x-560 Ordinary Domestic 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. Gary is a calendar-year eligible small employer and wishes to take advantage of the Credit for Small Employer Pension Plan Startup Costs. He incurred $2,000 in qualified startup cost in 2008 for an eligible plan that will become effective on January 1, 2009. What is Gary's Pension Startup Costs credit amount for calendar year 2008?

A. $500.
B. $0 (he gets the credit in 2009).
C. Either A or B above.
D. $1,000.

2. In 2008, Colleen started a SIMPLE plan for all five of her employees and herself. It cost her $400 in fees to administer the plan. She never had a pension plan prior to starting this plan. Her tax credit is:

A. $200.
B. $400.
C. $0.
D. $100.

3. Robert transferred an office building that has an adjusted basis of $60,000 and a fair market value of $105,000 to the Wargo Corporation in exchange for 100% of Wargo Corporation stock and $10,000 cash. The building was subject to a mortgage of $25,000, which Wargo Corporation assumed. The fair market value of the stock was $75,000. Which is the amount of Robert's realized gain and recognized gain?

A. Realized $55,000    Recognized $30,000.
B. Realized $50,000    Recognized $30,000.
C. Realized $50,000    Recognized $10,000.
D. Realized $35,000    Recognized $10,000.

4. Bob and Sam transfer a building with a basis of $100,000 to the Redwood Corporation in exchange for 75% of each class of stock with a fair market value of $300,000. The other 25% of the stock was already issued to Betty. What is the gain, if any, that Bob, Sam, or the Redwood Corporation must recognize?

A. Bob and Sam, none; Redwood Corporation none.
B. Bob and Sam, none; Redwood Corporation $300,000.
C. Bob and Sam, $200,000; Redwood Corporation none.
D. Bob and Sam, none; Redwood Corporation $200,000.

5. Regarding "other" business expenses, all of the following statements are correct EXCEPT:

A. You may deduct your own education expenses, including certain travel that is related to your trade or business.
B. Penalties you pay for late performance or nonperformance of a contract are generally deductible.
C. Legal fees paid to acquire a new office building must be added to the basis of the building and recovered through depreciation.
D. The cost of a license granted by a governmental unit or agency including issuances and renewals is a deductible business expense.

6. In determining whether an activity is engaged in for profit, the relevant facts and circumstances are taken into account. All of the following may indicate you are carrying on the activity for profit EXCEPT:

A. You carry on the activity in a businesslike manner.
B. You depend on income from the activity for your livelihood.
C. You can expect to make a future profit from the appreciation of assets used in the activity.
D. Despite your lack of profitability, you continue to use the same methods of operation to prove that you are serious and the activity is not just a hobby.

7. In 2007, Katie Good, a sole proprietor of Good's Bike Shop, had gross income of $235,000, a bad debt deduction of $7,000 and other expenses of $65,850. She reported the business on the accrual method of accounting and used the specific charge-off method for bad debts. In 2008, she recovered $5,000 of the $7,000 bad debt deducted in 2007. How much will she claim in income and in what year?

A. $7,000 in 2008.
B. Amend 2007 to eliminate bad debt deduction of $7,000.
C. $5,000 in 2008.
D. Amend 2007 to reduce bad debt deduction by $5,000.

8. On June 30, 2008, Cindy, who uses the cash method of accounting, borrowed $30,000 from a bank to use in her business. Cindy was to repay the loan in one payment with $2,000 interest due on December 30, 2008. On December 30, 2008. The new loan was for $32,000 (the original unpaid loan and unpaid interest). How much can Cindy deduct as interest expense for 2008?

A. $2,000.
B. $1,000.
C. $0.
D. $500.

9. During 2008, Mr. Smith had the following expenditures relating to commercial real estate that she owns:

What is the amount Ms. Smith may deduct as real estate taxes on her commercial real estate for 2008?

A. $2,955.
B. $4,455.
C. $3,765.
D. $5,265.

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.