Corp. Sol., 2008 Chap.3

Corp. Sol., 2008 Chap.3 - Chapter C:3 The Corporate Income...

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Chapter C:3 The Corporate Income Tax Discussion Questions C:3-1 Unless High Corporation is an S corporation or a personal service corporation, High can select a tax year ending on the last day of any month (i.e., a fiscal year or a calendar year). pp. C:3-2 through C:3-4. C:3-2 Yes. Port Corporation may change its annual accounting period without prior approval of the IRS if it satisfies the requirements of Rev. Proc. 2006-46, 2006-45 I.R.B. 859, as listed on page C:3-4 of the text. If Port does not satisfy these requirements, it can request approval of a change in accounting period by filing a Form 1128 on or before the fifteenth day of the third month following the close of the short period resulting from the change. p. C:3-4. C:3-3 Stan and Susan need to choose an accounting period. They generally can select either a calendar year or a fiscal year. A fiscal year can permit an income deferral. However, if they elect S corporation status, they generally are required to use a calendar year. Stan and Susan need to select an accounting method. They are required to use the accrual method for sales- related items because inventories are a material income-producing factor but may want to use the cash method for other items (i.e., the hybrid method) as long as they are eligible. Stan and Susan need to select an accounting method for their inventory, i.e., LIFO, FIFO, LCM, etc. They may want to investigate which method is best for their particular type of inventory. Because the price of digital circuits has declined in recent years, the LIFO method does not appear to be a logical choice. Stan and Susan need to determine whether they will make an election to deduct up to $5,000 each and amortize the balance of organizational expenditures and/or start-up expenditures. An election is advisable because the election cannot be made retroactively if, upon audit, the IRS reclassifies deducted expenses as organizational expenditures. Stan and Susan need to decide what method they will use to write off their research and development expenses, i.e., expense in year incurred or defer and amortize over 60 months or more. Stan and Susan need to determine whether they want to make an S election to pass through start-up losses. Stan and Susan need to determine whether they want to capitalize the corporation with debt as well as equity, and, if so, how much debt and how much equity they will use. pp. C:3-2 through C:3-5. C:3-4 Corporations and individuals compute capital gains and losses the same way. However, corporations cannot deduct capital losses from ordinary income. A corporation can carry a capital loss back three years and forward five years to offset capital gains. Individuals only can carry such losses forward, although the carryforward period is indefinite. Corporations also do not have a preferential tax rate for net capital gains that is lower than the top ordinary income rate as individuals do. pp. C:3-6 and C:3-7. C:3-5
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Corp. Sol., 2008 Chap.3 - Chapter C:3 The Corporate Income...

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