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Exam 17: Corporations: Introduction and Operating Rules

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Question 31

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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.

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B) False

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Question 32

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Dawn is the sole shareholder of Thrush Corporation, a calendar year C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.

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A C corporation is a separate taxable en...

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Question 33

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Copper Corporation, a C corporation, had gross receipts of $25 million in 2016, $26 million in 2017, and $23 million in2018. Gold Corporation, a personal service corporation (PSC) , had gross receipts of $24 million in 2016, $27 million in 2017, and $25 million in 2018. Which of the corporations will be allowed to use the cash method of accounting in 2019?

Eagle Corporation, a calendar year C corporation, owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In the current year, Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock? "1) Multiply the dividends received by the deduction percentage ($130,000 × 50% = $65,000) ." 2) Multiply the taxable income before the dividends received deduction by the deduction percentage ($100,000 × 50% = $50,000) . "3) Limit the deduction to the lesser of step 1 or step 2, unless subtracting the amount derived in step 1 ($65,000) from taxable income before the dividends received Deduction ($100,000) generates an NOL ($100,000 - $65,000 = $35,000 taxable income) . If so, use the amount derived in step 1 ($65,000) . In this case, the NOL exception to the taxable income limitation does not apply, and the deduction equals $50,000."

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 21% corporate tax rate and no valuation allowance. $\begin{array}{lcc}&\text { Tax Debit/(Credit)} &\text {Book Debit/(Credit) }\\\text { Assets }\\ \text { Cash } & \$ 300 & 300 \\\text { Accounts receivable } & 5,000 & 5,000 \\\text { Buildings } & 300,000 & 300,000 \\ \text { Accumulated depreciation } & (150,000) & (80,000) \\ \text { Furniture \& fixtures } & 40,000 & 40,000 \\\text { Accumulated depreciation } & (21,000) & (15,000) \\ \text { Total Assets } & \$ 174,300 & \$ 250,300 \\\end{array}$ $\begin{array}{l}\text { Liabilities }\\\begin{array}{lrr}\text { Accrued litigation expense } & \$-0- & (\$ 27,000) \\\text { Note payable } & \underline{(116,000)}& \underline{(116,000)} \\\text { Total liabilities } & \underline{(\$ 116,000)} & (\$143,000) \\\end{array}\end{array}$ $\begin{array}{lcc} \text { Paid-in capital } & (\$ 1,000) & (\$ 1,000) \\ \text { Retained earnings } & (57,300) & (106,300) \\ \begin{array}{l}\text { Total liabilities and } \\\text { stockholders' equity }\end{array} & (\$ 174,300) & (\$ 250,300) \\\end{array}$ Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. $\begin{array}{lc}&\text { Beginning of Year }\\\text { Accrued litigation expense } & \underline{\$ 20,000} \\\text { Subtotal } & \$ 20,000 \\\text { Applicable tax rate } & \underline{\times 21 \%} \\\text { Gross deferred tax asset } & \$ 4,200 \\\\\text { Building - } \\\quad \text { Accumulated depreciation } & (\$ 61,000) \\\text { Furniture \& fixtures - } & \\\quad \text { Accumulated depreciation } & \underline{(3,000)} \\\text { Subtotal } & (\$ 64,000) \\\text { Applicable tax rate } & \times 21 \% \\\text { Gross deferred tax liability } & \underline{(\$ 13,440)} \\\end{array}$ Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest and incurred $500 in nondeductible business meals expense. Determine the change in Black's deferred tax liabilities for the current year.

Which of the following statements is incorrect regarding the taxation of C corporations for tax years beginning after 2017?

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

In the current year, Crimson, Inc., a calendar C corporation, has income from operations of $180,000 and operating deductions of $225,000. Crimson also had $30,000 of dividends from a 15% stock ownership in a domestic corporation. Which of the following statements is correct with respect to Crimson for the current year?

On December 28, 2019, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation, authorized a contribution of land to a qualified charitable organization. The land (basis of $75,000, fair market value of $125,000) was acquired five years ago and held as an investment. For purposes of the taxable income limitation applicable to charitable deductions, Taupe has taxable income of $800,000 and $950,000 for 2019 and 2020, respectively. Describe the tax consequences to Taupe Corporation under the following independent situations. a. The donation is made on February 15, 2020. b. The donation is made on May 15, 2020.

Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and its first-year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21%, what is Gravel's current income tax expense reported on its GAAP financial statements?

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. Expenses of temporary directors and of organizational meetings $8,000 Fee paid to the state of incorporation 2,000 Accounting services incident to organization 3,500 Legal services for drafting the corporate charter and bylaws 4,300 Expenses incident to the printing and sale of stock certificates 6,000 Assuming a § 248 election, what is Opal's deduction for organizational expenditures for 2019?

Wanda is the Chief Executive Officer of Pink corporation, a publicly traded, calendar year C corporation. For the current year, Wanda's compensation package consists of: $\begin{array}{lr}\text { Cash compensation } & \$ 2,500,000 \\\text { Nontaxable fringe benefits } & 250,000 \\\text { Taxable fringe benefits } & 150,000 \\\text { Bonus tied to company performance } & 2,000,000\end{array}$ How much of Wanda's compensation is deductible by Pink Corporation?

For purposes of the accumulated earnings tax, earnings can be accumulated for reasonable needs of the business. List several examples of what is included and several examples of what is not included in the reasonable needs of the business.

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, 2019. How much salary must Gander pay Patrick during the period December 1 through December 31, 2019, to permit the corporation to continue to use its fiscal year without negative tax effects?

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

Which of the following statements is correct regarding the taxation of C corporations?

In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation. Azul owns 25% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

Morrisson, Inc., earns book net income before tax of $500,000. In computing its book income, Morrisson deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Morrisson records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21% and no valuation allowance is required, what is Morrisson's current income tax expense reported on its GAAP financial statements?

Explain the rules regarding the accounting periods available to corporate taxpayers.

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.