Exam 2: Corporations: Introduction and Operating Rules

Norma formed Hyacinth Enterprises, a proprietorship, in 2015. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her adjusted gross income for 2015?

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?

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.

On December 31, 2015, 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 2, 2016. For Flamingo's 2015 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

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

Which of the following statements is incorrect regarding the dividends received deduction?

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.

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2014. He also owns 60% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn. How much income must Bjorn report from these businesses?

Saleh, an accountant, is the sole shareholder of Turquoise Corporation, a C corporation. Turquoise is a personal service corporation with a fiscal year ending September 30 (pursuant to a § 444 election). The corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2015. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2015, if the corporation is to continue to use its fiscal year without negative tax effects?

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Thrush Corporation files Form 1120, which reports taxable income of $200,000. The corporation's tax is $56,250.

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?

On December 31, 2015, 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, 2016. Lavender can deduct the bonus in 2016, the year in which it is included in Barry's gross income.