable income $500,000D. Deduction $30,000; taxable income $270,000

Deduction = $500,000 * 6%; taxable income = $500,000 - $30,000



73. WEK Inc. is a New York corporation with manufacturing operations in the United States and in 12 foreign countries. This year, its taxable income from domestic manufacturing was $1,239,000, and its taxable income from foreign manufacturing was $1,773,000. WEK had no other sources of taxable income. WEK paid $487,000 compensation to its U.S. workers and $599,200 compensation to its foreign workers. Compute WEK's taxable income. A. $3,012,000B. $2,831,280C. $2,937,660D. $2,905,620

$3,012,000 global manufacturing income - $74,340 domestic manufacturing activity deduction ($1,773,000 * 6%).


74. Lexington Associates, Inc. is a personal service corporation. This year, Lexington reported $75,000 of taxable income. Which of the following statements regarding Lexington's regular tax liability is true? A. Regular tax liability will be less than it would have been if Lexington were not a personal service corporation.B. Regular tax liability will be greater than it would have been if Lexington were not a personal service corporation.C. Regular tax liability will be the same as it would have been if Lexington were not a personal service corporation.D. Regular tax liability will be zero.



75. Which of the following could cause a corporation's alternative minimum taxable income to be lower than regular taxable income? A. Current year percentage depletion is smaller than cost depletionB. ADS depreciation is larger than MACRS depreciationC. The company is entitled to an AMT exemptionD. The corporation has adjusted current earnings greater than AMTI before the ACE adjustment


76. Which of the following statements about the calculation of alternative minimum taxable income is true? A. Excess percentage depletion is a positive adjustment to AMTI.B. The AMT net operating loss can reduce AMTI to zero.C. The AMTI exemption for all corporations is $40,000.D. The minimum tax credit can be carried back two years.


77. Alexus Inc.'s alternative minimum taxable income before any AMT exemption is $210,000. Compute the corporation's AMT exemption: A. $25,000B. $0C. $42,500D. $40,000

$40,000 - 25% * ($210,000 - $150,000)



78. Loraine Manufacturing, Inc. reported the following for the current tax year:

What is Loraine Manufacturing's alternative minimum taxable income before any AMT exemption? A. $55,000B. $135,000C. $122,000D. $82,000

Taxable income is increased by depletion and decreased by the difference between MACRS and ADS.


79. Sunny Vale Co. reported the following for the current tax year:

Compute Sunny Vale's total income tax liability A. $23,250B. $950C. $24,200D. $47,450

Students will need a corporate tax rate schedule.



80. Silver Bullet Inc. reported the following for its current tax year:

Compute Silver Bullet's total income tax liability. A. $22,000.B. $83,250.C. $61,250.D. $141,525.

Students will need a corporate tax rate schedule. SilverBullet's regular tax is $61,500 and its AMT is $21,750 ($83,250 tentative minimum tax - regular tax).


81. For its current tax year, Volcano, Inc. reported the following:

Compute Volcano's alternative minimum tax. A. $136,000B. $162,400C. $26,400D. $298,400

$812,000 * 20% = tentative AMT of $162,400 - regular tax of $136,000 = alternative minimum tax.



82. Grumond was incorporated on January 1, 2003, and adopted a calendar year for tax purposes. It had the following gross receipts for its first six taxable years:

For which of these years is Grumond exempt from AMT? A. 2004B. 2004, 2005, and 2006C. 2004, 2005, 2006, and 2007D. 2004, 2005, 2006, 2007, and 2009

Exempt if average annual gross receipts for three years preceding the test year are less than $7,500,000. Once this test is failed, AMT applies for test year and all subsequent years.


83. Aloha, Inc. had the following results for its first two years of operation:

Which of the following statements is true? A. There is no AMT credit carryover from 2008 to 2009.B. There is an AMT credit carryover from 2008 to 2009.C. There is an AMT credit carryover from 2009 to 2010.D. There is an AMT credit carryback from 2009 to 2008.



84. Pocahontas, Inc. had the following results for its first two years of operation:

Which of the following statements is true? A. There is an AMT credit carryback from 2009 to 2008.B. There is an AMT credit carryover from 2009 to 2010.C. There is an AMT credit carryover from 2008 to 2009.D. There is an AMT credit carryback from 2008 to 2007.


85. Harmon, Inc. was incorporated and began business on January 1, 2008. Its tax liability for 2008 was $36,000. Its tax liability for 2009 was $50,000. Which of the following is a correct statement concerning the payment of estimated taxes for 2009? A. Harmon must pay $12,500 on the15th day of April, June, September, and December.B. Harmon must pay $9,000 on the 15th day of April, June, September and December. The $14,000 balance is payable by March 15, 2010.C. Harmon may pay the $50,000 tax no later than March 15, 2010.D. None of the above statements is correct.



86. Torquay Inc.'s 2009 taxable income was $9,782,200, and its tax liability was $3,325,948. Torquay's director of tax estimates that the corporation's 2010 taxable income will be $13,350,000. Use the corporate tax rate schedule to compute Torquay's 2010 estimated tax payment due on April 15, 2010. A. $1,134,750B. $1,028,813C. $831,487D. $1,143,125

Torquay must pay 25% of the $4,572,500 tax on its 2010 estimated taxable income.


87. Which of the following statements regarding corporate tax filing requirements is false? A. Corporations must file their annual federal income tax returns by the 15th day of the third month following the close of the taxable year.B. Corporations may request an automatic six-month extension of time to file their federal income tax returns.C. An extension of the income tax filing deadline also extends the payment deadline for any balance of tax due for the taxable year.D. Corporations must file their annual federal income tax returns by 15th day of the fourth month following the close of the taxable year.



88. Assuming that the corporation has a 34% MTR, which of the following statements is true? A. Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $31,680.B. Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100,000. The after-tax cost of the $7,000 dividend paid was $4,620.C. Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100. The after-tax cost of the $7,000 dividend paid was $2,380.D. Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $16,320.


89. Which of the following is a means to avoid the double taxation burden imposed on the profits of corporations? A. Treat all corporations as passthrough entities for federal tax purposes.B. Enact tax legislation that would make dividends nontaxable to all of the corporation's shareholders.C. Allow corporate shareholders a credit on their tax returns for the taxes paid by the corporation on the profits currently distributed to such shareholders as dividends.D. All of the above would avoid double taxation.



90. Joanna has a 35% marginal tax rate and owns 100% of the stock of Loman Corporation. This year, Loman generated $400,000 of taxable income, paid $136,000 of corporate income tax, and paid a $50,000 dividend to Joanna. Suppose that the federal income tax system has been amended to allow shareholders to gross up dividend income by the corporate tax paid with respect to the dividend and credit this tax against their individual tax. Further assume that dividends received by individuals are not taxable at a preferential tax rate. Calculate Joanna's reported dividend income and her tax due on the dividend. A. Dividend income, $75,758; tax due, $758B. Dividend income, $67,000; tax due, $5,450C. Dividend income, $50,000; tax due, $17,500D. Dividend income, $50,000; tax due, $500


91. Which of the following statements regarding the taxation of corporate profits is false? A. Dividends payments are deductible in computing corporate taxable income.B. The tax treatment of corporate dividend treatments creates a bias in favor of debt financing.C. Corporations cannot deduct interest payments in computing corporate taxable income.D. Corporations with high debt-to-equity ratios have less burdensome cash flow commitments and lower risk of insolvency.


92. In determining the incidence of the corporate income tax: A. Corporations may pass the tax burden onto consumers in the form of higher pricesB. Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investmentC. Corporate employees may bear the burden of the corporate tax in the form of lower compensationD. All of the above parties may bear the indirect burden of the corporate income tax


Application Problems


93. Corporation F owns 95 percent of the outstanding stock of Corporation G. This year, the corporations' records provide the following information:

a. Compute each corporation's taxable income if they file separate tax returns. b. Compute consolidated taxable income if Corporation F and Corporation G file a consolidated tax return.

If they file separately, Corporation F reports a taxable loss of $(481,000) = $(500,000) + $15,000 + $4,000; Corporation G reports taxable income of $797,000 = $800,000 - $3,000 and has a non-deductible capital loss. If they file consolidated, the net Section 1231 gain of $1,000 = $4,000 - $3,000 is treated as a capital gain and the consolidated group can deduct $16,000 = $15,000 + $1,000 of Corporation G's capital loss. Consolidated taxable income is $300,000 = $(500,000) + $800,000 + $15,000 + $4,000 - $3,000 - $16,000 deductible capital loss.


94. This year, Sonoma Corporation received the following dividends:

Before considering the above dividends, Sonoma has taxable income of $550,000. Calculate Sonoma's allowable dividends-received deduction and taxable income.

Dividends-received deduction: $61,000 = $30,000 * 70% + $20,000 * 0% + $50,000 * 80%; taxable income: $589,000 = $550,000 + $100,000 dividend income - $61,000 DRD.



95. Gosling, Inc., a calendar year, accrual basis corporation, reported $756,000 net income after tax on its 2008 financial statements prepared in accordance with GAAP. The corporation's financial records reveal the following information: Gosling earned $478,000 from a qualified domestic production activity. Gosling earned $3,500 on an investment in tax-exempt municipal bonds. Gosling's depreciation expense per books was $72,000, and its MACRS depreciation deduction was $105,000. Gosling recorded $58,000 of business meals and entertainment expense for book purposes. Gosling's federal income tax expense per books was $440,000.a. Compute Gosling's taxable income and regular tax liability.b. Prepare a Schedule M-1, page 4, Form 1120, reconciling Gosling's book and taxable income.

Taxable income: $1,159,820 = $756,000 - 6% * $478,000 - $3,500 + $72,000 - $105,000 + 50% * $58,000 + $440,000. Regular tax liability: $394,339.

Difficulty: DifficultLearning Objective: 3 and 4


96. Tropical Corporation was formed in 2006. For 2006 through 2008, its regular and tentative minimum tax were as follows:

a. Compute Tropical's tax due for each year b. In 2009, Tropical's regular taxable income is $2,000,000, and it has positive AMT adjustments of $500,000 and AMT preferences of $600,000. Compute Tropical's regular tax, tentative minimum tax, and tax due for 2009.

Tax due: 2006, $400,000; 2007, $350,000; 2008, $400,000.2009: Regular tax = $680,000 before credits, Tentative minimum tax = $620,000, Tax due = $680,000 - $60,000 minimum tax credit = $620,000.


97. Franton Co., a calendar year, accrual basis corporation, reported $2,076,000 net income after tax on its 2009 financial statements prepared in accordance with GAAP. The corporation's financial records reveal the following information. Federal tax expense per books was $1,069,000. Franton received $22,400 of dividends from its investment in Microsoft and General Motors stock. Bad debt expense was $12,900, and write-offs of uncollectible accounts receivable totaled $16,300. Book depreciation was $110,890, and MACRS depreciation was $94,700 Franton paid a $50,000 fine to the City of Albany for illegal trash dumping.Compute Franton's taxable income and regular tax liability.

Taxable income: $3,207,790 = $2,076,000 + $1,069,000 - $15,680 DRD - $3,400 additional bad debt expense + $16,190 nondeductible book depreciation + $50,000 nondeductible fine. Regular tax liability: $1,090,649.

Difficulty: MediumLearning Objective: 3 and 4

taxation exam chapter 10 &11

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