Question: (TCO 2) Luann is the owner of Pet Grooming Service (a C corporation).
During the year, the
company had gross income of $150,000 and operating expenses of $97,500, including Luann’s salary of
In July, Pet sold a capital asset that had been held by the business for two years for a $7,500 loss.
During the year, Pet paid Luann a dividend of $10,000.
What is Pet’s taxable income for the year?
None of the above.
Instructor Explanation: Pet reports the income and expenses of the business on Form 1120, resulting in net
profit (ordinary income) of $52,500 ($150,000 – $97,500).
Pet also reports a $7,500 LTCL on Schedule D
of its Form 1120, but is not allowed to deduct any of the capital loss this year.
The LTCL may be carried
back three years or forward five years to be offset against capital gains.
The corporation cannot deduct the
dividend paid to Luann.
Points Received: 2 of 2
Question: (TCO 2) Penguin Corporation, a C corporation, has two equal shareholders, Bob and Leo.
Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to
Before considering the dividend, Bob is in the 10% marginal tax bracket and Leo is in
the 28% marginal tax bracket.
Which of the following statements is incorrect?
$100,000 will be subject to double taxation.
Penguin could have avoided paying corporate tax if, instead of paying a dividend, it had paid Bob
and Leo a salary of $50,000 each (assuming a $50,000 salary for each is reasonable).
A preferential tax rate will apply to the dividend income of both Bob and Leo.
If Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less Federal income
tax on his salary than Leo would have paid on his salary.
None of the above.
Instructor Explanation: To the extent Bob's dividend income would otherwise be taxed at 105 and 15%,
the preferential rate on his dividend is 0%.
thus, bob will not pay tax on some of his dividend income and
to that extent not all $100,000 is subject to double taxation.
REF: p. 2-4 / p. 2-5
Points Received: 0 of 2
Question: (TCO 2) Tulip Corporation had $750,000 operating income and $510,000 operating expenses
during the year.
Tulip, which owns 25% of Daisy, Inc.’s stock, received a $75,000 dividend from Daisy.
Tulip also had a $45,000 long-term capital gain and a $15,000 short-term capital loss.
taxable income for the year.