Questions and Answers of Principles Taxation Business

Transcom, an Ohio corporation, earned $700,000 U.S. source income from sales of goods to U.S. customers and $330,000 foreign source income from sales of goods to customers in Canada. Canada’s
Axtell Corporation has the following taxable income.U.S. source income .................................. $1,620,000Foreign source income:Country A
Watch Corporation has U.S. source income for the current year of $2 million, foreign source income from Country X of $3 million, and foreign source income from Country Y of $1 million, for total
Refer to the facts in the preceding problem. Compute U.S. income tax if Jackson conducted its foreign operations through a foreign subsidiary that made no shareholder distributions during the current
Jackson Inc. has the following taxable income.U.S. source income ................................ $18,800,000Foreign source income ......................... 2,690,000Taxable
Refer to the facts in the preceding problem. How would your answer change if Zenon conducted its foreign operations through a foreign subsidiary that made no shareholder distributions during the
Zenon Inc. has the following taxable income.U.S. source income .................................. $1,900,000Foreign source income ............................ 240,000Taxable
Halifax Inc. operates its business in Country U through a subsidiary incorporated under Country U law. The subsidiary has never paid a dividend and has accumulated more than $10 million after-tax
Mr. Young operates a photography studio as a sole proprietorship. His average annual income from the business is $100,000. Because Mr. Young does not need the entire cash flow for personal
Agatha is planning to start a new business venture and must decide whether to operate as a sole proprietorship or incorporate. She projects that the business will generate annual cash flow and
Mr. and Mrs. Tinker own a size-able investment portfolio of stock in publicly held corporations. The couple has four children-ages 20, 22, 25, and 27-with whom they want to share their wealth.
Megan operates a housecleaning business as a sole proprietorship. She oversees a team of 10 cleaning personnel, markets the business, and provides supplies and equipment. The business has been
Refer to the facts in the preceding problem. Briefly explain the payroll tax consequences of the revenue agent’s conclusions.Data from Prob. 19Graham is the sole shareholder of Logan Corporation.
Graham is the sole shareholder of Logan Corporation. For the past five years, Logan has reported little or no taxable income as a result of paying Graham a salary of $500,000 per year. During a
During a recent IRS audit, the revenue agent decided that the Parker family used their closely held corporation, Falco, to avoid shareholder tax by accumulating earnings beyond the reasonable needs
During a recent IRS audit, the revenue agent determined that Level Corporation meets the definition of a personal holding company. If Level’s undistributed after-tax income last year was $670,000,
In 1994, Mr. and Mrs. Adams formed ADC by transferring $50,000 cash in exchange for 100 shares of common stock and a note from the corporation for $49,000. The note obligated ADC to pay 10 percent
Mr. Vernon is the sole shareholder of Teva. He also owns the office building that serves as corporate headquarters. Last year, Teva paid $180,000 annual rent to Mr. Vernon for use of the building.
Ms. Xie, who is in the 37 percent tax bracket, is the sole shareholder and president of Xenon. The corporation’s financial records show the following.Gross income from sales of goods
American Corporation has two equal shareholders, Mr. Freedom and Brave Inc. In addition to their investments in American stock, both shareholders have made substantial loans to American. During the
Mr. Pauper and Mrs. Queen are the equal shareholders in Corporation PQ. Both shareholders have a 37 percent marginal tax rate. PQ’s financial records show the following.Gross income from sales of
Mr. Lion, who is in the 37 percent tax bracket, is the sole shareholder of Toto, Inc., which manufactures greeting cards. Toto’s average annual net profit (before deduction of Mr. Lion’s salary)
Refer to the facts in the preceding problem.a. If the business is operated as a partnership, explain the payroll tax/self-employment tax implications for the entity, Thomas, and Angela. (No
Angela and Thomas are planning to start a new business. Thomas will invest cash in the business but not be involved in day-to-day operations. Angela plans to work full-time overseeing business
A number of tax and nontax factors should be considered in choosing the type of pass through entity through which to operate a new business. For each of the following considerations, indicate whether
Mrs. Franklin, who is in the 37 percent tax bracket, owns a residential apartment building that generates $80,000 annual taxable income. She plans to create a family partnership by giving each of her
Ms. Kona owns a 10 percent interest in Carlton LLC. This year, the LLC generated $72,400 ordinary income. Ms. Kona’s marginal tax rate is 32 percent, and she does not pay SE tax on her LLC
Mr. and Mrs. Lund and their two children (Ben and June) are the four equal partners in LBJ Partnership. This year, LBJ generated $36,000 ordinary income. Compute the tax cost for the business if Mr.
Grant and Marvin organized a new business as a corporation in which they own equal interests. The new business generated a $65,000 operating loss for the year. a. Assume the corporation expects
Mr. and Mrs. Velotta are self-employed professional musicians. Their average annual income from performance fees and music lessons is $130,000. The couple wants to shift income to their two children,
On December 10, 2017, the representative of a national charitable organization contacted the CEO of Wilkie Inc., a calendar year accrual basis corporation, to solicit a $100,000 donation. The CEO
In early 2018, Connor Inc. announced its intention to construct a manufacturing facility in the Shenandoah Valley. To persuade Connor to locate the facility in Augusta County, the county government
Talon Corporation has accumulated minimum tax credits from prior years. However, it currently projects that it will operate at a loss for 2018 and 2019, owing no regular tax liability for these
Ferris Corporation is looking to relocate its corporate headquarters to a small, historic town in the northeastern United States. Representatives of the town government have suggested several
Griffin Corporation received $50,000 of dividend income from Eagle, Inc. Griffin owns 5 percent of the outstanding stock of Eagle. Griffin’s marginal tax rate is 21 percent.a. Calculate Griffin’s
Leona, whose marginal tax rate on ordinary income is 37 percent, owns 100 percent of the stock of Henley Corporation. This year, Henley generates $1 million of taxable income.a. If Henley wants to
In 2017, NB Inc.’s federal taxable income was $242,000. Compute the required installment payments of 2018 tax in each of the following cases:a. NB’s 2018 taxable income is $593,000.b. NB’s 2018
In 2017, Bartley Corporation’s federal income tax due was $147,000. Compute the required installment payments of 2018 tax in each of the following cases:a. Bartley’s 2018 taxable income is
Hall Corporation plans to invest $5.5 million in rehabilitating a certified historic structure. Calculate the net present value of Hall’s allowable rehabilitation credit. Assume Hall has ample
Callen Inc. has accumulated minimum tax credits of $1.3 million from tax years prior to 2018. The following are Callen€™s regular tax before credits for 2018 through 2021.Complete the
Camden Corporation, a calendar year accrual basis corporation, reported $5 million of net income after tax on its current year financial statements prepared in accordance with GAAP. In addition, the
Jackson Corporation has accumulated minimum tax credits of $475,000 from tax years prior to 2018. If 2018 regular tax before credits is $210,000 and Jackson qualifies for general business credits of
Perkin Corporation has determined that it qualifies for a tax credit in the amount of $120,000. For the current year, it has tax liability before credits of $75,000. It expects at least that amount
Refer to the cases in the preceding problem. In each case, identify the corporation’s marginal tax rate, and compute its average tax rate.Data from Prob. 17In each of the following cases, compute
In each of the following cases, compute the corporation’s regular tax:a. Allen Corporation has $160,000 taxable income for its tax year ended December 31, 2017.b. Benson Corporation has $160,000
Corporation AB’s marginal tax rate is 15 percent, and Corporation YZ’s marginal tax rate is 21 percent.a. If both corporations are entitled to an additional $5,000 deduction, how much tax savings
Grim Corporation has income and expenses for its current fiscal year, recorded under generally accepted accounting principles, as shown in the following schedule. In addition, a review of
EFG, a calendar year, accrual basis corporation, reported $479,900 net income after tax on its financial statements prepared in accordance with GAAP. The corporation's financial records reveal the
Western Corporation, a calendar year, accrual basis corporation, reported $500,000 of net income after tax on its 2018 financial statements prepared in accordance with GAAP. The corporation’s
Cramer Corporation, a calendar year, accrual basis corporation, reported $1 million of net income after tax on its 2018 financial statements prepared in accordance with GAAP. The corporation's books
Hallick Inc. has a fiscal year ending June 30. Taxable income is $5,000,000 for its year ended June 30, 2018, and it projects similar taxable income for its 2019 fiscal year.a. Compute Hallick’s
Cranberry Corporation has $3,240,000 of current year taxable income.a. If the current year is a calendar year ending on December 31, 2017, calculate Cranberry’s regular income tax liability.b. If
In your own words, explain why a tax credit is more valuable than a tax deduction of the same dollar amount.
Corporations are required to detail their book/tax differences on either Schedule M-1 or Schedule M-3 attached to the corporate income tax return. Why is the IRS interested in this
Corporations are allowed a dividends-received deduction for dividends from other domestic, taxable corporations. How does this deduction prevent the same corporate income from potentially three
On March 1, 2018, Eve and Frank each contributed $30,000 cash to the newly formed EF Partnership in exchange for a 50 percent general interest. The partnership immediately borrowed $50,000 from an
Herold had been a calendar year S corporation since 1990. On October 10, 2018, Mrs. Hughes sold 18 shares of Herold stock to a foreign partnership, thereby terminating Herold’s S election.
Mr. and Mrs. Chou file a joint income tax return. Mr. Chou reports the income from his full-time landscaping business on a Schedule C, which lists him as the sole proprietor. He also reports 100
Ellie has operated a sole proprietorship for six years during which net profit has been stable and Ellie’s marginal tax rate has been a constant 24 percent. Ellie projects that her profit next year
Refer to the facts in part c of the preceding problem. In 2019, BLS repaid its $8,000 debt to Leo before he restored any basis in the debt. How much gain or loss, if any, will Leo recognize as a
Refer to the facts in the preceding problem. BLS generated $408,000 ordinary business income in 2018.a. How much of Leo’s share of this income is included in his 2018 taxable income?b. Compute
On January 1, 2017, Leo paid $15,000 for 5 percent of the stock in BLS, an S corporation. In November, he loaned $8,000 to BLS in return for a promissory note. BLS generated a $600,000 operating loss
At the beginning of 2018, Ms. P purchased a 20 percent interest in PPY Partnership for $20,000. Ms. P’s Schedule K-1 reported that her share of PPY’s debt at year-end was $12,000, and her share
Refer to the facts in the preceding problem. In 2018, YZ generated $7,000 ordinary business income and $18,000 dividend and interest income. The partnership made no distributions. At the end of the
Zelda owns a 60 percent general interest in YZ Partnership. At the beginning of 2016, the adjusted basis in her YZ interest was $95,000. For 2017, YZ generated a $210,000 business loss, earned
Jayanthi and Krish each own a 50 percent general partner interest in the JK Partnership. The following information is available regarding the partnership’s 2017 activities.Sales revenue
Rochelle is a partner in Megawatt Partnership. For 2018, her schedule K-1 from the partnership reported the following share of partnership items.Ordinary income
Kari is a partner in Lizard Partnership. This year, Kari’s share of partnership ordinary income is $20,000, and she received a cash distribution of $30,000. Kari’s tax basis in her partnership
Amit is a partner in Reynolds Partnership. This year, Amit’s Schedule K-1 from Reynolds reflected $50,000 of ordinary income, $1,000 of interest income, and a cash distribution of $35,000. Amit’s
Jane is a self-employed attorney. This year, her net profit exceeded $350,000, which put her in the 37 percent tax bracket. Early in the year, Jane hired Ben as a paralegal and paid him a $33,000
JC recently graduated from veterinary school and opened her own professional practice. This year, her net profit was $32,000. Compute JC’s after-tax income from her practice assuming:a. Her
In 2018, Wilma Way’s sole proprietorship, WW Bookstore, generated $120,000 net profit. In addition, Wilma recognized a $17,000 gain on the sale of business furniture and shelving, all of which was
Mrs. Singer owns a profitable sole proprietorship. For each of the following cases, use a Schedule SE, Form 1040, to compute her 2017 self-employment tax and her income tax deduction for such tax.a.
Calculate the total Social Security and Medicare tax burden on a sole proprietorship earning 2018 profit of $300,000, assuming a single sole proprietor.
For 2018, Ms. Deming earned wages totaling $225,000. Calculate any .9 percent additional Medicare tax owed, assuming that:a. Ms. Deming is single.b. Ms. Deming files a joint return with her husband
Refer to the facts in the preceding problem. Assume that in the year 2019, the Social Security base amount increases to $131,000. Compute BDF’s 2019 employer payroll tax with respect to Mr.
Mr. Williams is employed by BDF Inc. Compute BDF’s 2018 employer payroll tax with respect to Mr. Williams assuming that:a. His annual compensation is $60,000.b. His annual compensation is $200,000.
James Jones is the owner of a small retail business operated as a sole proprietorship. During 2017, his business recorded the following items of income and expense.Revenue from inventory sales
This year, Mr. Pitt’s sole proprietorship generated a $17,000 net loss. Can Mr. Pitt use this loss as a net operating loss carry forward deduction?
Margo, a calendar year taxpayer, paid $580,000 for new machinery (seven-year recovery property) placed in service on August 1, 2017.a. Assuming that the machinery was the only tangible property
In 2017, Company W elected under Section 179 to expense $19,300 of the cost of qualifying property. However, it could deduct only $15,000 of the expense because of the taxable income limitation. In
Assuming a 21 percent tax rate, compute the after-tax cost of the following business expenditures:a. $20,000 cost of equipment subject to Section 179 election.b. $17,500 business expansion
Warren Company is a calendar year, cash basis firm. On December 6, 2018, Warren paid $7,200 cash to a landscape service business that maintains the lawns and gardens around Warren's headquarters. How
Dr. P is a physician with his own medical practice. For the past several years, his marginal income tax rate has been 37 percent. Dr. P’s daughter, who is a college student, has no taxable income.
Corporation P owns a controlling stock interest in Subsidiary S and Subsidiary T. Corporation P’s marginal tax rate is 21 percent. It engages in one transaction that shifts $10,000 income to
Firm HR is about to implement an aggressive long-term strategy consisting of three phases. It is crucial to the success of the strategy that the IRS accepts Firm HR’s interpretation of the tax
Using an electronic research database such as Checkpoint, CCH IntelliConnect, or LexisNexis, do a keyword search that includes both the phrase capital gain and the keyword livestock. Include both
Find the IRS Revenue Procedure that gives the standard deduction amounts for the 2017 tax year. Prepare a table reporting the standard deduction amounts and their associated filing statuses. Also
Using an electronic research database such as Checkpoint, CCH IntelliConnect, or LexisNexis, do a keyword search on the phrase hobby loss to find secondary authorities discussing the tax treatment of
Using an electronic research database such as Checkpoint, CCH IntelliConnect, or LexisNexis, find the case Mortex Manufacturing Co., Inc., T.C. Memo 1994-110, and answer the following questions. The
Using an electronic research database such as Checkpoint, CCH IntelliConnect, or LexisNexis, find the case Thomas A. Curtis, M.D., Inc., 1994 T.C. Memo ¶94,015, and answer the following questions.
Nello Company owed $23,400 overdue rent to its landlord, Bonview Inc. Because Nello is a desirable tenant, Bonview agreed to settle the overdue account for a $15,000 cash payment from Nello. Both
Bontaine Publications, an accrual basis, calendar year corporation, publishes and sells weekly and monthly magazines to retail bookstores and newsstands. The sales agreement provides that the
Company Y began business in February 2018. By the end of the calendar year, it had billed its clients for $3.5 million of services and had incurred $800,000 of operating expenses. As of December 31,
For each of the following businesses, indicate the choice of taxable year corresponding to the end of each business's natural business cycle. Your choices should match one of the following
CheapTrade, an accrual basis, calendar year corporation, operates a discount securities brokerage business. CheapTrade accepts orders to buy or sell marketable securities for its customers and
Corporation VB was formed in 2018. Immediately prior to year-end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before the end of 2018, or wait until 2019.
Assuming a 21 percent marginal tax rate, compute the after-tax cost of the following business expenses:a. $5,600 premium on business property and casualty insurance.b. $1,200 fine paid for business
Moleri, an accrual basis corporation with a fiscal taxable year ending on July 31, owns real estate on which it pays annual property tax to Madison County, Texas. The county assesses the tax for the
Northwest Company has average gross receipts of $50 million annually. This year, Northwest incurred $10.5 million of net business interest and has adjusted taxable income of $29 million. Compute

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