Question 1. Norma formed Hyacinth Enterprises, a proprietorship, in 2

1. Norma formed Hyacinth Enterprises, a proprietorship, in 2014. 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 taxable income for 2014?

a. Increases Norma’s taxable income by $157,000 ($160,000 ordinary business income – $3,000 long­term capital loss).

b. Increases Norma’s taxable income by $150,000 ($160,000 ordinary business income – $10,000 long­term capital loss).

c. Increases Norma’s taxable income by $75,000.

d. Increases Norma’s taxable income by $160,000.

e. None of the above.

2. Pablo, a sole proprietor, sold stock held as an investment for a $40,000 long-term capital gain. Pablo’s marginal tax rate is 33%. Loon Corporation, a C corporation, sold stock held as an investment for a $40,000 long-term capital gain. Loon’s marginal tax rate is 35%. What tax rates are applicable to these capital gains?

a. 15% rate applies to Pablo and 35% rate applies to Loon.

b. 15% rate applies to Loon and 33% rate applies to Pablo.

c. 35% rate applies to Loon and 33% rate applies to Pablo.

d. 15% rate applies to both Pablo and Loon.

e. None of the above.

3. Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation. During the year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000. In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000. During the year, Rhea Corporation distributed $50,000 to Lucinda. With respect to this information, which of the following statements is correct?

a. Rhea Corporation will pay tax on taxable income of $200,000.

b. Lucinda reports ordinary income of $50,000.

c. Lucinda reports ordinary income of $120,000.

d. Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.

e. None of the above.

4. Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the year. In addition, Elk has a $10,000 long­term capital gain and a $17,000 short­term capital loss. Elk’s taxable income is:

a. $63,000.

b. $73,000.

c. $80,000.

d. $90,000.

e. None of the above.

5. Flycatcher Corporation, a C corporation, has two equal individual shareholders, Nancy and Pasqual. In the current year, Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder. Regardless of any tax consequences resulting from their interests in Flycatcher, Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket. With respect to the current year, which of the following statements is incorrect?

a. Flycatcher cannot avoid the corporate tax altogether by distributing all $100,000 of net profit as dividends to the shareholders.

b. Nancy incurs income tax of $1,500 on her dividend income.

c. Pasqual incurs income tax of $1,500 on his dividend income.

d. Flycatcher pays corporate tax of $22,250.

e. None of the above.

6. Which of the following statements is incorrectabout LLCs and the check-the-box Regulations?

a. If a limited liability company with more than one owner does not make an election, the entity is taxed as a corporation.

b. All 50 states have passed laws that allow LLCs.

c. An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.

d. If a limited liability company with one owner does not make an election, the entity is taxed as a sole proprietorship.

e. A limited liability company with one owner can elect to be taxed as a corporation.

7. Copper Corporation, a C corporation, had gross receipts of $5 million in 2011, $6 million in 2012, and $3 million in 2013. Gold Corporation, a personal service corporation (PSC), had gross receipts of $4 million in 2011, $7 million in 2012, and $5 million in 2013. Which of the corporations will be allowed to use the cash method of accounting in 2014?

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