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Exam 17: Corporations: Introduction and Operating Rules

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During the current year, Gray Corporation, a C corporation in the financial services business, made charitable contributions to qualified organizations as follows: ∙ Stock (basis of $20,000, fair market value of $45,000) in Drab Corporation, held for six months as an investment, to the Salvation Army. (Salvation Army plans on selling the stock.) ∙ Painting (basis of $90,000, fair market value of $250,000), held for four years as an investment, to the Museum of Fine Arts. (The Museum plans on including the painting in its collection.) Gray Corporation's taxable income (before any charitable contribution deduction) is $1.8 million. a. Gray's total amount of charitable contributions is $270,000 [$20,000 (stock) + $250,000 (painting)], computed as follows: Stock: this is ordinary income property, because a sale of the stock would not result in a long-term capital gain or a § 1231 gain for Gray (i.e., STCG). Thus, the amount of the contribution is the stock's basis, or $20,000. a. What is the total amount of Gray's charitable contributions for the year? b. What is the amount of Gray's charitable contribution deduction in the current year, and what happens to any excess charitable contribution, if any?

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Painting: this is capital gain property,...

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The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.

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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. $\begin{array}{lrr}&\text { Tax Debit/(Credit) }&\text { Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 300 & \$ 300 \\\text { Accounts receivable } & 5,000 & 5,000 \\\text { Buildings } & 300,000 & 300,000 \\\quad \text { Accumulated depreciation } & (150,000) & (80,000) \\\text { Furniture \& fixtures } & 40,000 & 40,000 \\\quad \text { Accumulated depreciation } & \underline{(21,000)} & \underline{(15,000)} \\\text { Total assets } & \underline{\$ 174,300} & \underline{\underline{\underline{\$250,300}}}\\\\\text { Liabilities }\\\text { Accrued litigation expense } & \$-0- & (\$ 27,000) \\\text { Note payable } & \underline{(116,000)} & \underline{(116,000)} \\\text { Total liabilities } & \underline{(\$ 116,000)} & \underline{(\$ 143,000)}\\\\\text { Stockholders' Equity }\\\text { Paid in capital } & (\$ 1,000) & (\$ 1,000) \\\text { Retained earnings } & \underline{(57,300)} & \underline{(106,300)} \\\begin{array}{l}\text { Total liabilities and } \\\text { stockholders' equity }\end{array} & \underline{(\$ 174,300)} & \underline{\underline{(\$ 250,300)}} \\\end{array}$ Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are as follows: $\begin{array}{lr}&\text { Beginning of Year }\\\text { Accrued litigation expense } & \underline{\$ 20,000} \\\text { Subtotal } & \$ 20,000 \\\text { Applicable tax rate } & \underline{\times 21 \%} \\\text { Gross deferred tax asset } & \underline{\$ 4,200} \\\text { Building - } & \\\quad \text { Accumulated depreciation } &( \$ 61,000)\end{array}$ 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 it incurred $500 in nondeductible business meals expense. Provide the journal entry to record Black's current tax expense.

In the current year, Tern, Inc., a calendar year C corporation, has $9 million of adjusted taxable income, $300,000 of business interest income, zero floor plan financing interest, and $3.2 million of business interest expense. Tern has average gross receipts for the prior three-year period of $45 million. Which of the following statements is correct about the treatment of Tern's business interest expense?

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

In tax planning for charitable contributions, a current-year's contribution might have to be deferred to a later year in order to deduct a contribution carryover amount.

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2018 of $5,000. In 2019, Heron made a further charitable contribution of $20,000. Heron's 2019 deduction is limited to $15,000 (10% of taxable income). The 2019 contribution must be applied first against the $15,000 limitation.

Violet, Inc., a closely held corporation (not a PSC) , has $55,000 of passive activity loss, $80,000 of net active income, and $20,000 of portfolio income. How much is Violet's taxable income for the current year?

Which of the following taxes are included in the total income tax liability of a corporation reported on its Federal income tax return?

Plum Corporation (a C corporation and a computer manufacturer) donated 100 laptop computers to a local university (a qualified educational organization) this year. The computers were constructed by Plum earlier this year, and the university will use the computers for research and research training. Plum's basis in the computers is $35,000, and their fair market value is $120,000. What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation) ?

Contrast the tax treatment of capital gains and losses of C corporations with that of individual taxpayers.

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?

Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation. Canary owns 18% of the Stork Corporation stock. Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.

A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

Beige Corporation, a C corporation, purchases a warehouse on August 1, 2003, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 12, 2019, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty?

Which of the following taxes are included in the total income tax expense of a corporation as reported on its GAAP financial statements?

Owl Corporation (a C corporation) , a retailer of children's apparel, made the following donations to qualified charitable organizations this year. How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation) ?

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

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return if a proper election is made.