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Exam 2: Corporations: Introduction and Operating Rules

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Question 31

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Beige Company has approximately $400,000 in net income in 2008 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: a.Janet operates Beige Company as a proprietorship. b.Janet incorporates Beige Company and pays herself a salary of $100,000 and no dividend. c.Janet incorporates the company and pays herself a $100,000 salary and a dividend of $199,750 ($300,000 - $100,250 corporate income tax). d.Janet incorporates the company and pays herself a salary of $400,000.

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Question 32

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Virginia,who owns a proprietorship,has scheduled an appointment to talk with you about the advisability of incorporating.At this time,you know nothing about Virginia's business or her existing tax situation.List the questions you will need to ask during the appointment so you can help her make an informed decision.

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Question 33

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Zircon Corporation donated scientific property worth $350,000 to City University (a qualified charitable organization)to be used in research.The basis of the property was $100,000,and Zircon had held it for ten months as inventory.Zircon Corporation may deduct $225,000 as a charitable contribution (ignoring the taxable income limitation).

Distinguish between organizational expenditures and start-up expenditures and give examples of each.Discuss the tax treatment of each type of expenditure.

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.

Emma,the sole shareholder of Quail Corporation (a C corporation),has the corporation pay her a salary of $300,000 in 2008.The Tax Court has held that $80,000 represents unreasonable compensation.Assuming Emma is in the 35% bracket in 2008,the Tax Court's holding will reduce the total tax she pays in 2008.

Elk,a C corporation,has $400,000 operating income and $350,000 operating expenses during the year.In addition,Elk has a $30,000 long-term capital gain and a $52,000 short-term capital loss.Elk's taxable income is:

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

Shaw,an architect,is the sole shareholder of Shaw Corporation,a professional association.The corporation paid Shaw a salary of $360,000 during its fiscal year ending September 30,2008. A)How much salary must Shaw Corporation pay Shaw during the period October 1 through December 31, 2008, to enable the corporation to continue to use its fiscal year without negative tax effects? B)If Shaw Corporation had net profit of $150,000 for the year ending September 30, 2008, what is its tax liability?

Pierre is the sole shareholder of Pine Corporation,which has annual taxable income of approximately $100,000.He decides to transfer half of the Pine assets to Oak Corporation (a new corporation of which Pierre is sole shareholder)in order to reduce overall corporate income taxes.Will Pierre's plan work? Discuss.

A cash basis corporation that incurs (but does not pay)qualifying organizational expenditures in its first year of operations may include such expenses in the 180-month amortization period.

The corporate marginal tax rates range from 10% to 35%,while the individual marginal tax rates range from 15% to 39%.

Herman and Henry are equal partners in Badger Enterprises,a calendar year partnership.During the year,Badger Enterprises had $305,000 gross income and $230,000 operating expenses.Badger distributed $20,000 to each of the partners. Herman and Henry each must report $37,500 of income from the partnership.

FIN 48 provides that a tax position must be recognized when it has a "more-likely-than-not" probability of being sustained on examination. In this analysis,the statutes of limitation should be considered.

A client has requested from you information regarding the advantages of converting his sole proprietorship to an LLC. Describe the advantages an LLC would provide the client,and discuss the "check-the-box" Regulations in regard to a single-member LLC.

No dividends received deduction is allowed unless the corporation has held the stock for more than 60 days.

During the year,Quartz Corporation (a calendar year taxpayer)has the following transactions: Quartz owns 15% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss)for the year?

Juan is the sole shareholder of an S corporation,and Diego owns a sole proprietorship.Both businesses,which were started in 2008,make a profit of $300,000 in 2008.Each owner withdraws $225,000 from his business during the year.Which of the following statements is correct?

Quail Corporation is a C corporation with net income of $500,000 during 2008.If Quail paid dividends of $70,000 to its shareholders,the corporation must pay tax on $430,000 of net income.Shareholders must report the $70,000 of dividends as income.

Which of the following statements about a limited liability company is correct?