Questions and Answers of Essentials Federal Taxation

Aishwarya’s husband passed away in 2022. She needs to determine whether Jasmine, her 17-year-old stepdaughter who is single, qualifies as her dependent in 2023. Jasmine is a resident but not a
Mel and Cindy Gibson’s 12-year-old daughter Rachel was abducted on her way home from school on March 15, 2023. Police reports indicated that a stranger had physically dragged Rachel into a waiting
Grayson (single) is in the 24 percent tax rate bracket and has the sold the following stocks in 2023:What is Grayson’s net short-term capital gain or loss from these transactions?What is
AMP Corporation (calendar-year-end) has 2023 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2023, AMP acquired the following assets:What is the maximum amount of
Assume that Timberline Corporation has 2023 taxable income of $240,000 for purposes of computing the §179 expense. It acquired the following assets in 2023:What is the maximum amount of §179
Assume that ACW Corporation has 2023 taxable income of $1,500,000 for purposes of computing the §179 expense. The company acquired the following assets during 2023 (assume no bonus
Assume TDW Corporation’s (calendar-year-end) has 2023 taxable income of $650,000 for purposes of computing the §179 expense. The company acquired the following assets during 2023:What is the
Using an available tax service or the Internet, identify three basic tax planning ideas or tax tips suggested for year-end tax planning. Which basic tax strategy from this chapter does each planning
While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE),
Abigail, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago. While Abigail and Bobby actively participate in running the company, Claudia has a
Barry Potter and Winnie Weasley are considering making an S election on March 1, 2019, for their C corporation, Omniocular. However, first they want to consider the implications of the following
Mark is the sole shareholder of Tex Corporation. Mark first formed Tex as a C corporation. However, in an attempt to avoid having Tex’s income double taxed, Mark elected S corporation status for
Wood Corporation was a C corporation in 2017 but elected to be taxed as an S corporation in 2018. At the end of 2017, its earnings and profits were $15,500. The following table reports Wood’s
Tempe Corporation is a calendar-year corporation. At the beginning of 2018, its election to be taxed as an S corporation became effective. Tempe Corp.€™s balance sheet at the end of 2017
Virginia Corporation is a calendar-year corporation. At the beginning of 2018, its election to be taxed as an S corporation became effective. Virginia Corp.€™s balance sheet at the end of
Rivendell Corporation uses the accrual method of accounting and has the following assets as of the end of 2017. Rivendell converted to an S corporation on January 1, 2018.a. What is
Last year, Miley decided to terminate the S corporation election of her solely owned corporation on October 17, 2017 (effective immediately), in preparation for taking it public. At the time of the
Janna has a tax basis of $15,000 in her Mimikaki stock (Mimikaki has been an S corporation since inception). In 2018, Janna was allocated $20,000 of ordinary income from Mimikaki. What is the amount
Chandra was the sole shareholder of Pet Emporium that was originally formed as an S corporation. When Pet Emporium terminated its S election on August 31, 2017, Chandra had a stock basis and an
Timo is the sole owner of Jazz Inc., an S corporation. On October 31, 2018, Timo executed an unsecured demand promissory note of $15,000 and transferred the note to Jazz (Jazz could require Timo to
Winkin, Blinkin, and Nod are equal shareholders in SleepEZ, an S corporation. In the conditions listed below, how much income should each report from Sleep EZ for 2018 under both the daily allocation
Cathy, Heathcliff, and Isabelle are equal shareholders in Wuthering Heights (WH), an S corporation. Heathcliff has decided he would like to terminate the S election. In the following alternative
Jane has been operating Mansfield Park as a C corporation and decides she would like to make an S election. What is the earliest the election will become effective under each of these alternative
Carrie D€™Lake, Reed A. Green, and Doug A. Divot share a passion for golf and decide to go into the golf club manufacturing business together. On January 2, 2018, D€™Lake, Green,
When are partnerships mandated to adjust the basis of their assets (inside basis) when a partner sells a partnership interest or receives a partnership distribution?
Under what circumstances will a partner recognize a loss from an operating distribution?
Rex and Felix are the sole shareholders of the Dogs and Cats Corporation (DCC). After several years of operations, they chose to liquidate the corporation and operate the business as a partnership.
Wolverine Corporation made a distribution of $500,000 to Jim Harb Inc. in partial liquidation of the company on December 31 of this year. Jim Harb Inc. owns 100 percent of Wolverine Corporation. The
Hoosier Corporation declared a stock distribution to all shareholders of record on March 25 of this year. Shareholders will receive one share of Hoosier Corporation stock for each share of stock they
Tiny and Tim each own half of the 100 outstanding shares of Flower Corporation. This year, Flower reported taxable income of $10,000. In addition, Flower received $20,000 of life insurance proceeds
Beaver Corporation reported taxable income of $500,000 from operations this year. The company paid federal income taxes of $105,000 on this taxable income. During the year, the company made a
Illini Corporation reported taxable income of $500,000 from operations for this year. The company paid federal income taxes of $105,000 on this taxable income. During the year, the company made a
Spieth Corporation reported taxable income of $500,000 from operations this year. The company paid federal income taxes of $105,000 on this taxable income. During the year, the company made a
Volunteer Corporation reported taxable income of $500,000 from operations this year. The company paid federal income taxes of $105,000 on this taxableincome. During the year, the company made a
Paladin Inc. reported taxable income of $1,000,000 this year and paid federal income taxes of $210,000. The company reported a capital gain from the sale of investments of $150,000, which was
Gator Inc. reported taxable income of $1,000,000 this year and paid federal income taxes of $210,000. Included in the company’s computation of taxable income is gain from the sale of a depreciable
Boilermaker Inc. reported taxable income of $500,000 this year and paid federal income taxes of $105,000. Not included in the company’s computation of taxable income is tax-exempt income of
Gopher Corporation reported taxable income of $500,000 this year. Gopher paid a dividend of $100,000 to its sole shareholder, Sven Anderson. The dividend meets the requirements to be a qualified
Robert and Kelly invited Ben to join them in forming Aero, a plane chartering company, as a corporation. Ben did not want to join at the time and declined their invitation. More than a year later,
Marathon Inc. (a C corporation) reported $1,000,000 of taxable income in the current year. During the year, it distributed $100,000 as dividends to its shareholders as follows:• $5,000 to Guy, a 5%
Karane Enterprises, a calendar-year manufacturer based in College Station, Texas, began business in 2017. In the process of setting up the business, Karane has acquired various types of assets. Below
Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting but he doesn’t keep any significant inventories
Joe and Jessie are married and have one dependent child, Lizzie. Lizzie is currently in college at State University. Joe works as a design engineer for a manufacturing firm while Jessie runs a craft
Using the IRS website (https://www.irs.gov/uac/The-Tax- Gap), how large is the current estimated “tax gap” (i.e., the amount of tax underpaid by taxpayers annually)? What group of taxpayers
Using the facts from the previous problem, how would your answer change if, instead, Duff adopted the cash method of accounting to allow him to better control the timing of his cash receipts and
Using the same facts from the previous problem, how would your answer change if Randy estimates that there is only a 20 percent chance that the position will be sustained upon audit or judicial
For tax purposes, how is the compensation paid to an S corporation shareholder similar to compensation paid to an owner of an entity taxed as a partnership? How is it different?
Why might it be a good tax planning strategy for an S corporation with one shareholder to pay a salary to the shareholder on the low end of what the services are potentially worth?
Would a corporation with a small amount of current–year taxable income (before the net operating loss deduction) and a large net operating loss carryover have a tax liability for the current year?
In its first year of existence, SMS, an S corporation, reported a business loss of $10,000. Michelle, SMS’s sole shareholder, reports $50,000 of taxable income from sources other than SMS. What
ELS, an S corporation, reported a business loss of $1,000,000. Ethan, ELS’s sole shareholder, is involved in ELS’s daily business activities and he reports $1,200,000 of taxable income from
Which entity types are generally allowed to use the cash method of accounting?
If entities taxed as partnerships and S corporations are both flow-through entities for tax purposes, why might an owner prefer one form over the other for tax purposes? List separately the tax
What are the tax advantages and disadvantages of converting a C corporation into an (taxed as a partnership)?
Andrea would like to organize SHO as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 11 percent annual before-tax return on a
Jacob is a member of WCC (an LLC taxed as a partnership). Jacob was allocated $100,000 of business income from WCC for the year. Jacob's marginal income tax rate is 37 percent. The business
Amanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 8 percent annual before-tax return on a
Sandra would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 8 percent annual before-tax return on a
Tremaine would like to organize UTA as either an S Corporation or a C corporation. In either form, the entity will generate a 9 percent annual before tax return on a $1,000,000 investment.
After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 22 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. uring the
Mackenzie is considering conducting her business, Mac561, as either a single– member LLC or as an S corporation. Determine Mackenzie’s after-tax cash flow from the entity’s business income and
In its first year of existence (year 1), SCC corporation (a C corporation) reported a loss for tax purposes of $30,000. How much tax will SCC pay in year 2 if it reports taxable income from
In its first year of existence (year 1), Willow Corp. (a C corporation) reports a loss for tax purposes of $50,000. In year 2 it reports a $40,000 loss. For year 3, it reports taxable income from
Danni is a single 30 percent owner of Kolt (a business entity). In the current year, Kolt reported a $1,000,000 business loss. Answer the following questions associated with each of the following
Daisy Taylor has developed a viable new business idea. Her idea is to design and manufacture cookware that remains cool to the touch when in use. She has had several friends try out her prototype
True or False. The receipt of boot by a shareholder in a §351 transaction causes the transaction to be fully taxable. Explain.
True or False. A corporation’s assumption of shareholder liabilities will always constitute boot in a §351 transaction. Explain.
Can C corporations use the cash method of accounting? Explain.
Describe how purchased goodwill leads to temporary book–tax differences.
What is the carryover period for a net operating loss? Explain.
Is a net operating loss incurred in 2017 treated the same as a net operating loss incurred in 2018? Explain.
When a corporation has NOL carryovers arising in different years, how does the corporation apply the NOLs to reduce taxable income in a given year?
How many tax brackets are there in the corporate tax rate schedule?
Ivan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation€™s stock. The property transferred
Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation€™s stock. The property transferred
ELS corporation is about to begin its sixth year of existence. Assume that ELS reported gross receipts for each of its first five years of existence for Scenarios A, B, and C as follows:a. In what
WCC Corp. has a $100,000 net operating loss carryover into 2019. Assume that it reported $75,000 of taxable income in 2019 (before the net operating loss deduction) and $30,000 of taxable income in
In 2019, SML Corp. reported taxable income of $100,000 before any NOL deductions. SML has a $170,000 NOL carryover from 2017 and a $90,000 NOL carryover from 2018. What is SML’s 2019 taxable income
In year 1 (the current year), LAA Inc. made a charitable donation of $100,000 to the American Red Cross (a qualifying charity). For the year, LAA reported taxable income of $550,000, which included a
Riverbend Inc. received a $200,000 dividend from stock it held in Hobble Corporation. Riverbend’s taxable income is $2,100,000 before deducting the dividends received deduction (DRD), a $100,000
Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC’s deductible DRD in each of the following situations:a. WC’s taxable
Compute SWK Inc.’s tax liability for each of the following scenarios: a. SWK’s taxable income is $60,000.b. SWK’s taxable income is $275,000.c. SWK’s taxable income is $50,000,000.
Last year, JL Corporation’s tax liability was $500,000. For the current year, JL Corporation reported the following taxable income at the end of its first, second, and third quarters (see table
Last year, Cougar Corp. (CC) reported a net operating loss of $25,000. In the current year, CC expected its current year tax liability to be $300,000, so it made four equal estimated tax payments of
Compute MV, Corp.’s current year taxable income given the following information relating to its current year activities. Also, compute MV’s Schedule M-1 assuming that MV’s federal income tax
Compute HC Inc.’s current year taxable income given the following information relating to its current year activities. Also, compute HC’s Schedule M-1 assuming that HC’s federal income tax
Timpanogos Inc. is an accrual-method calendar-year corporation. For 2018, it reported financial statement income after taxes of $1,552,000. Timpanogos provided the following information relating to
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year audited income statement. Notes with important tax
What is meant by the phrase double taxation of corporate income?
Historically, taxpayers have implemented strategies to mitigate or eliminate the effects of double taxation. Why might taxpayers think twice before implementing such strategies today? Explain.
True or False. A calendar-year corporation has positive current E&P of $100 and accumulated negative E&P of $200. A cash distribution of $100 to the corporation’s sole shareholder at year
A shareholder receives appreciated noncash property from his corporation and assumes a liability attached to the property. How does the assumption affect the amount of dividend he reports in gross
Why does the tax law impose constructive stock ownership rules on stock redemptions?
True or False. All shareholders receive the same tax treatment in a complete liquidation of a corporation. Explain.
Explain why certain long-lived assets are capitalized and recovered over time rather than immediately expensed.
Discuss how the property limitation restricts large businesses from taking the §179 expense.
Describe assets that are considered to be listed property. Why do you think Congress requires them to be “listed”?
Are taxpayers allowed to claim depreciation on assets they use for both business and personal purposes? What are the tax consequences if the business use drops from above 50 percent in one year to
Discuss the method used to determine the amount of organizational expenditures or start-up costs that may be immediately expensed in the year a taxpayer begins business.
Emily purchased a building to store inventory for her business. The purchase price was $760,000. Emily also paid legal fees of $300 to acquire the building. In March, Emily incurred $2,000 to repair

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