Dave and his friend Stewart each own 50 percent of KBS. During the year, Dave receives $75,000 compensation for services he performs for KBS during the year. He performed a significant amount of work for the entity and he was heavily involved in management decisions for the entity (he was not a passive investor in KBS). After deducting Dave’s compensation, KBS reports taxable income of $30,000. How much FICA and/or self-employment tax is Dave required to pay on his compensation and his share of the KBS income if KBS is formed as a C corporation, S corporation, or a limited liability company (ignore the .9 percent additional Medicare tax)?
> Describe the three types of controlled groups.
> Explain the controlled group rules in very general terms and indicate what type of behavior the rules are attempting to prevent in terms of computing a corporation’s tax liability.
> Why do the marginal rates in the corporate tax rate schedule increase and then decrease before increasing again?
> What limitations apply to the amount of the allowable dividends received deduction?
> How does a corporation determine the percentage for its dividends received deduction? Explain.
> Why does Congress provide the dividends received deduction for corporations receiving dividends?
> What are common book-tax differences relating to corporate charitable contributions? Are these differences favorable or unfavorable?
> Compute HC Inc.’s current year taxable income given the following information relating to its 2016 activities. Also, compute HC’s Schedule M-1 assuming that HC’s federal income tax expense for book purposes is $30,000. • Gross profit from inventory sales
> Compute MV, Corp.’s 2016 taxable income given the following information relating to its year 1 activities. Also, compute MV’s Schedule M-1 assuming that MV’s federal income tax expense for book purposes is $100,000. • Gross profit from inventory sales of
> XYZ is a calendar-year corporation that began business on January 1, 2016. For 2016, it reported the following information in its current year audited income statement. Notes with important tax information are provided below. Required: a. Reconcile book
> What is the difference between recognition and realization as it applies to the recording of a deferred tax asset on a balance sheet?
> Timpanogos Inc. is an accrual-method calendar-year corporation. For 2015, it reported financial statement income after taxes of $1,152,000. Timpanogos provided the following information relating to its 2016 activities: Life insurance proceeds as a result
> For the current year, Maple Corporation, a C corporation, reports taxable income of $200,000 before paying salary to its sole shareholder Diane. Diane’s marginal tax rate on ordinary income is 35.9 percent (including the additional Medicare tax) and 18.8
> For the current year, Custom Craft Services Inc. (CCS), a C corporation, reports taxable income of $200,000 before paying salary to Jaron the sole shareholder. Jaron’s marginal tax rate on ordinary income is 35 percent and 15 percent on dividend income.
> After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 18 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. During the current year JBD reports $1,000,000 of after-tax inco
> Jack would like to organize PPS as either an LLC or as a C corporation generating an 11 percent annual before-tax return on a $100,000 investment. Assume Jack’s marginal tax rate on earned income is 38 percent (including the .9% additional Medicare tax a
> What are the two components of a company’s income tax provision? What does each component represent about a company’s income tax provision?
> Briefly describe the six step process by which a company computes its income tax provision.
> What distinguishes an income tax from other taxes?
> How does the fact that most corporations file their financial statements several months before they file their income tax returns complicate the income tax provision process?
> True or False: ASC 740 is the sole source for the rules that apply to accounting for income taxes. Explain.
> What is the purpose behind a valuation allowance as it applies to deferred tax assets?
> Identify some of the reasons why accounting for income taxes is complex.
> Briefly describe the difference between a company’s effective tax rate, cash tax rate, and structural tax rate.
> What is a company’s hypothetical income tax provision and what is its importance in a company’s disclosure of its income tax provision in the tax footnote?
> True or False: A publicly traded company must disclose all of the components of its deferred tax assets and liabilities in a footnote to the financial statements. Explain.
> Under what conditions can a company net its current deferred tax assets with its current deferred tax liabilities on the balance sheet?
> How does a company determine if a deferred tax asset or liability should be classified as current or noncurrent on its balance sheet?
> Why did many companies oppose FIN 48 when it was first proposed?
> Where on the balance sheet does a company report its unrecognized tax benefits?
> True or False: When Congress changes the corporate tax rates, only the current year book-tax temporary differences are measured using the new rates. Explain.
> You have been assigned to compute the income tax provision for Motown Memories, Inc. (MM) as of December 31, 2016. The Company’s federal income tax rate is 34%. The Company’s Income Statement for 2016 is provided below:Motown Memories, Inc.
> True or False: ASC 740 requires that a company treat potential interest and penalties related to an unrecognized tax benefit as part of its income tax provision. Explain.
> Spartan Builders Corporation is a builder of high end housing with locations in major metropolitan areas throughout the Midwest. At June 30, 2016, the company has deferred tax assets totaling $10 million and deferred tax liabilities of $5 million, all of
> Access the 2014 Annual Report for Google, Inc. and answer the following questions. a. Using information from the company’s Income Statement and Income Taxes footnote, what was the company’s effective tax rate for 2014? Show how the rate is calculated. b.
> You have been assigned to compute the income tax provision for Tulip City Flowers, Inc. (TCF) as of December 31, 2016. The company’s federal income tax rate is 34%. The company’s Income Statement for 2016 is provided below:Tulip City Flower
> Golf Corp. (GC), a calendar-year accrual-method corporation, held its directors meeting on December 15 of year 1. During the meeting the board of directors authorized GC to pay a $75,000 charitable contribution to the World Golf Foundation, a qualifying
> Assume that in year 1 Hill Corporation reported a net operating loss of $10,000 that it carried forward to year 2. In year 1, Hill also reported a net capital loss of $3,000 that it carried forward to year 2. In year 2, ignoring any carryovers from other
> WCC, Inc. has a current year (2016) net operating loss of $100,000. It is trying to determine whether it should carry back the loss or whether it should elect to forgo the carryback. How would you advise WCC in each of the following alternative situation
> MWC Corp. is currently in the sixth year of its existence (2016). In 2011 - 2015, it reported the following income and (losses) (before net operating loss carryovers or carrybacks). 2011: ($70,000) 2012: (30,000) 2013: 60,000 2014: 140,000 2015: (25
> What book-tax differences in year 1 and year 2 associated with its capital gains and losses would DEF Inc. report in the following alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent or temporary. a. In
> What book-tax differences in year 1 and year 2 associated with its capital gains and losses would ABD Inc. report in the following alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent or temporary. a. b.
> Assume that on January 1, year 1, XYZ Corp. issued 1,000 nonqualified stock options with an estimated value of $4 per option. Each option entitles the owner to purchase one share of XYZ stock for $14 a share (the per share price of XYZ stock on January 1
> True or False: A company determines its unrecognized tax benefits with respect to a transaction only at the time the transaction takes place; subsequent events are ignored. Explain.
> True or False: All temporary differences have a financial accounting basis. Explain.
> Evon would like to organize SHO as either an S corporation or as a C corporation generating a 9 percent annual before-tax return on a $200,000 investment. Assume individual and corporate tax rates are both 35 percent and individual capital gains and divi
> Evon would like to organize SHO as either an LLC or as a C corporation generating an 11 percent annual before-tax return on a $200,000 investment. Assume individual and corporate tax rates are both 35 percent and individual capital gains and dividend tax
> Kevin and Bob have owned and operated SOA as a C corporation for a number of years. When they formed the entity, Kevin and Bob each contributed $100,000 to SOA. They each have a current basis of $100,000 in their SOA ownership interest. Information on SO
> Rondo and his business associate, Larry, are considering forming a business entity called R&L but they are unsure about whether to form it as a C corporation, an S corporation or as an LLC. Rondo and Larry would each invest $50,000 in the business. Thus,
> Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $200,000 for a 40% ownership interest, Mickalya is contributing a building with a value of $200,000 and a tax basis of $150,000 for a 40%
> Damarcus is a 50% owner of Hoop (a business entity). In the current year, Hoop reported a $100,000 business loss. Answer the following questions associated with each of the following alternative scenarios. a. Hoop is organized as a C corporation and Dama
> In its first year of existence (year 1) WCC Corporation (a C corporation) reported taxable income of $170,000 and paid $49,550 of federal income tax. In year 2, WCC reported a net operating loss of $40,000. WCC projects that it will report $800,000 of ta
> In its first year of existence (year 1), SCC corporation (a C corporation) reported a loss for tax purposes of $30,000. Using the corporate tax rate table, determine how much tax SCC will pay in year 2 if it reports taxable income from operations of $20,
> Under what circumstances can a taxpayer meet the ownership and use requirements for a residence but still not be allowed to exclude all realized gain on the sale of the residence?
> Ultimate Comfort Blankets Inc. has had a great couple of years and wants to distribute its earnings while avoiding double taxation on its income. It decides to give its sole shareholder, Laura, a salary of $1,500,000 in the current year. What factors wou
> Nutt Corporation projects that it will have taxable income for the year of $400,000 before incurring any interest expense. Assume Nutt’s tax rate is 35 percent. a. What is the amount of the overall tax (corporate level + shareholder level) on the $400,00
> Jabar Corporation, a C corporation, projects that it will have taxable income of $300,000 before incurring any lease expenses. Jabar’s tax rate is 35 percent. Abdul, Jabar’s sole shareholder, has a marginal tax rate of 39.6 percent on ordinary income and
> Sandy Corp. projects that it will have taxable income of $150,000 for the year before paying any fringe benefits. Assume Karen, Sandy’s sole shareholder, has a marginal tax rate of 35 percent on ordinary income and 15 percent on dividend income. Assume S
> How do shareholder loans to corporations mitigate the double tax of corporate income?
> When a corporation leases property from a shareholder and pays the shareholder at a higher than market rate, how is the excess likely to be classified by the IRS?
> How can leasing property to a corporation be an effective method of mitigating the double tax on corporate income?
> How can fringe benefits be used to mitigate the double taxation of corporate income?
> When a corporation pays salary to a shareholder-employee beyond what is considered to be reasonable compensation, how is the salary in excess of what is reasonable treated for tax purposes? Is it subject to double taxation?
> Explain why the IRS would be concerned that a closely held C corporation only pay its shareholders reasonable compensation.
> What are the ownership and use requirements a taxpayer must meet to qualify for the exclusion of gain on the sale of a residence?
> What limits apply to the amount of deductible salary a corporation may pay to an employee-shareholder?
> Explain why paying a salary to an employee-shareholder is an effective way to mitigate the double taxation of corporate income.
> How many times is income from a C corporation taxed if a retirement fund is the owner of the corporation’s stock? Explain.
> If XYZ corporation is a shareholder of BCD corporation, how many levels of tax is BCD’s before-tax income potentially subject to? Has Congress provided any tax relief for this result? Explain.
> Evaluate the following statement: “When dividends and long-term capital gains are taxed at the same rate, the overall tax rate on corporate income is the same whether the corporation distributes its after-tax earnings as a dividend or whether it reinvest
> Is it possible for the overall tax rate on corporate taxable income to be lower than the tax rate on flow-through entity taxable income? If so, under what conditions would you expect the overall corporate tax rate to be lower?
> How does a corporation’s decision to pay dividends affect its overall tax rate [(corporate level tax + shareholder level tax)/taxable income]?
> Is it possible for shareholders to defer or avoid the second level of tax on corporate income? Briefly explain.
> Who pays the second level of tax on a C corporation’s income? What is the tax rate applicable to the second level of tax and when is it levied?
> Who pays the first level of tax on a C corporation’s income? What is the tax rate applicable to the first level of tax?
> A taxpayer owns a home in Salt Lake City, Utah and a second home in St. George, Utah. How does the taxpayer determine which home her principal residence is for tax purposes?
> What are the differences, if any, between the legal and tax classification of business entities?
> In general, how are unincorporated entities classified for tax purposes?
> Other than corporations, are there other legal entities that offer liability protection? Are any of them taxed as flow-through entities? Explain.
> How do corporations protect shareholders from liability? If you formed a small corporation, would you be able to avoid repaying a bank loan from your community bank if the corporation went bankrupt? Explain
> What is an operating agreement for an LLC? Are operating agreements required for limited liability companies? If not, why might it be important to have one?
> How do business owners create legal entities? Is the process the same for all entities? If not, what are the differences?
> What are the most common legal entities used for operating a business? How are these entities treated similarly and differently for state law purposes?
> What are the tax advantages and disadvantages of converting a C corporation into an LLC?
> If limited liability companies and S corporations are both taxed as flow-through entities for tax purposes, why might an owner prefer one form over the other for tax purposes? List separately the tax factors supporting the decision to operate as either a
> Compare the entity level tax consequences for C corporations, S corporations, and partnerships for both nonliquidating and liquidating distributions of noncash property. Do the tax rules tend to favor one entity type more than the others? Explain.
> Does a residence for tax purposes need to be situated at a fixed location? Explain.
> Explain how liabilities of an LLC or an S corporation affect the amount of tax losses from the entity that limited liability company members and S corporation shareholders may deduct. Do the tax rules favor LLCs or S corporations?
> Compare and contrast the FICA tax burden of S corporation shareholder-employees and LLC members receiving compensation for working for the entity (guaranteed payments) and business income allocations to S corporation shareholders and LLC members assuming
> According to the tax rules, how are profits and losses allocated to LLC members? How are they allocated to S corporation shareholders? Which entity permits greater flexibility in allocating profits and losses?
> Which entity types are generally allowed to use the cash method of accounting?
> Are C corporations or flow-through entities (S corporations and entities taxed as partnerships) more flexible in terms of selecting a tax year-end? Why are the tax rules in this area different for C corporations and flow-through entities?
> Why are S corporations less favorable than C corporations and entities taxed as partnerships in terms of owner-related limitations?
> In its first year of existence, KES, an S corporation, reported a business loss of $10,000. Kim, KES’s sole shareholder, reports $50,000 of taxable income from sources other than KES. What must you know in order to determine whether she can deduct the $1
> Does a C corporation gain more tax benefit by carrying forward a net operating loss to offset other taxable income two years after the NOL arises or by carrying the NOL back two years? Explain.
> A C corporation has a current year loss of $100,000. The corporation had paid estimated taxes for the year of $10,000 and expects to have this amount refunded when it files its tax return. Is it possible that the corporation may receive a refund larger t
> Is a current-year net operating loss of a C corporation available to offset income from the corporation in other years? Explain.
> How does a taxpayer determine whether a dwelling unit is treated as a residence or nonresidence for tax purposes?
> Conceptually, what is the overall tax rate imposed on interest paid on loans from shareholders to corporations?
> Cool Touch Cookware (CTC) has been in business for about 10 years now. Dawn and Linda are each 50 percent owners of the business. They initially established the business with cash contributions. CTC manufactures unique cookware that remains cool to the t
