chapter_2_solutions - 2-1Chapter 2 Solutions Corporations:...

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Unformatted text preview: 2-1Chapter 2 Solutions Corporations: Introduction and Operating Rules (2012) updated: August 8, 2011 34. a. Otter, a partnership, is not a taxpaying entity. Its profit (loss) and separate items flow through to the partners. The partnerships Form 1065 reports net profit of $110,000 ($320,000 income $210,000 expenses). The partnership also reports the $15,000 short-term capital loss as a separately stated item on Form 1065. Ellie and Linda each receive a Schedule K-1 reflecting net profit of $55,000 and separately stated short-term capital loss of $7,500, which each reports on her own return (subject to capital loss limitation). The withdrawals do not affect taxable income but decrease their basis in the partnership. Example 2 b. Otter, an S corporation, is not a taxpaying entity. Its profit (loss) and separate items flow through to the shareholders. The S corporations Form 1120S reports net profit of $110,000 ($320,000 income $210,000 expenses). The S corporation also shows the $15,000 short-term capital loss as a separately stated item on Form 1120S. Ellie and Linda each receive a Schedule K-1 reporting net profit of $55,000 and separately stated short-term capital loss of $7,500, which each reports on her own return (subject to capital loss limitation). The withdrawals do not affect taxable income but decrease their basis in the S corporation. p. 2-3 c. Otter, a C corporation, is a taxpaying entity. Otters Form 1120 reports taxable income of $110,000 ($320,000 income $210,000 expenses). The short-term capital loss is not deductible in the current year. Instead, the $15,000 net capital loss is carried back 3 years and forward 5 years. Ellie and Linda report dividend income of $25,000 each. The dividend income is subject to a maximum tax rate of 15%. pp. 2-3, 2-4, 2-12, and Example 3 35. a. Azure Company, as a C corporation, has taxable income of $550,000 ($500,000 net operating income + $50,000 LTCG), and corporate income tax of $187,000 [$550,000 34% (see Exhibit 2.1)]. C corporations do not receive a preferential tax rate with respect to LTCGs. Since Sasha received no dividends or salary from Azure during the year, she is not currently taxed on any the corporations income. b. Since dividend distributions are not deductible, the income tax consequences to Azure Company, a C corporation, are the same as in a. above (i.e., corporate income tax of $187,000). Sasha incurs income tax of $15,000 ($100,000 15%) with respect to the dividends she received during the year. c. The salary paid to Sasha is deducible by Azure Company, resulting in taxable income of $450,000 ($400,000 net operating income + $50,000 LTCG), and corporate income tax of $153,000 [$450,000 34% (see Exhibit 2.1)]. Sasha incurs income tax of $35,000 ($100,000 35%) with respect to the salary she received during the year....
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This note was uploaded on 09/09/2011 for the course TAX 5015 taught by Professor Kelliher,c during the Spring '08 term at University of Central Florida.

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chapter_2_solutions - 2-1Chapter 2 Solutions Corporations:...

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