Thank you for consulting my firm on this important decision We are pleased to

Thank you for consulting my firm on this important

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Thank you for consulting my firm on this important decision. We are pleased to provide analyses that will help you make the right choice. Sincerely, Jon Thomas, CPA 40. a. The salary for the deferral period (October 1 through December 31) must be at least proportionate to the employee’s salary received for the prior fiscal year. The amount that
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Carmine Corporation must pay Juan during the period October 1 through December 31, 2014, to permit Carmine to continue to use its fiscal year without negative tax effects, is $84,000 ($336,000 × 3/12). b. Carmine Corporation, a PSC, is subject to a tax rate of 35% on all of its taxable income. The corporation would pay tax of $33,250 ($95,000 × 35%) for the tax year ending September 30, 2014. To illustrate the negative tax impact of classification as a PSC, compare this amount with to the $20,550 (see Exhibit 2.1) that a corporation that is not a PSC would pay on taxable income of $95,000. 41. a. Under the cash method of accounting, the salaries are deducible in the year they are paid by Broadbill. Thus, Broadbill deducts $440,000 ($220,000 × 2), the amount of salaries paid by the corporation in 2014. The $40,000 of salaries paid by Broadbill in 2015 is deductible by the corporation in 2015. b. An accrual method corporation cannot claim a deduction for an accrual with respect to a related party (e.g., more-than-50% shareholder). Instead, the deduction is deferred until such time the recipient reports that amount as income. Thus, Broadbill deducts $460,000 [$220,000 (salary paid in 2014 to related party Marcia) + $240,000 (salary paid and accrued to unrelated party Zack)]. The $20,000 of Marcia’s 2014 salary that is accrued by Broadbill on December 31, 2014, is deductible by the corporation in 2015 (the year it is paid to Marcia). 42. a. Under the check-the-box Regulations, a single-member LLC is treated as a sole proprietorship unless corporate status is elected by filing a proper Form 8332 (Entity Classification Election). If Lemon Company is a proprietorship, then $10,500 ($70,000 × 15%) of individual income tax results in the current year for Jonathan. The income (or loss) of a proprietorship is reported on the proprietor’s individual return (Form 1040). Individuals in the 33% marginal tax bracket receive a preferential tax rate of 15% on LTCGs. b. If Lemon is a C corporation, then $12,500 of corporate income tax results in the current year. Corporations do not receive a preferential tax rate for LTCGs, and such income is taxed at the normal corporate rates resulting in a tax of $12,500 [($50,000 × 15%) + ($20,000 × 25%)]. 43. a. $105,000 taxable income = $480,000 (operating income) – $390,000 (operating expenses) + $55,000 (LTCG) – $40,000 (STCL). The tax on $105,000 of taxable income is $24,200 [($50,000 × 15%) + ($25,000 × 25%) + ($25,000 × 34%) + ($5,000 × 39%)]. Corporations include LTCGs in taxable income and do not receive a preferential tax rate with respect to such income. b. $90,000 taxable income = $480,000 (operating income) – $390,000 (operating expenses) + $15,000 (LTCG) – $15,000 (STCL). No deduction is allowed for the $25,000 net capital loss. Instead, the net capital loss is carried back 3 years and forward 5 years. The tax on $90,000 of taxable income is $18,850 [($50,000 × 15%) + ($25,000 × 25%) + ($15,000 × 34%)].
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  • Spring '11
  • williams
  • Taxation in the United States

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