Question: Prance, Inc., earns pretax book net income

> In each of the following independent situations, determine the corporation’s income tax liability. Assume that all corporations use a calendar year for tax purposes and that the tax year involved is 2017.

> Egret Corporation, a calendar year C corporation, was formed on March 6, 2017, and opened for business on July 1, 2017. After its formation but prior to opening for business, Egret incurred the following expenditures: Accounting………………$ 7,000 Advertising

> Gull Corporation, a cash method, calendar year C corporation, was formed and began business on November 1, 2017. Gull incurred the following expenses during its first year of operations (November 1, 2017–December 31, 2017): Expenses of temporary directo

> In each of the following independent situations, determine the dividends received deduction. Assume that none of the corporate shareholders owns 20% or more of the stock in the corporations paying the dividends. Almond Blond Cherry Corporation Corp

> During the current year, Swallow Corporation, a calendar year C corporation, has the following transactions: Income from operations………………………………….$660,000 Expenses from operations………………………………....720,000 Dividends received from Brown Corporation………240,000

> Marcia, a shareholder in a corporation with stores in five states, donated stock with a basis of $10,000 to a qualified charitable organization in 2016. Although the stock of the corporation was not traded on a public stock exchange, many shares had been

> Keshara has the following net § 1231 results for each of the years shown. What would be the nature of the net gains in 2016 and 2017? Tax Year Net 5 1231 Loss Net 5 1231 Gain 2012 $18,000 2013 33,000 2014 42,000 2015 $41,000 2016 30,000 2

> Kevin purchases 1,000 shares of Bluebird Corporation stock on October 3, 2017, for $300,000. On December 12, 2017, Kevin purchases an additional 750 shares of Bluebird stock for $210,000. According to market quotations, Bluebird stock is selling for $285

> White Corporation, a calendar year C corporation, manufactures plumbing fixtures. For the current year, White has taxable income [before the domestic production activities deduction (DPAD)] of $900,000, qualified production activities income (QPAI) of $1

> Dan Simms is the president and sole shareholder of Simms Corporation, 1121 Madison Street, Seattle, WA 98121. Dan plans for the corporation to make a charitable contribution to the University of Washington, a qualified public charity. He will have the co

> In 2017, Gray Corporation, a calendar year C corporation, has a $75,000 charitable contribution carryover from a gift made in 2012. Gray is contemplating a gift of land to a qualified charity in either 2017 or 2018. Gray purchased the land as an investme

> Bernadette Rosen, a longtime client of yours, is an architect and the president of the local Rotary chapter. To keep up to date with the latest developments in her profession, she attends continuing education seminars offered by the architecture school a

> Joseph Thompson is president and sole shareholder of Jay Corporation. In December 2017, Joe asks your advice regarding a charitable contribution he plans to have the corporation make to the University of Maine, a qualified public charity. Joe is consider

> In the current year, Plum, Inc., a closely held C corporation, has $410,000 of net active income, $20,000 of portfolio income, and a $75,000 passive activity loss. What is Plum’s taxable income for the current year under the following circumstances? a. P

> Determine whether the following expenditures by Cuckoo Corporation are organizational expenditures, startup expenditures, or neither. a. Legal expenses incurred for drafting the corporate charter and bylaws. b. Accounting fees incurred in organization. c

> Define the terms temporary difference and permanent difference as they pertain to the financial reporting of income tax expenses. Describe how these two book-tax differences affect the gap between book and taxable income. How are permanent and temporary

> Janice is the sole owner of Catbird Company. In the current year, Catbird had operating income of $100,000, a long-term capital gain of $15,000, and a charitable contribution of $5,000. Janice withdrew $70,000 of profit from Catbird. How should Janice re

> A sculpture that Korliss Kane held for investment was destroyed in a flood. The sculpture was insured, and Korliss had a $60,000 gain from this casualty. He also had a $17,000 loss from an uninsured antique vase that was destroyed by the flood. The vase

> Art, an executive with Azure Corporation, plans to start a part-time business selling products on the internet. He will devote about 15 hours each week to running the business. Art’s salary from Azure places him in the 35% tax bracket. He projects substa

> Karen Samuels (Social Security number 123-45-6789) makes the following purchases and sales of stock: Assuming that Karen is unable to identify the particular lots that are sold with the original purchase, determine the recognized gain or loss on each t

> Barbara owns 40% of the stock of Cassowary Corporation (a C corporation) and 40% of the stock of Emu Corporation (an S corporation). In the current year, each corporation has operating income of $120,000 and tax-exempt interest income of $8,000. Neither

> Ken and Mary Jane Blough, your neighbors, have asked you for advice after receiving correspondence in the mail from the IRS. You learn that the IRS is asking for documentation in support of the itemized deductions the Bloughs claimed on a recent tax retu

> Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity. Prepare a list of questions you would ask in helping them decide which type of entity they

> Marcellus Jackson, the CFO of Mac, Inc., notices that the tax liability reported on Mac’s tax return is less than the tax expense reported on Mac’s financial statements. Provide a letter to Jackson outlining why these two tax expense numbers differ. Mac’

> Jim and Mary Jean are married and have two dependent children under the age of 13. Both parents are gainfully employed and earn salaries as follows: $16,000 (Jim) and $5,200 (Mary Jean). To care for their children while they work, Jim and Mary Jean pay E

> In the current year, Woodpecker, Inc., a C corporation with $8.5 million in assets, reported amortization of $40,000 on its financial statements and deducted amortization of $55,000 on its Federal tax return. Is Woodpecker required to file Schedule M–3?

> Schedule M–1 of Form 1120 is used to reconcile financial accounting net income with taxable income reported on the corporation’s income tax return as follows: Net income per books + Additions ─ Subtractions = Taxable income. Classify the following items

> When are C corporations required to make estimated tax payments? How are these payments calculated?

> Emily spent $135,000 to rehabilitate a building (adjusted basis of $90,000) that originally had been placed in service in 1935. a. Compute Emily’s credit for rehabilitation expenditures. b. How would your answer change if the building were a historic str

> Marmot Corporation pays a dividend of $100,000 in the current year. Otter Corporation, which is in the 25% marginal bracket, owns 15% of Marmot’s stock. Gerald, an individual taxpayer in the 25% marginal bracket, also owns 15% of Marmot’s stock. Compare

> Gold Corporation, a calendar year C corporation, was formed in 2011 and has been profitable until the current year. In 2017, Gold incurs a net operating loss. Identify the issues that Gold Corporation should consider regarding its NOL carryback and carry

> The city of Lawrence recently was hit by a tornado, leaving many families in need of food, clothing, shelter, and other necessities. Betty contributed $500 to a family whose home was completely destroyed by the tornado. Jack contributed $700 to the famil

> The board of directors of Orange Corporation, a calendar year taxpayer, is holding its year-end meeting on December 29, 2017. One topic on the board’s agenda is the approval of a $25,000 gift to a qualified charitable organization. Orange has a $20,000 c

> On December 22, 2017, the directors of Partridge Corporation, an accrual basis calendar year taxpayer, authorized a cash contribution of $10,000 to the American Cancer Association. The payment is made on April 13, 2018. Can Partridge deduct the charitabl

> Osprey Corporation, a closely held corporation, has $100,000 of net active income, $25,000 of portfolio income, and a $120,000 loss from a passive activity. a. How much of the passive activity loss can Osprey deduct in the current year if it is a PSC? b

> Paul and Donna Decker are married taxpayers, ages 44 and 42, respectively, who file a joint return for 2017. The Deckers live at 1121 College Avenue, Carmel, IN 46032. Paul is an assistant manager at Carmel Motor Inn, and Donna is a teacher at Carmel Ele

> A taxpayer sells a warehouse for a recognized gain. Depreciation had been properly claimed on the property, based on the straight-line method over a 39-year recovery period. Will the same amount of depreciation recapture result whether the taxpayer is an

> Paul and Karen Kent are married, and both are employed (Paul earned $44,000 and Karen earned $9,000 this year). Paul and Karen have two dependent children, Samuel and Joy, both under the age of 13. Paul and Karen pay $3,800 ($1,900 for each child) to Sun

> Leon sells his interest in a passive activity for $100,000. Determine the tax effect of the sale based on each of the following independent facts: a. Adjusted basis in this investment is $35,000. Losses from prior years that were not deductible due to th

> Harriet, who is single, is the owner of a sole proprietorship. Two years ago, Harriet developed a process for preserving doughnuts that gives the doughnuts a much longer shelf life. The process is not patented or copyrighted, and only Harriet knows how i

> John (a sole proprietor) and Eagle Corporation (a C corporation) each recognize a long-term capital gain of $10,000 and a short-term capital loss of$18,000 on the sale of capital assets. Neither taxpayer had any other property transactions during the yea

> In the current year, Jeanette, an individual in the 25%marginal tax bracket, recognized a $20,000 long-term capital gain. Also in the current year, Parrot Corporation, a C corporation in the 25% marginal tax bracket, recognized a $20,000 long-term capita

> In the current year, Juanita and Joseph form a two-member LLC and do not file Form 8832 (Entity Classification Election). As a result, the LLC will be treated as a partnership for Federal tax purposes. Assess the validity of this statement.

> Buddy Morgan is a real estate agent for Coastal Estates, a residential real estate development. Because of his outstanding sales performance, Buddy is permitted to buy a lot for $300,000 that normally would sell for $500,000. Buddy is the only real estat

> Joel is the sole shareholder of Manatee Corporation, a C corporation. Because Manatee’s sales have increased significantly over the last several years, Joel has determined that the corporation needs a new distribution warehouse. Joel has asked your advic

> Using the facts of Problem 28, determine the 2016 end-of-year balance in Prance’s deferred tax asset and deferred tax liability balance sheet accounts. Facts of Problem 28 Prance, Inc., earns pretax book net income of $800,000 in 2016. Prance acquires a

> Hummingbird Corporation, a closely held C corporation that is not a PSC, has $40,000 of net active income, $15,000 of portfolio income, and a $45,000 loss from a passive activity. Compute Hummingbird’s taxable income for the year.

> Aqua Corporation purchases nonresidential real property on May 9, 2014, for $1 million. Straight-line cost recovery is taken in the amount of $89,765 before the property is sold on November 30, 2017, for $1.5 million. a. Compute the amount of Aqua’s reco

> Goose Corporation, a C corporation, incurs a net capital loss of $12,000 for 2017. It also has ordinary income of $10,000 in 2017. Goose had net capital gains of $2,500 in 2013 and $5,000 in 2016. a. Determine the amount, if any, of the net capital loss

> Asok’s AGI for 2017 is $133,050. Included in this AGI is a $45,000 25% long-term capital gain and a $13,000 0%/15%/20% long-term capital gain. Asok is single, uses the standard deduction, and has only his personal exemption. Compute his taxable income, t

> Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112, respectively. Alice’s birthday is September 21, 1969, and Bruce’s is June 27, 196

> Durell and Earline are married, file a joint return, and claim dependency exemptions for their two children, ages 5 years and 6 months. They also claim Earline’s 18-year-old son from a previous marriage as a dependent. Durell and Earline’s combined AGI i

> Compute the income tax liability for each of the following unrelated C corporations. a. Darter Corporation has taxable income of $68,000. b. Owl Corporation has taxable income of $10,800,000. c. Toucan Corporation, a personal service corporation, has tax

> Cherry Corporation, a calendar year C corporation, is formed and begins business on April 1, 2017. In connection with its formation, Cherry incurs organizational expenditures of $54,000. Determine Cherry Corporation’s deduction for organizational expendi

> Yancy’s personal residence is condemned as part of an urban renewal project. His adjusted basis for the residence is $480,000. He receives condemnation proceeds of $460,000 and invests the proceeds in stocks and bonds. a. Calculate Yancy’s realized and r

> Crane and Loon Corporations, two unrelated C corporations, have the following transactions for the current year: a. Compute the dividends received deduction for Crane Corporation. b. Compute the dividends received deduction for Loon Corporation. Cr

> Compute the charitable contribution deduction (ignoring the percentage limitation) for each of the following C corporations. a. Amber Corporation donated inventory of clothing (basis of $24,000, fair market value of $30,000) to a qualified charitable org

> Your client supplies water to a housing development. The company requires new customers to pay for the extension of the water lines to their homes. The water lines are the company’s property. The company has consistently treated the amounts received from

> Your client is not permitted to deduct a year-end accrual for vacation pay earned but not paid. This result occurs because the tax law considers this to be deferred compensation that is ineligible for the recurring item exception, unless it is paid by Ma

> Why did the AICPA object to former Congressman Dave Camp’s tax reform proposal introduced in February 2014 (later officially introduced as H.R. 1 of the 113rd Congress) regarding the use of the cash method of accounting?

> Hakim’s rental building was not insured when it was destroyed by a hurricane. His adjusted basis for the building was substantial, but was less than he had paid for the building in 2013. The building was Hakim’s only asset that was damaged by the hurrica

> In 2017, your client, Clear Corporation, changed from the cash to the accrual method of accounting for its radio station. The company had a positive § 481 adjustment of $2.4 million as a result of the change and began amortizing the adjustment in 2017. I

> Your client is a manufacturer. For several years, the company buried empty paint cans on its property. The paint was used in the production process. Recently, a state environmental agency informed the company that it was required to dig up the paint cans

> Zorn conducted his professional practice through Zorn, Inc. The corporation uses a fiscal year ending September 30 even though the business purpose test for a fiscal year cannot be satisfied. For the year ending September 30, 2017, the corporation paid Z

> Ann and Bill were on the list of a local adoption agency for several years seeking to adopt a child. Finally, in 2016, good news comes their way and an adoption seems imminent. They pay qualified adoption expenses of $5,000 in 2016 and $11,000 in 2017. T

> Reba, who is single, does a lot of business entertaining at home. Lawrence, Reba’s 84-year-old dependent grandfather, lived with Reba until this year, when he moved to Lakeside Nursing Home because he needs medical and nursing care. During the year, Reba

> Which of the following results in a recognized gain or loss? a. Kay sells her vacation cabin (adjusted basis of $100,000) for $150,000. b. Adam sells his personal residence (adjusted basis of $150,000) for $100,000. c. Carl’s personal residence (adjusted

> How do the all events and economic performance requirements apply to the following transactions by an accrual basis taxpayer? a. The company guarantees its products for six months. At the end of 2017, customers had made valid claims for $600,000 that wer

> What accounting method (cash or accrual) would you recommend for the following businesses? a. A gift shop with average annual gross receipts of $900,000. b. An accounting partnership with annual gross receipts of $12 million. c. A drywall subcontractor w

> Compute Mary’s income or deductions for 2017 using (1) the cash basis and (2) the accrual basis for each of the following: a. In May 2017, Mary paid a license fee of $1,200 for the period June 1, 2017, through May 31, 2018. b. In December 2017, Mary coll

> Gold, Inc., is an accrual basis taxpayer. In 2017, an employee accidentally spilled hazardous chemicals on leased property. The chemicals destroyed trees on neighboring property, resulting in $30,000 of damages. In 2017, the owner of the property sued Go

> Ivanna, who has three children under age 13, worked full-time while her husband, Sergio, was attending college for nine months during the year. Ivanna earned $28,000 and incurred $9,100 of child care expenses. Determine the amount of Ivanna and Sergio’s

> Mauve Corporation began operations as a farm supplies business and used a fiscal year ending October 31. The company gradually went out of the farm supplies business and into the mail-order Christmas gifts business. The company has received permission fr

> Red, White, and Blue are unrelated corporations engaged in real estate development. The three corporations formed a joint venture (treated as a partnership) to develop a tract of land. Assuming that the venture does not have a natural business year, what

> Swallow Company is a large real estate construction company that has made a Subchapter S election. The company reports its income using the percentage of completion method. In 2018, the company completed a contract at a total cost of $4.8 million. The co

> Ostrich Company makes gasoline storage tanks. Everything produced is under contract (that is, the company does not produce until it gets a contract for a product). Ostrich makes three basic models. However, the tanks must be adapted to each individual cu

> On March 31, 2015, Big Boats Company entered into a contract with Vacations Unlimited to produce a state-of-the-art cruise ship, to be completed within three years. Big Boats estimated the total cost of building the ship at $300 million. The contract pri

> Same as Problem 32, except that Jimenez paid $2 million in income taxes to other countries. Data from Problem 32 Jimenez Enterprises is incorporated in Arkansas. It generated a $5 million profit on its overseas operations this year. Jimenez paid $1 mill

> Chee purchases Tan, Inc. bonds for $108,000 on January 2, 2017. The face value of the bonds is $100,000; the maturity date is December 31, 2021; and the annual interest rate is 5%. Chee will amortize the premium only if he is required to do so. Chee sell

> Joe was in an accident and required cosmetic surgery for injuries to his nose. He also had the doctor do additional surgery to reshape his chin, which had not been injured. Will the cosmetic surgery to Joe’s nose qualify as a medical expense? Will the co

> Rust Company is a real estate construction company with average annual gross receipts of $4 million. Rust uses the completed contract method, and the contracts require 18 months to complete. a. Which of the following costs would be allocated to construct

> For calendar year 2017, Stuart and Pamela Gibson file a joint return reflecting AGI of $350,000. Their itemized deductions Casualty loss after $100 floor (not covered by insurance)…………..$48,600 Home mortgage interest…………………………………………………………….19,000 Credit

> Charlie sells his antique farm tractor collection at a loss. He had acquired all of the tractors for his personal pleasure and sold all of them for less than he paid for them. What is the tax status of the tractors? Is his gain a 28% loss? Explain.

> The Wren Construction Company reports its income by the completed contract method. At the end of 2017, the company completed a contract to construct a building at a total cost of $800,000. The contract price was $1.2 million, and the customer paid Wren $

> George sold land to an unrelated party in 2016. His basis in the land was $45,000, and the selling price was $120,000—$30,000 payable at closing and $30,000 (plus 10% interest) due January 1, 2017, 2018, and 2019. What would be the tax consequences of th

> On December 30, 2016, Maud sold land to her son, Charles, for $50,000 cash and a 7% installment note for $350,000, payable over 10 years. Maud’s cost of the land was $150,000. In October 2018, after Charles had paid $60,000 on the principal of the note,

> On June 30, 2017, Kelly sold property for $240,000 cash and a $960,000 note due on September 30, 2018. The note will also pay 6% interest, which is slightly higher than the Federal rate. Kelly’s cost of the property was $400,000. She is concerned that Co

> Kay, who is not a dealer, sold an apartment house to Polly during the current year (2017). The closing statement for the sale is as follows: During 2017, Kay collected $9,000 in principal on the installment note and $2,000 of interest. Kayâ€

> Floyd, a cash basis taxpayer, has received an offer to purchase his land. The cash basis buyer will pay him either $100,000 at closing or $50,000 at closing and $56,000 two years after the date of closing. If Floyd recognizes the entire gain in the curre

> Ross Company is a corporation providing medical diagnostic services. Ross has used the cash method since inception because its gross receipts did not exceed $5,000,000. This year its average annual gross receipts for the prior three years crossed the $5,

> Would a tax year ending December 31 be appropriate for a ski lodge? Why or why not?

> Pam owns a personal use boat that has a fair market value of $35,000 and an adjusted basis of $45,000. Pam’s AGI is $100,000. Calculate the realized and recognized gain or loss if: a. Pam sells the boat for $35,000. b. Pam exchanges the boat for another

> Jimenez Enterprises is incorporated in Arkansas. It generated a $5 million profit on its overseas operations this year. Jimenez paid $1 million in income taxes to various countries on these profits. Jimenez’s marginal Federal income tax rate is 35%. Comp

> Is a note receivable that arose in the ordinary course of the taxpayer’s retail business a capital asset? Why or why not?

> The Hawk Corporation builds yachts. The vessels it currently produces are practically identical and are completed in approximately 8 months. A customer has approached Hawk about constructing a larger yacht that would take approximately 15 months to compl

> In December 2017, Carl Corporation sold land it held as an investment. The corporation received $50,000 in 2017 and a note payable (with adequate interest) for $150,000 to be paid in 2019. Carl Corporation’s cost of the land was $80,000. The corporation

> Linda, who files as a single taxpayer, had AGI of $280,000 for 2017. She incurred the following expenses and losses during the year: Medical expenses (before the 10%-of-AGI limitation)……………………………..$33,000 State and local income taxes……………………………………………………

> Samantha, an accrual basis taxpayer, subscribes to a service that updates a database used in her business. In December 2017, Samantha paid the $120,000 subscription for the period January 2017 through December 2018. What is Samantha’s deduction for 2017?

> Edgar uses the cash method to report the income from his software consulting business. A large publicly held corporation has offered to invest in Edgar’s business as a limited partner. What tax accounting complications would be created if Edgar and the c

> In 2016, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled $80,000, and the inventory on hand totaled $320,000. What is the am