Questions and Answers of Taxation of Business Entities

How do the requirements for accruing expenses under financial accounting differ from the requirements for accruing deductions under tax accounting?
Explain why Congress sometimes mandates that businesses use specific accounting methods while other times Congress is content to require businesses to use the same accounting methods for tax purposes
Explain when an expenditure should be “capitalized” based upon accounting principles. From time to time, it is suggested that all business expenditures should be deducted when incurred for tax
What is the difference between a full year and a short year? Describe circumstances in which a business may have a short year.
Explain the difference between calculating a loss deduction for a business asset that was partially damaged in an accident and calculating a loss deduction for a business asset that was stolen or
Describe the computation of the limit placed on the business interest deduction. Is the disallowed business interest ever deductible?
Clyde lives and operates a sole proprietorship in Dallas, Texas. This year Clyde found it necessary to travel to Fort Worth (about 25 miles away) for legitimate business reasons. Is Clyde’s trip
Troy operates an editorial service that often entertains prospective authors to encourage them to use Troy’s service. This year Troy paid $3,000 for the cost of meals and$6,200 for the cost of
What kinds of deductions are prohibited as a matter of public policy? Why might Congress deem it important to disallow deductions for expenditures that are against public policy?
Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost of
Apply cash and accrual methods to determine business income and expense deductions.
Describe accounting periods available to businesses.
Determine the limits on deducting business expenses.
Identify common business deductions.
Explain cost recovery of natural resources and the allowable depletion methods.
Calculate the deduction for amortization.
Calculate the deduction allowable under the additional special cost recovery rules (§179, bonus, and listed property).
Determine the applicable cost recovery (depreciation) life, method, and convention for tangible personal and real property and the deduction allowable under basic MACRS.
Describe the cost recovery methods for recovering the cost of personal property, real property, intangible assets, and natural resources.
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Classify the following from 0 to 5 based on the hierarchy of safety programs provided in Table 1-3. Explain why.a. The company and plant executive teams are very receptive to any safety suggestions
Engineering ethics: Write an essay on why you think safety (and process safety) is an important part of any engineering ethics statement.
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Euro Corporation, a U.S. corporation, operates through a branch in Germany. During 2022, the branch reported taxable income of $1,000,000 and paid German income taxes of $300,000. In addition, Euro
Carmen SanDiego, a U.S. citizen, is employed by General Motors Corporation, a U.S. corporation. On April 1, 2022, GM relocated Carmen to its Brazilian operations for the remainder of 2022. Carmen was
Riverbend Semiconductor Corporation (RSC) is an Arizona corporation engaged in the manufacture and sale of semiconductors and other computer equipment. RSC spent $3 million on research and
Banele had a taxable estate of $15.5 million when they died this year. Calculate the amount of estate tax due (if any) under the following alternatives.a) Banele’s prior taxable gifts consist of a
Oisha gave a parcel of realty to Julie valued at $210,000 (Oisha purchased the property five years ago for $88,000). Compute the amount of the taxable gift on the transfer, if any. Suppose several
Harold and Maude were married and lived in a common-law state. Maude died in 2018 with a taxable estate of $25 million and left it all to Harold. Maude’s executor filed a timely estate tax return
Vince and Millie are married. Vince dies this year with a gross estate of $25 million and no adjusted prior gifts. Calculate the amount of estate tax due (if any) under the following alternative
Diego is a single individual who owns a life insurance policy worth $1.5 million that will be worth $8 million upon his death. This year Diego transferred the policy and all incidents of ownership to
Roberta is considering making annual gifts of $16,000 of stock to each of four children. Roberta expects to live another five years and to leave a taxable estate worth approximately $18 million.
Why might a corporation issue a stock distribution to its shareholders?
What are the carryover and carryback periods for a net operating loss? Does a corporation have the option to choose the years to which it carries back a NOL? Explain.
ELS Corporation reported gross receipts for 2019–2021 for Scenarios A, B, and C as follows:a) Is ELS allowed to use the cash method of accounting in 2022 under Scenario A?b) Is ELS allowed to use
Distinguish the tax treatment of a NOL incurred in 2017, a NOL incurred in 2020, and a NOL incurred in 2022.
In 2022 Hill Corporation reported a net operating loss of $10,000 that it carried forward to 2023. In 2022 Hill also reported a net capital loss of $3,000 that it carried forward to 2023. In 2023,
WCC Corp. has a $100,000 net operating loss carryover to 2022 from a previous year. Assume that it reported $75,000 of taxable income in 2022 (before the net operating loss deduction) and $30,000 of
In 2022, SML Corp. reported taxable income of $100,000 before any NOL deductions. SML has a $170,000 NOL carryover that originated in 2017 and a $90,000 NOL carryover that originated in 2020. What is
Cedar Corporation reported a $25,000,000 net operating loss in 2022. It also has a $100,000 NOL carryover from 2017. In 2023, Cedar reported taxable income before any NOL carryovers of $20,000,000.
In 2022, OCC Corp. made a charitable donation of $400,000 to the International Rescue Committee (a qualifying charity). For the year, OCC reported taxable income of $1,500,000 before deducting any
Briefly describe the five-step process by which a company computes its income tax provision.
Which of the following organizations can issue rules that govern accounting for income taxes?a) FASB.b) SEC.c) IRS.d) Both (a) and (b) above.e) All of the above organizations.
Bautista Corporation reported pretax book income of $1,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $50,000, and
Akoto Corporation reported pretax book income of $2,000,000. Tax depreciation exceeded book depreciation by $500,000. During the year, the company capitalized $250,000 into ending inventory under
Choi Company determined that the book basis of its office building exceeded the tax basis by $800,000. This basis difference is properly characterized as:a) A permanent difference.b) A taxable
Kumara Corporation reported pretax book income of $1,000,000. Kumara also reports an increase in the taxable temporary differences of $200,000, an increase in the deductible temporary differences of
Song Inc. reported pretax book income of $10,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000.
Li Corporation reported pretax book income of $600,000. Tax depreciation exceeded book depreciation by $400,000. In addition, the company received $300,000 of tax-exempt municipal bond interest. The
Rimas Corporation reported pretax book income of $1,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $50,000, and favorable
Which of the following would not be considered positive evidence in determining whether Arain Corporation needs to record a valuation allowance for some or all of its deferred tax assets?a) The
Arain Corporation has total deferred tax assets of $3,000,000 at year-end. Management is assessing whether a valuation allowance must be recorded against some or all of the deferred tax assets. What
What was Facebook’s accounting effective tax rate for 2020? What items caused the company’s accounting effective tax rate to differ from the “hypothetical” tax rate of 21 percent? What was
Hafnaoui Company reported pretax net income from continuing operations of $800,000 and taxable income of $500,000. The book–tax difference of $300,000 was due to a $200,000 favorable temporary
Bulldog Corporation reported taxable income of $500,000 this year, before any deduction for any payment to its sole shareholder and employee, Rojas. Bulldog chose to pay a bonus of $100,000 to Rojas
Nail Corporation made a distribution of $500,000 to Rusty in partial liquidation of the company on December 31 of this year. Rusty, an individual, owns 100 percent of Nail Corporation. The
Nareh joined Jim in forming DBJ Corp. Nareh contributed appreciated land for 90 percent of the stock in DBJ. Jim received 10 percent of the DBJ stock valued at $15,000. Determine Jim’s tax
Camila 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,
Newman Corporation owns 90 shares of SP Corporation. The remaining 10 shares are owned by Kenny (an individual). After several years of operations, Newman decided to liquidate SP Corporation by
On January 21, 2020, FB Financial Corporation agreed to acquire Franklin Financial Network, Inc., a Tennessee bank corporation, in a tax-deferred acquisition. The Form 8-K for FB (NYSE ticker FBK,
Jakub and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU Inc., in a tax-deferred triangular merger using an acquisition subsidiary of WU. The
Jakub and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU Inc., in a stock-for-stock Type B acquisition. The sole shareholder of EMU, Edie Eagle,
What is a partnership’s ordinary business income (loss), and how is it calculated?
Is the character of partnership income/gains and expenses/losses determined at the partnership or partner level? Why?
What items will increase a partner’s basis in the partnership interest?
Gamila, James, Helen, and Carlos each owns an equal interest in GJHC Partnership, a calendar-year-end, cash-method entity. On January 1 of the current year, James’s basis in his partnership
What items will decrease a partner’s basis in the partnership interest?
Rania contributed equipment worth $200,000, purchased 10 months ago for $250,000 cash and used in her sole proprietorship, to Sand Creek LLC in exchange for a 15 percent profits and capital interest
Malak has decided to contribute some equipment she previously used in her sole proprietorship in exchange for a 10 percent profits and capital interest in Fast Choppers LLC. Malak originally paid
Kamal contributed $10,000 in cash and a capital asset he had held for three years with a fair market value of $20,000 and tax basis of $10,000 for a 5 percent capital and profits interest in Green
Mustafa’s tax basis in his partnership interest at the beginning of the year was $10,000. If his share of the partnership liabilities increased by $10,000 during the year and his share of
Nareh began the year with a tax basis of $45,000 in her partnership interest. Her share of partnership liabilities consists of $6,000 of recourse liabilities and $10,000 of nonrecourse liabilities at
Markell’s basis in the Markit Partnership is $58,000. In a proportionate liquidating distribution, Markell receives the following assets:a) How much gain or loss will Markell recognize on the
For an accrual-method partnership, are accounts receivable considered unrealized receivables? Explain.
Joaquin is a 30 percent partner in the SBD Partnership, a calendar-year-end entity. As of the end of this year, Joaquin has an outside basis in his interest in SBD of $188,000, which includes his
Amina is a 30 percent partner in the AOM Partnership when she sells her entire interest to Hope for $72,000 cash. At the time of the sale, Amina’s basis in AOM is $44,000 (which includes her $6,000
Rania has a $68,000 basis in her 50 percent partnership interest in the KD Partnership before receiving a current distribution of $6,000 cash and land with a fair market value of $35,000 and a basis
Mikaere’s basis in the Jimsoo Partnership is $53,000. In a proportionate liquidating distribution, Mikaere receives cash of $7,000 and two capital assets: (1) Land A with a fair market value of
Rivendell Corporation uses the accrual method of accounting and has the following assets as of the end of 2021. Rivendell converted to an S corporation on January 1, 2022.a) What is Rivendell’s net
Maria 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
Timo is the sole owner of Jazz Inc., an S corporation. On October 31, 2022, Timo executed an unsecured demand promissory note of $15,000 and transferred the note to Jazz (Jazz could require Timo to
Tempe Corporation is a calendar-year corporation. At the beginning of 2022, its election to be taxed as an S corporation became effective. Tempe Corp.’s balance sheet at the end of 2021 reflected
Chandra was the sole shareholder of Pet Emporium, which was originally formed as an S corporation. When Pet Emporium terminated its S election on August 31, 2021, Chandra had a stock basis and an
Wood Corporation was a C corporation in 2021 but elected to be taxed as an S corporation in 2022. At the end of 2021, its earnings and profits were $15,500. The following table reports Wood Corp.’s
Dejan owns stock in two S corporations, Blue and Green. He actively participates in the management of Blue but maintains ownership in Green only as a passive investor. Dejan has no other business
On January 1, 2022, Janna has a tax basis of $15,000 in her Mimikaki stock (Mimikaki has been an S corporation since inception). In 2022, Janna was allocated $20,000 of ordinary income from Mimikaki.
Miley decided to terminate the S corporation election of her solely owned corporation on October 17, 2021 (effective immediately), in preparation for taking it public. Miley had previously elected S
Inuk is the sole shareholder of Tex Corporation. Inuk first formed Tex as a C corporation. However, in an attempt to avoid having Tex’s income double-taxed, Inuk elected S corporation status for
Rocco operates a beauty salon as a sole proprietorship. Rocco also owns and rents an apartment building. In 2022, Rocco had the following income and expenses. Determine Rocco’s AGI and complete
During 2022, your clients, Mr. and Mrs. Howell, owned the following investment assets:Because of the downturn in the stock market, Mr. and Mrs. Howell decided to sell most of their stocks and the
AMP Corporation (calendar-year-end) has 2022 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2022, AMP acquired the following assets:a) What is the maximum amount of
Assume that TDW Corporation (calendar-year-end) has 2022 taxable income of $650,000 for purposes of computing the §179 expense. The company acquired the following assets during 2022:a) What is the
George recently received a great stock tip from his friend, Mason. George didn’t have any cash on hand to invest, so he decided to take out a $20,000 loan to facilitate the stock acquisition. The
Assume that Timberline Corporation has 2022 taxable income of $240,000 for purposes of computing the §179 expense. It acquired the following assets in 2022:a) What is the maximum amount of §179
Assume that ACW Corporation has 2022 taxable income of $1,500,000 for purposes of computing the §179 expense. The company acquired the following assets during 2022 (assume no bonus depreciation):a)
Chaz Corporation has taxable income in 2022 of $312,000 for purposes of computing the §179 expense and acquired the following assets during the year:What is the maximum total depreciation deduction
Woolard Supplies (a sole proprietorship) has taxable income in 2022 of $240,000 before any depreciation deductions (§179, bonus, or MACRS) and placed some office furniture into service during the
Assume that Sivart Corporation has 2022 taxable income of $1,750,000 for purposes of computing the §179 expense and acquired several assets during the year. Assume the delivery truck does not

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