12. The tax system

Provisions of the U.S. Tax Code for Corporations and Individuals

From a corporations point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing?

Debt financing

Equity financing

To offset taxable income in a given year, ordinary corporate operating losses can be:

Carried back for 2 years and carried forward for 20 years

Carried back for 5 years and carried forward for 10 years

Cute Camel Woodcraft Company owns 201,000 shares in the Lazy Zebra Furniture. If Lazy Zebra has 300,000 shares of common stock outstanding, can Cute Camel file a single income tax return that reports the incomes and expenses of both companies?

No, because Cute Camel Woodcraft Companys ownership stake in Lazy Zebra is less than or equal to 40%, whereas 50% or more is required by the U.S. Tax Code.

No, because Cute Camel Woodcraft Companys ownership stake in Lazy Zebra is less than or equal to 79%, whereas 80% or more is required by the U.S. Tax Code.

Yes, because Cute Camel Woodcraft Companys ownership stake in Lazy Zebra is greater than or equal to 80%, as required by the U.S. Tax Code.

Assume that the tax rate on corporate taxable income up to $50,000 is 15%, and 25% for income levels between $50,001 and $75,000. If the Clumsy Chihuahua Music Company has a taxable income of $57,000, then it has a tax liability of and an average tax rate of .

Suppose you want to invest $10,000. You have two options:

	Option #1: Invest in municipal bonds with an expected return of 10.00%, or
	Option #2: Invest in the corporate bonds of Jefferson & Alexander Inc. which are offering an expected return of 13.50%

Assume that your decision is based solely on your tax situation. If everything else is the same for both bonds, at what tax rate would you be indifferent between these two bond investments?

24.11%

33.19%

25.93%

28.52%

For your personal portfolio, you purchased 1,000 shares of a foreign manufacturing company for $45.00 per share and sold it for $60.00 per share after 18 months. How will your gain or loss be treated when you file your taxes?

As a capital gain that will be taxed at the current ordinary income tax rate

As a capital gain that will be taxed at the capital gains tax rate