Question 1. Nancy Smith is the sole shareholder and em

1. Nancy Smith is the sole shareholder and employee of White Corporation, a C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 33% marginal tax bracket irrespective of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)

a. $56,125.

b. $64,325.

c. $67,625.

d. $84,000.

e. None of the above.

2. Which of the following statements is incorrectregarding the taxation of C corporations?

a. Similar to those applicable to individuals, the marginal tax rate brackets for corporations are adjusted for inflation.

b. Taxable income of a personal service corporation is taxed at a flat rate of 35%.

c. A tax return must be filed whether or not the corporation has taxable income.

d. The highest corporate marginal tax rate is 39%.

e. None of the above.

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

a. Schedule M-2 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation’s tax return.

b. The corporate return is filed on Form 1120S.

c. Corporations can receive an automatic extension of nine months for filing the corporate return by filing Form 7004 by the due date for the return.

d. A corporation with total assets of $7.5 million or more is required to file Schedule M-3.

e. None of the above.

4. Robin Corporation, a calendar year C corporation, had taxable income of $1.9 million, $1.2 million, and $900,000 for 2011, 2012, and 2013, respectively. Robin has taxable income of $1.5 million for 2014. The minimum 2014 estimated tax installment payments for Robin are:

a. April 15, 2014, $76,500; June 16, 2014, $76,500; September 15, 2014, $76,500; December 15, 2014, $76,500.

b. April 15, 2014, $110,500; June 16, 2014, $127,500; September 15, 2014, $127,500; December 15, 2014, $127,500.

c. April 15, 2014, $127,500; June 16, 2014, $127,500; September 15, 2014, $127,500; December 15, 2014, $127,500.

d. April 15, 2014, $76,500; June 16, 2014, $178,500; September 15, 2014, $127,500; December 15, 2014, $127,500.

e. None of the above.

5. 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?

a. Dividends received deduction.

b. Proceeds of life insurance paid on death of key employee.

c. Excess of capital losses over capital gains.

d. Tax-exempt interest.

e. None of the above.

6. 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 a subtraction on Schedule M-1?

a. Book depreciation in excess of tax depreciation.

b. Excess of capital losses over capital gains.

c. Proceeds on key employee life insurance.

d. Income subject to tax but not recorded on the books.

e. None of the above.

7. During the current year, Skylark Company had operating income of $420,000 and operating expenses of $250,000. In addition, Skylark had a long-term capital loss of $20,000, and a charitable contribution of $5,000. How does Toby, the sole owner of Skylark Company, report this information on his individual income tax return under following assumptions?

a. Skylark is an LLC, and Toby does not withdraw any funds from the company during the year.

b. Skylark is an S corporation, and Toby does not withdraw any funds from the company during the year.

c. Skylark is a regular (C) corporation, and Toby does not withdraw any funds from the company during the year.

8. Amber Company has $100,000 in net income in the current year before deducting any compensation or other payment to its sole owner, Alfredo. Assume that Alfredo is in the 33% marginal tax bracket. Discuss the tax aspects of each of the following independent arrangements. (Assume that any salaries are reasonable in amount and ignore any employment tax considerations.)

a. Alfredo operates Amber Company as a proprietorship.

b. Alfredo incorporates Amber Company and pays himself no salary and no dividend.

c. Alfredo incorporates Amber Company and pays himself a $50,000 salary and a dividend of $42,500 ($50,000 – $7,500 corporate income tax).

9. During the current year, Maroon Company had $125,000 net profit from operations. Belinda, the sole owner of Maroon, is in the 33% marginal tax bracket. Determine the combined tax burden for Maroon and Belinda under the following independent situations. (Ignore any employment taxes.)

a. Maroon Company is a C corporation and all of its after-tax income is distributed to Belinda.

b. Maroon Company is a proprietorship and all of its after-tax income is withdrawn by Belinda.

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