1. ACC/455 Corporate Taxation I
Week Three Problem Set
ACC/455 Corporate Taxation I

2. C:3-3 Discussion Question – Case Scenario on Tax Elections
C:3-3 The two calendar year taxpayers, named Susan and Stan, are going to start a new business of digital circuits where they will manufacture and sell these goods. They are planning to do so with the help of their own capital of $600,000 and another equity capital of $2 million that other people invested. The company’s target is to gain $100,000 as organizational and start-up expenditure. A material income-producing factor is the inventories. The company is also thinking that a loss of $500,000 may have to be brought in the first two years of operation and first three year’s expenditures for development purpose. They expect that by three years they will break even and will make a profit by the end of fourth year although it is important to run research activities and make development frequently in this kind of business. Question is what type of accounting schemes and tax elections Susan and Stan should keep in mind in the first year of their operation? Explain the probable alternatives for each and every scheme and election and what advantages and disadvantages these have.

3. C: 3-3 Discussion Question – Case Scenario on Tax Elections
Tax Year
Calendar Year
benefit–The calendar year is currently being used by Susan and Stan
Fiscal Year
Advantage – to avoid short time filing, it can agree with the starting date of business
Accounting Methods
Accrual Method
Advantage –typical financial reporting is coordinated
Cash Method
Advantage– Stan and Susan are eligible because of inventories although it is less burdensome
Hybrid Method
Advantage–less burdensome for other revenue and expenses and also meets financial reporting customary
In order to establish the tax year for the corporation to follow, Susan and Stan need to make the first tax election during the formation of the corporation. Stan and Susan may choose either calendar year or fiscal year. In the calendar year scheme, starting month is Jan. 1st and ending is Dec. 31st. According to fiscal year, the 12-month period ends on any month`s last day other than December. If Susan and Stan form a C-corporation then they will have the freedom to make such decision. If they form an outline other than this one for the corporation then they have to follow the calendar year as the taxes that follow the calendar year are going to flow through to their own income tax returns. This is vital to make this decision as the company will have to go on with this decision for at least 48 months before submitting the Form 1128 to change the tax year period. Susan and Stan have to consider the date of formation of the corporation when they elect a tax year. The calendar tax year is the best pick if the corporation is created at the starting of the year. When the corporation is chosen to form in the middle of the year then they could select a fiscal year or they also may choose the calendar year and can file a short time return for their primary tax return.
For the purpose of tax, Susan and Stan also have to select an accounting method. There are three options for them to choose from as a method: the accrual method, the cash method, and the hybrid method. Accrual method has to be used by most of the corporations as it reports about the expenses in the tax year they use. The accrual method is regarded as the standard reporting layout for financial reporting as it is just tax calculations at the end of the year. Yet, the corporation belonging to Susan and Stan may use the cash method since they meet the gross receipts test $5 million dollar. In the cash method, the company gets reports whenever it gets a payment or pays expenses rather than according to the period they are incurred in. Stan and Susan think of their inventories that these are a material and income producing factor and will rule out the cash method. But Stan and Susan are bound to use either accrual method or hybrid method. The hybrid method uses both cash and accrual method; one to report about sales, costs, inventories and accounts receivable and payable, and other one for reporting any other expenses or income. The hybrid scheme might be the best preference as the cash method is less burdensome to use for other objects related to income and cost.
Therefore Stan and Susan ought to decide whether they want to create a C corporation (with the possibility of being taxed twice) or want to make an S corporation in order to pass the start up losses or want to capitalize the corporation with dept as well as equity.

4. C:5-8 Discussion Question – Identify Items as AMT Adjustment or Preference
The following items should be identified as (A) an AMT adjustment to taxable income, (B) a tax preference item or (N) none of them.
a. At the end of the tax year, percentage reduction in excess of a property’s adjusted basis.
b. The Sec. 179 expense along with first-year MACRS decrease claimed on a machine, with placing in service in the present year, which cost $200,000.
c. Discrepancy between the gain, mentioned in Part b, on the sale of the asset and the other minimum taxable income purposes.
d. The tax-exempt interest which was earned on State of Michigan private activity bond.
e. The tax-exempt interest that was earned on State of Michigan general revenue bond.
f. 75% of the surplus of adjusted current earnings (ACE) over preadjustment AMTI.

5. C:5-8 Discussion Question –Items to identify as AMT Adjustment or Preference
A. – P – Tax inclination item
B. – A – AMT Alteration to taxable income (decrease)
C. – A – AMT Alteration to taxable income
D. – P – Tax inclination item
E. – A – AMT Alteration to taxable income
F. – A – AMT Alteration to taxable income
a. – P – tax inclination item –the glut depletion of the property’s adjusted basis meet the criteria of being a tax preference item and increases AMTI.
b. – A – AMT alteration to taxable income –The claim for the machinery by the Sec 179 expense and bonus MACRS decrease will lessen payable income by the amount of reduction and bonus.
c. – A – AMT alteration to taxable income – The dissimilarity on the gain is reported as an AMT change for AMTI and ACE purposes
d. – P – tax inclination item – although the interest brought in on private activity bonds is tax-exempt for regular tax, it is not exempt when calculating AMT.
e. – A – AMT alteration to taxable income – Tax exempt interest for general purpose bonds is an increase for Adjusted Current Earnings (ACE), if it was not considered as a preference item and not integrated in the reckoning of AMTI.
f. – A – AMT alteration to taxable income – The ACE adjustment is additional adjustment to pre-adjusted AMTI.

6. C:3-37 Problem – Charitable Contributions of Property
Charitable contributions of property. Blue Corporation confers some properties specified below to Johnson Elementary School:
1. 2 years ago XYZ corporation stock purchased for $25,000. There is a $19,000 FMV to the stock on the contribution date.
2. It cost $16,000 a year ago when computer equipment was built. The equipment has a $50,000 FMV on the donation date. The business of manufacturing computer equipment doesn’t include Blue.
3. six months ago XYZ corporation stock was purchased at $12,000. The hoard has a $19,000 FMV on the date of the bequest.
By selling the stock, the school will remodel a classroom for the use of a computer laboratory. The taxable income for Blue is $400,000 regarding all charitable contribution deduction, dividends-received deduction and NOL or capital loss carry back.
a. What is Blue’s recent charitable contribution deduction?
b. If there is any charitable contribution carryover for this company then what is that? What years it can be used in?
c. Considering the XYZ stock donation, what could be a better tax plan?

7. C:3-37 Problem – Charitable Contributions of Property
- $40,000
- $47,000
Sell XYZ stock and contribute proceeds. Claim loss on sale against taxable earnings and donation of income as charitable contribution
Blue Corporation
Taxable Income
$ ,000
Contributions
Cost
FMV
XYZ Stock
$ 25,000
$ 19,000
Equipment
$ 16,000
$ 50,000
PQR Stock
$ 12,000
$ 18,000
Total donation
$ 53,000
$ 87,000
highest Allowable Deduction
$ ,000
Contribution Carryover
$ ,000
$400,000 was the Blue Corporation’s charitable contributions deduction for the year which was the highest
allowable deduction. 10% of adjusted taxable income is the highest deduction to allow for corporations without any regard to the present donation. The total donation Blue made was $87,000.
The donation of $87000 goes above the deduction limit for the Blue Corporation in the current year. So $47000 will be the amount for Blue Corporation to carry forward. This donation may be carried forward by the Blue Corporation for the forthcoming five years until the contribution expires.
The XYZ stock, Blue Corporation will donate to Johnson Elementary School will be sold by the school. By making this step the company is bringing in the chances of being on a loss for themselves and making out the FMV as a charitable donation. It would be a better idea if they have sold the stock and then give the proceeds as donation to the school, and then claim a loss against taxable income and assert the charitable contribution.

8. C:3-64 Tax Form /Return Preparation Problem – Knoxville Musical Sales Inc. Tax Return Preparation
See attached Form 1120, Form 1120 Schedule D, and Form 4562 in Assignment Section