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Exam 17: Corporations: Introduction and Operating Rules

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Question 71

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On December 31, 2019, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

A) In 2019, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2020.
B) In 2020, if payment was made at any time during that year.
C) In 2019, if payment was made on or before April 15, 2020.
D) In 2020, but only if payment was made on or before April 15, 2020.
E) None of these.

F) A) and E)
G) None of the above

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Question 72

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A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current-year GAAP financial statements.

A) True
B) False

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Question 73

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Adrian is the president and sole shareholder of Pigeon Corporation. He also lends money and rents a building to the corporation. Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation. What limitations are there on the use of such relationships?

In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting five years ago for $10,000. Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

Heron Corporation, a calendar year, accrual basis taxpayer, provides the following information for the current year and asks you to prepare Schedule M-1. Net income per books (after-tax) $258,050 Taxable income 195,000 Federal income tax liability 40,950 Interest income from tax-exempt bonds 5,000 Interest paid on loan incurred to purchase tax-exempt bonds 2,000 Life insurance proceeds received as a result of death of Heron's president 100,000 Premiums paid on policy on life of Heron's president 4,500 Excess of capital losses over capital gains 2,000 Retained earnings at beginning of year 375,000 Cash dividends paid 90,000 Tax depreciation in excess of book depreciation 7,500

In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered? What compensation is included in the limit?

Canary Corporation, an accrual method C corporation, uses the calendar year for tax purposes. Leticia, a cash method taxpayer, is both a shareholder of Canary and the corporation's CFO. On December 31, 2019, Canary has accrued a $75,000 bonus to Leticia. Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations. a. Leticia owns 35% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 4, 2020. b. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on May 6, 2020. c. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on April 7, 2020.

For tax years ending after 2017, which of the following statements is incorrect with respect to the treatment of a net operating loss by a calendar year C corporation?

Ostrich, a C corporation, has a net short-term capital gain of $20,000 and a net long-term capital loss of $90,000 during 2019. Ostrich also has taxable income from other sources of $1 million. Prior years' transactions included the following: $\begin{array} { l r } 2015 \text { net short-term capital gains } & \$ 20,000 \\2016 \text { net long-term capital gains } & 15,000 \\2017 \text { net short-term capital gains } & 25,000 \\2018 \text { net long-term capital gains } & 5,000\end{array}$ a. How are the capital gains and losses treated on Ostrich's 2019 tax return? b. Determine the amount of the 2019 net capital loss that is carried back to each of the previous years. c. Compute the amount of capital loss carryover, if any, and indicate the years to which the loss may be carried. d. If Ostrich were a proprietorship, how would Ellen, the owner, report these transactions on her 2019 tax return?

Canary Corporation, which sustained a $5,000 net short-term capital loss during the year, will enter $5,000 as an addition on Schedule M-1 of Form 1120.

Carrot Corporation, a C corporation, has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2019. Carrot Corporation had taxable income from other sources of $720,000. Prior years' Transactions included the following: $\begin{array} { l l r } 2015 & \text { Net long-term capital gain } & \$ 150,000 \\2016 & \text { Net short-term capital gain } & 60,000 \\2017 & \text { Net short-term capital gain } & 45,000 \\2018 & \text { Net long-term capital gain } & 35,000\end{array}$ Compute the amount of Carrot's capital loss carryover to 2020.

Kingbird Corporation (a calendar year C corporation) reports the following income and expenses this year: $\begin{array}{lr}\text { Income from operations } & \$ 200,000 \\\text { Expenses from operations } & 140,000 \\\text { Dividends received (15\% ownership) } & 15,000\end{array}$ On October 1, Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash (not included in any of the above items) . Determine Kingbird's charitable contribution deduction.

Grebe Corporation, a closely held corporation that is not a PSC, had $75,000 of net active income, $60,000 of portfolio income, and a $105,000 passive activity loss during the year. How much of the passive activity loss can Grebe deduct in the current year?

Tonya, an actuary, is the sole shareholder of Shrike Corporation, a professional C corporation. The corporation paid Tonya a salary of $360,000 during its fiscal year ending September 30, 2019. How much salary must Shrike Corporation pay Tonya during the period October 1 through December 31, 2019, to enable the corporation to continue to use its fiscal year without negative tax effects?

Only U.S. corporations are included in a combined GAAP financial statement.

South, Inc., earns book net income before tax of $400,000 in year 1. It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $10,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21% in both years, what is South's current income tax expense reported on its GAAP financial statements for year 2?