x-536 - Business Taxed as Corporations

Here we will cover rules for ordinary domestic corporations. Examples of businesses taxed as corporations are businesses formed under a federal or state law that refers to it as a corporation, body corporate, or body politic, a business formed under a state law that refers to it as a joint-stock company or joint-stock association, an insurance company, certain banks and businesses owned by state or local governments.

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 You will need IRS Publication 542 to complete this topic.

Please answer the following as accurately as possible.

1. A net operating loss (NOL) may be carried forward if a proper election is made. Which of the following statements about the election is NOT correct.

A. Once the election is made, you can use the net operating loss only in the 20-year carry-forward period.
B. To make the election, you attach a statement to your tax return filed by the due date (including extensions) for the net operating loss year.
C. Once the election is made to waive the carry back period for one net operating loss, it remains in effect for all subsequent net operating losses.
D. If you filed your return timely, but did not attach the election statement, you have 6 months from the due date of your original return (excluding extensions) to file the statement with an amended return for the net operating loss year.

2. Stephanie owns and operates a small flower shop that generated a $7,000 loss in 2008. She told some of the land she uses for the business at a $3,000 gain, and some business equipment at a loss of $1,000. She also earned $1,750 from her part-time job as a supermarket cashier. She earned $450 in interest on her personal savings account in 2008. Stephanie files as single and claims the standard deduction. Her exemption and standard deduction amounts for 2008 are $3,500 and $5,450 respectively. Her net operating loss (NOL) for 2008 is:

A. $2,250.
B. $10,600.
C. $2,800.
D. $3,250.

3. Tom Thumb owned a greenhouse that was built on leased land. He used the greenhouse one half for business and one-half for personal uses. In 2008, the greenhouse was totally destroyed by a hurricane. The greenhouse cost $500,000 to build, had a fair market value of $300,000 and accumulated depreciation of $50,000 when it was destroyed. Tom received $250,000 from his insurance company in 2008 to reimburse him for the loss. Tom's adjusted gross income for 2008 is $54,000. What is the amount of Tom's deductible loss on the greenhouse for 2008?

A. $150,000.
B. $44,500.
C. $25,000.
D. $94,500.

4. Which of the following statements pertaining to a net operating loss (NOL) is incorrect?.

A. The carry back period for a farming loss is 5 years.
B. If you choose not to carry back an NOL then you can use the NOL only in the 20-year carry forward period.
C. To waive the carry back of an NOL, a separate statement must be submitted within 6 months of the original NOL year return's due date (including extensions).
D. If you do not use an NOL within the 2-year carry back and 20-year carry forward period, you lose any remaining NOL forever.

5. Which of the following losses generally would not generate a net operating loss:

A. Loss from trade or business.
B. Casualty or theft loss.
C. Loss from rental property.
D. Loss created by sale of personal residence for less that its cost.

6. All of the following statements about foregoing the net operating loss (NOL) carry-back period are correct except:

A. To make the election, you attach a statement to your tax return filed by the due date (including extensions) for the NOL year.
B. A taxpayer has three years to amend a prior year's return to include the election.
C. Once the election is made, the taxpayer cannot later revoke the election.
D. Once the election is made, you can use your NOL only in the 20 year carry-forward period.

7. What is Sam's (a single taxpayer) net operating loss for the current year based on the following information?

A. $4,500.
B. $5,000.
C. $7,500.
D. $14,950.

8. A corporation is a personal service corporation if

A. Its principal activity during the "testing period" is performing personal services.
B. Its employee-owners substantially perform the services in performing personal services.
C. Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period.
D. All of the above.

9. The tentative minimum tax of a small corporation is zero. This means that a small corporation will not owe AMT.

True False

10. If a corporation is required to use the Electronic Federal Tax Payment System (EFTPS) and fails to do so, it may be subject to a 10% penalty.

True False

11. If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. This rule applies both to individuals and to groups who transfer property to a corporation. It also applies whether the corporation is being formed or is already operating. However, it does not apply if

A. The corporation is an investment company.
B. You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors.
C. The stock received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt.
D. All of the above.

12. ABC Corporation's tax year ends on October 31, 2008. When is ABC Corporation's income tax return required to be filed?

A. January 31, 2009.
B. January 15, 2009.
C. March 15, 2009.
D. March 31, 2009.

13. Abbot Corporation's tax year ends on June 30, 2008. If Abbot Corporation (a domestic Corporation) timely files a Form 7004 Extension of Time to File, what is the extended due date of Abbot Corporation's income tax return for tax year ended June 30, 2008?

A. March 15, 2009.
B. March 30, 2009.
C. April 15, 2009.
D. May 15, 2009.

14. A corporation can accumulate its earnings for a possible expansion or other bona fide business reasons. However, if a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax of

A. 20%.
B. 25%.
C. 15%.
D. None of the above.

15. You must treat certain transactions that increase a shareholder's proportionate interest in the earnings and profits or assets of a corporation as if they were distributions of a stock or stock rights.

True False

16. If a corporation cancels a shareholder's debt without repayment by the shareholder, the amount canceled is

A. Not taxable by the shareholder.
B. Treated as a distribution to the shareholder.
C. Forgiven and not treated as a distribution.
D. Treated as a gift.

17. The amount of a distribution is generally the amount of any money paid to the shareholder plus the fair market value (FMV) of any property transferred to the shareholder. However, this amount is reduced (but not below zero) by

A. Any liability of the corporation the shareholder assumes in connection with the distribution.
B. Any liability to which the property is subject immediately before the distribution.
C. Any liability to which the property is subject immediately after the distribution.
D. All of the above.

18. Bob Moon Forms Moon Enterprises LLC (Limited Liability Company) during the year. What form must Moon Enterprises LLC file in order to elect to be taxed as a C corporation?

A. Form 1065 (U.S. Partnership Tax Return).
B. Form 8832 (Entity Classification Election).
C. Form 1120 (U.S. Corporation Income Tax Return).
D. Form 7004 (Application for Extension of time to file for Corporations).

19. ABC Corporation is dissolved on July 9, 2008. What is the due date, without extensions, for filing of the final corporate income tax return?

A. March 15, 2009.
B. December 31, 2008.
C. October 15, 2008.
D. October 9, 2008.

20. The corporation's basis of property contributed to capital by a shareholder is

A. Zero.
B. The same as the basis the shareholder had in the property.
C. Not taxable to the corporation.
D. None of the above.