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Exam 2: Corporations Introduction and Operating Rules

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Question 1

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On December 31, 2016, Lavender, Inc., an accrual basis C corporation, accrues a $50,000 bonus to Barry, its vice president and a 40% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 14, 2017. Lavender can deduct the bonus in 2017, the year in which it is included in Barry's gross income.

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B) False

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Question 2

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No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

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B) False

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Question 3

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On December 31, 2016, 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?

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

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, 2016. How much salary must Gander pay Patrick during the period December 1 through December 31, 2016, to permit the corporation to continue to use its fiscal year without negative tax effects?

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.

Almond Corporation, a calendar year C corporation, had taxable income of $900,000, $1.1 million, and $1.2 million for 2013, 2014, and 2015, respectively. Almond's taxable income is $2 million for 2016. Compute the minimum estimated tax payments for 2016 for Almond Corporation.

In the current year, 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?

Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation's taxable income is $140,000.

Red 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 $28,000. Which of the following statements is correct?

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

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 2016. Carrot Corporation had taxable income from other sources of $720,000. Prior years' transactions included the following: $\begin{array} { l l r } 2012 & \text { Net long-erm capital gain } & \$ 150,000 \\2013 & \text { Net short-term capital gain } & 60,000 \\2014 & \text { Net short-term capital gain } & 45,000 \\2015 & \text { Net long-erm capital gain } & 35,000\end{array}$ Compute the amount of Carrot's capital loss carryover to 2017.

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:

Grebe Corporation, a closely held corporation that is not a PSC, had $75,000 of net active income, $60,000 of portfolio income, and a $105,000 passive activity loss during the year. How much of the passive activity loss can Grebe deduct in the current year?

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

*Based on preceding year's tax, for first installment only: [$900,000 taxable income × 34% (see Exhibit 2.1) ] = $306,000 ÷ 4 = $76,500. **Based on current year's tax, for remaining installments: [$1.5 million taxable income × 34% (see Exhibit 2.1) ] = $510,000 ÷ 4 = $127,500. Second installment must include shortfall from first installment: [$127,500 + ($127,500 - $76,500) ] = $178,500. -Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is an addition on Schedule M-1?

Under the "check-the-box" Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

Heron Corporation, a calendar year, accrual basis taxpayer, provides the following information for this year and asks you to prepare Schedule M-1. ? $\begin{array} { l r } \text { Net income per books (after-tax) } & \$ 239,700 \\\text { Taxable income } & 195,000 \\\text { Federal income tax liability } & 59,300 \\\text { Interest income from tax-exempt bonds } & 5,000 \\\text { Interest paid on loan incurred to purchase tax-exempt bonds } & 2,000 \\\text { Life insurance proceeds received as a result of death of Heron's } & 100,000 \\\text { president } & \\\text { Premiums paid on policy on life of Heron's president } & 4,500 \\\text { Excess of capital loses over capital gains } & 2,000 \\\text { Retained earnings at beginning of year } & 375,000 \\\text { Cash dividends paid } & 90,000 \\\text { Tax depreciation in excess of book depreciation } & 7,500\end{array}$ ?

Beige Corporation, a C corporation, purchases a warehouse on August 1, 2000, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 11, 2016, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty?

Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income.