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Exam 17: Corporations: Introduction and Operating Rules

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Question 31

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

A) True
B) False

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Question 32

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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.

A) True
B) False

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Question 33

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During the current year,Lavender Corporation,a C corporation in the business of manufacturing tangible research equipment,made charitable contributions to qualified organizations as follows: Lavender Corporation's taxable income (before any charitable contribution deduction)is $17.5 million.

On December 31,2011,Peregrine Corporation,an accrual method,calendar year taxpayer,accrued a performance bonus of $100,000 to Charles,a cash basis,calendar year taxpayer.Charles is president and sole shareholder of the corporation.When can Peregrine deduct the bonus?

Flycatcher Corporation,a C corporation,has two equal individual shareholders,Nancy and Pasqual.In the current year,Flycatcher earned $200,000 net profit and paid a dividend of $40,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher,Nancy is in the 28% marginal tax bracket and Pasqual is in the 35% marginal tax bracket.With respect to the current year,which of the following statements is incorrect?

Canary Corporation,which sustained a $5,000 net capital loss during the year,will enter $5,000 as a addition item on Schedule M-1.

Income that is included in net income per books but not included in taxable income is an addition item on Schedule M-1.

No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days.

Generally,corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years.

During the current year,Kingbird Corporation (a calendar year C corporation) had the following income and expenses: On October 1,Kingbird Corporation made a contribution to a qualified charitable organization of $6,300 in cash (not included in any of the above items) .Determine Kingbird's charitable contribution deduction for the current year.

In the current year,Oriole Corporation donated a painting worth $75,000 to the Texas Art Museum,a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $25,000.Oriole's charitable contribution deduction is $25,000 (ignoring the taxable income limitation).

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

Beige Company has approximately $250,000 in net income in 2011 before deducting any compensation or other payment to its sole owner,Janet (who is single).Assume that Janet is in the 35% marginal tax bracket.Discuss the tax aspects of each of the following arrangements.(Ignore any employment tax considerations.)

Heron Corporation,a calendar year C corporation,had an excess charitable contribution for 2010 of $5,000.In 2011,Heron made a further charitable contribution of $20,000.Heron's 2011 deduction is limited to $15,000 (10% of taxable income).The current year's contribution must be applied first against the $15,000 limitation.

Elk,a C corporation,has $370,000 operating income and $290,000 operating expenses during the 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:

A corporation with $10 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Eagle Company,a partnership,had a short-term capital loss of $10,000 during the year.Aaron,who owns 25% of Eagle,will report $2,500 of Eagle's short-term capital loss on his individual tax return.

An expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1.

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

Azul Corporation,a personal service corporation,had $300,000 of active income,$40,000 of portfolio income,and a $190,000 passive loss during the year.How much is Azul's taxable income?