SM Ch02 SWFT.docx
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SM Ch02 SWFT.docx
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SMCh02SWFT
CHAPTER2
CORPORATIONS:
INTRODUCTIONANDOPERATINGRULES
SOLUTIONSTOPROBLEMMATERIALS
Status:
Q/P
Question/
Learning
Present
inPrior
Problem
Objective
Topic
Edition
Edition
1LO1Choiceofentity:
taxandnontaxfactorsUnchanged1
inentityselection
2LO1CorporationversusScorporation:
treatmentNew
ofoperatingincomeandtax-exempt
income;nodistributions
3LO1,7Corporationversusproprietorship:
treatmentUnchanged3
oflosses
4LO1,2Corporationversuspartnership:
treatmentofUnchanged4
operatinglossesandLTCG
5LO1,2CorporationversusLLCandScorporationUnchanged5
6LO1,7Closelyheldcorporations:
shareholderUnchanged6
transactions
7LO1CorporateandindividualtaxratescomparedUnchanged7
8LO1LLCs:
taxtreatmentofUnchanged8
9LO1LLCs:
multi-ownerdefaultruleNew
10LO2Accountingperiods:
generalruleandfiscalNew
yearlimitation
11LO2Accountingperiods:
PSCfiscalyearNew
limitation
12LO2Accountingmethods:
limitationoncashNew
method
13LO2Accountingmethods:
limitationonaccrualUnchanged13
ofexpensestocashbasisrelatedparty
14LO2Netcapitalgain:
corporateandindividualUnchanged14
taxratescontrasted
15LO2Netcapitalloss:
corporationandUnchanged15
individualcontrasted
16LO2Recaptureofdepreciation:
§291adjustmentNew
17LO2Passivelossrules:
closelyheldCUnchanged17
corporationsandPSCscontrasted
18LO2Passivelossrules:
closelyheldCModified18
corporation
Status:
Q/P
Question/
Learning
Present
inPrior
Problem
Objective
Topic
Edition
Edition
19LO2Charitablecontributions:
yearofdeductionUnchanged19
foraccrualbasiscorporation
20LO2Charitablecontributions:
amountofNew
contributions
21LO2,7Charitablecontributions:
year-endplanningUnchanged21
issueswithcarryover
22LO2Domesticproductionactivitiesdeduction:
New
computation
23LO2,3,7NOLcarryoverissuesUnchanged23
24LO1,3Dividendsreceiveddeduction:
corporateModified24
versusindividualtreatment
25LO3Dividendsreceiveddeduction:
reducedUnchanged25
ownershipinterest
26LO3Dividendsreceiveddeduction:
holdingNew
periodrequirement
27LO3OrganizationalandstartupexpendituresUnchanged27
contrasted
28LO4Corporateincometaxrates:
highestUnchanged28
marginalrate
29LO5TaxliabilityofrelatedcorporationsNew
30LO6Estimatedtaxpayments:
requiredannualUnchanged30
payment
31LO6ScheduleM-1:
adjustmentsUnchanged31
32LO6ScheduleM-3:
reconciliationofexpenseModified32
item
33LO1CompareLTCGtreatmentforregularUnchanged33
corporationsandproprietorships
34LO1TaxtreatmentofincomeanddistributionsUnchanged34
frompartnership,SandCcorporations
35LO1,2Corporationversusproprietorship:
salaryModified35
versusdividends;tax-exemptinterest
36LO1,2CorporationsversusScorporation:
ordinaryNew
incomeandLTCG
*37LO1Corporationversusproprietorship:
after-Updated37
taxcomparison
38LO2ComparisonofdeductionforcasualtylossModified38
forindividualandcorporatetaxpayers
*39LO1,4,7TaxliabilitydeterminationasproprietorshipUnchanged39
orcorporation
40LO2,4Personalservicecorporation:
salaryNew
requirementsforuseoffiscalyearand
taxrate
41LO2Accountingmethods:
relatedpartyexpense;New
cashversusaccrual
42LO2,4Capitalgainsandlosses:
taxrateonLTCGUnchanged42
forcorporationversusindividual
43LO2NetcapitallossofcorporationUnchanged43
44LO2ComparisonoftreatmentofnetcapitallossesUnchanged44
forindividualandcorporatetaxpayers
Status:
Q/P
Question/
Learning
Present
inPrior
Problem
Objective
Topic
Edition
Edition
45LO2Capitalgainsandlossesofacorporation;Unchanged45
carryback/carryover
46LO2Recaptureofdepreciationon§1250Modified46
property:
corporationversusindividual
47LO2Passivelossofcloselyheldcorporation;Unchanged47
PSC
48LO2Corporatecharitablecontributions:
amountNew
ofcontributions
49LO2,7Corporatecharitablecontributions:
taxUnchanged49
planning
50LO2,7Corporatecharitablecontributions:
Unchanged50
carryover;taxplanning
51LO2,7Corporatecharitablecontributions:
timingUnchanged51
ofdeduction;taxableincomelimit
52LO2DomesticproductionactivitiesdeductionNew
*53LO2,3Netoperatingloss:
computedwithNew
dividendsreceiveddeduction
*54LO3DividendsreceiveddeductionUnchanged54
55LO3OrganizationalexpendituresUnchanged55
*56LO3StartupexpendituresModified56
*57LO4DeterminecorporateincometaxliabilityUnchanged57
58LO5TaxliabilityofrelatedcorporationsModified58
59LO6Estimatedtaxpayments:
largecorporationNew
*60LO6ScheduleM-1,Form1120Unchanged60
61LO6ScheduleM-1,Form1120Modified61
62LO6ScheduleM-2,Form1120Unchanged62
63LO6ScheduleM-3,Form1120Unchanged63
64LO6ScheduleM-3,Form1120Unchanged64
65LO6ScheduleM-3,Form1120Modified65
66LO2,3,7TaxissuesinvolvedinstartinganewUnchanged66
businessinthecorporateform
*Thesolutiontothisproblemisavailableonatransparencymaster.
Status:
Q/P
TaxReturn
Present
inPrior
Problem
Topic
Edition
Edition
1Corporationincometax(Form1120withSch.M-3)Modified1
2Corporationincometax(Form1120)Unchanged2
Status:
Q/P
Research
Present
inPrior
Problem
Topic
Edition
Edition
1Limitationonfiscalyear-endforPSC:
businessNew
purposeexception
2Charitablecontributionofinventory:
enhancedUnchanged1
deduction
3Personalservicecorporation:
applicationtoUnchanged2
surveyingbusiness
4InternetactivityUnchanged4
5InternetactivityNew
6InternetactivityUnchanged6
CHECKFIGURES
33.a.Juanitawillreportprofit$50,000andlong-termcapitalgain$20,000.
33.b.Juanita’sincomeisnotincreased.
34.a.Eachpartnerreports$55,000netprofitandshort-termcapitalloss$7,500.
34.b.Sameasa.
34.c.Corporationreports$110,000income.Shareholderseachreport$25,000dividendincome.
35.a.Azuretaxof$119,000;Sasha$0tax.
35.b.Azuretaxof$119,000;Sasha$11,250tax.
35.c.Azuretaxof$90,500;Sasha$26,250tax.
35.d.Azuretaxof$0;Sasha$122,500tax.
35.e.Azuretaxof$0;Sasha$122,500tax.
36.a.Taupetaxof$0;Charlenetaxof$151,500.
36.b.Taupetaxof$153,000;Charlene$0tax.
37.a.After-taxincome$152,689.
37.b.After-taxincome$124,702.
37.c.After-taxincome$109,169.
38.a.$17,400itemizeddeduction.
38.b.$40,000.
39.a.$56,000.
39.b.$43,350.
39.c.$45,650.
39.d.$54,023.
40.a.$84,000.
40.b.$33,250.
41.a.$440,000.
41.b.$460,000.
42.a.$17,150.
42.b.$12,750.
43.a.$60,000taxableincome;$10,000tax.
43.b.$68,000taxableincome;$12,000tax.
44.a.$19,000deducted2012;$12,000carriedforwardto2013.
44.b.$16,000deducted2012;$15,000carriedbackto2009,then2010,etc.
45.a.Offsetshort-termcapitalgainof$70,000againstnetlong-termcapitallossof$195,000.The$125,000netcapitallossiscarriedback3yearsandforward5years.
45.b.Totalcarryback$110,000.
45.c.$15,000;carryforwardto2013,etc.
45.d.Deduct$73,000in2012,$122,000carriedforwardindefinitely.
46.a.Ordinaryincomeof$57,498and§ 1231gainof$429,994.
46.b.Section1231gainof$487,492.
47.Offset$225,000ofpassivelossagainstactiveincome.NooffsetifaPSC.
48.$118,500.
50.Giftlandin2013.
51.2012.
52.a.$81,000.
52.b.$75,000.
53.a.$54,000.
53.b.($12,000).
54.Green$140,000;Orange$105,000;Yellow$140,000.
55.a.$6,317.
55.b.$2,300.
56.$6,217.
57.Purple$6,750;Azul$104,150;Pink$799,000;Turquoise$7,350,000;Teal$28,000.
58.Red$42,325;White$69,625.
59.April15,$59,500;June15,$212,500;September15,$136,000;December15,$136,000.
60.Taxableincomeof$120,000.
61.Taxableincomeof$265,000.
DISCUSSIONQUESTIONS
1.Youshouldaskquestionsthatwillenableyoutoassessbothtaxandnontaxfactorsthatwillaffecttheentitychoice.Somerelevantquestionsareaddressedinthefollowingtable,althoughtherearemanyadditionalpossibilities.
Question
Reasonforthequestion
Whattypeofbusinessareyougoingtooperate?
Thisquestionwillprovideinformationthatmayaffecttheneedforlimitedliability,abilitytoraisecapital,easeoftransferringinterestsinthebusiness,howlongthebusinesswillcontinue,andhowthebusinesswillbemanaged.
Whatamountandtypeofincome(loss)doyouexpectfromthebusiness?
Whatistheamountandtypeofincome(loss)thatyouexpectfromothersources?
Incomefromabusinesswilleventuallybereportedonthetaxreturnsoftheowners.
Forexample,income(loss)fromapartnership,Scorporation,orLLCwill‘‘flowthrough”totheowners.DividendsfromaCcorporationmustbereportedonthetaxreturnsoftheshareholders.Anyincome(loss)fromothersourceswillalsobereportedonthereturnsoftheowners.Thus,forplanningpurposes,itisimportanttoknowallsourcesandtypesofincome(loss)thattheownerswillhave.
Doyouexpectt
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