Corporations Concluded

For federal tax purposes, royalty income that is not derived in the ordinary course of a business is classified as: (Points : 5) portfolio income. answer active income. passive income. None of the above 2. (TCO F) When comparing corporate and individual taxation, the following statement is true: (Points : 5) Unlike individual taxpayer, corporate may not have a long-term capital loss carryforward. Both types of taxpayers have percentage limitations on the charitable contribution deduction, coupled with a carryover of the excess contribution. All taxpayers may carry net operating losses back two years, forward 20 years.

All of the above. answer 3. (TCO H) Al and Amy file a joint return for the 2012 tax year. Their adjusted gross income is $80,000. They had net investment income of $7,000. In 2012, they had the following interest expenses: Personal credit card interest: $4,000 Home mortgage interest: $8,000 Investment interest (on loans used to buy stocks): $10,000 What is the interest deduction for Al and Amy for the 2012 tax year? (Points : 5) $8,000 $15,000. answer $12,000 $18,000 4. (TCO B) A contribution made to the following donee is not deductible. (Points : 5) Boy Scouts of America Oxford University, England. answer

Society for the Prevention of Cruelty to Animals Michigan State University California State Fair (an activity of the State of California)

(TCO A) The following taxes were paid by Tim: Real estate taxes on his home: $2,000 State income taxes: $900 State gasoline tax (personal use of automobile): $150 In itemizing his deductions, what is the amount that Tim may claim as a deduction for taxes? (Points : 5) $2,000 $2,900. answer $3,050 $0

(TCO F) Hoover, Inc. had gross receipts from operations of $230,000, operating and other expenses of $310,000, and dividends received from a 45 percent-owned domestic corporation of $120,000.

Hoover’s tax position for the year is: (Points : 5) $8,000 taxable income. $56,000 net operating loss. answer $40,000 taxable income. $80,000 net operating loss.

(TCO G) All of the outstanding stock of a closely held C corporation is owned equally by David Smith and Steve Bufusno. In 2012, the corporation generates taxable income of $30,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much income does the C corporation report for 2012?

(Points : 5) $10,000 of portfolio income $0 $20,000 of portfolio income. answer None of the above

(TCO G) Bob, who is single, has $90,000 of salary, $25,000 of income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $90,000. Of the $30,000 loss, how much is deductible? (Points : 5) $30,000. answer $10,000 $25,000 $0

(TCO F) Jen owns a sole proprietorship, and Steve is the sole shareholder of a C (regular) corporation.

Each business sustained a $14,000 operating loss and a $3,000 capital loss for the year. Evaluate how these losses will affect the taxable income of the two owners? (Points : 17) A sole proprietorship is taxed through the business owner’s personal tax return. Therefore Jen would enter the $14,000 operating loss from the proprietorship on Schedule C of Form 1040 or one of its variants. This reported loss would offset any income Jen reported from any other source on her personal income tax filed. As a noncorporate taxpayer Jen can also deduct the $3000 capital loss for the year.

As the sole shareholder of a C corp Steve will see no effect on his taxable income as the shareholder. Income from a C corporation is reported when the shareholder receive dividends. C corporation losses are not reported by the shareholders.

(TCO G) Briefly (1) define and (2) discuss the purpose and impact of each of the following: a. at-risk rules b. suspended passive activity losses c. material participation (Points : 18) a. at-risk rules Definition: Losses from a business operation are limited to the amount of money you can actually lose in the business.

You are subject to at-risk rules if you are filing Schedules C, E, or F. Tax laws limiting the amount of losses an investor (usually a limited partner) can claim. Only the amount actually at risk can be deducted.

Suspended passive activity losses Definition: A capital loss that cannot be realized in a given tax year due to passive activity limitations. These losses are therefore “suspended” until they can be netted against passive income in a future tax year. Suspended losses are incurred as a result of passive activities, and can only be carried forward.

Suspended losses that are incurred as a result of the disposition of a passive interest are subject to an annual capital loss limit. Suspended losses can, however, be used to offset income realized in a later year that is generated from material participation in the activity that initially produced the loss. For example, if a taxpayer incurs a $5,000 suspended loss in one year from a passive activity and then materially participates in the activity the following year and earns $10,000, then the suspended loss may be applied against $5,000 of the earned income, leaving the taxpayer with $5,000 of declarable income for the year.

Material participation. Definition: A set of criteria that determines whether a taxpayer is a material participant in a business venture. The material participation test will determine whether business income received by the taxpayer is active or passive. Material participation is determined each year. The IRS has seven tests to determine material participation: The taxpayer works 500 hours or more during the year in the activity. The taxpayer does substantially all the work in the activity.

The taxpayer works more than 100 hours in the activity during the year and no one else works more than the taxpayer. The activity is a significant participation activity (SPA), and the sum of SPAs in which the taxpayer works 100-500 hours exceeds 500 hours for the year. The taxpayer materially participated in the activity in any 5 of the prior 10 years. The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years.

Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year. However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity. Determination of “material participation” is complicated, and lack of material participation can result in passive loss rules. If you think lack of material participation may be an issue in your business, check with your tax adviser.