How much of the $1,200 is taxable in the current year if the company is an accrual basis taxpayer? On April 1 of the current year, the company sold a customer a one-year contract for $1,200.

It contracts to provide service to homeowners once a month under a one-, two-, or three-year contract. Purple Corporation, an exterminating company, is a calendar year taxpayer. Alfredo incorporates Amber Company and pays himself a $50,000 salary and a dividend of $42,500 ($50,000 - $7,500 corporate income tax).Īmber's tax on $50,000 at corporate rates $10,500Īlfredo's tax on $42,500 dividend distributed at 15% 6,375Īlfredo's tax on $50,000 salary at 32% 16,000ġ. Alfredo incorporates Amber Company and pays himself no salary and no dividend. Alfredo operates Amber Company as a proprietorship. (Assume that any salaries are reasonable in amount, ignore any employment tax considerations, and that Amber's QBI deduction is not limited.)Ī. Discuss the tax aspects of each of the following independent situations. Assume that Alfredo is in the 32% marginal tax bracket. Amber Company has $100,000 in net income in the current year before deducting any compensation or other payment to its sole owner, Alfredo. Therefore, Toby does not report any of Skylark's operating profit, long-term capital loss, or charitable contribution on his individual return. Shareholders of a regular (C) corporation report income from the corporation to the extent of dividends received.

Skylark is a regular (C) corporation, and Toby does not withdraw any funds from the company during the year. The LTCL will be subject to the capital loss limitations applicable to individual taxpayers.Ĭ. Consequently, Toby reports the $170,000 operating profit, $20,000 long-term capital loss, and $5,000 charitable contribution on his individual return (Form 1040). Separately stated items (e.g., LTCL and charitable contribution) retain their character at the shareholder level. Income, deductions, gains, and losses of an S corporation flow through to the shareholders.Skylark is an S corporation, and Toby does not withdraw any funds from the company during the year. The LTCL will be subject to the capital loss limitations applicable to individual taxpayers.ī.

A single-member LLC is taxed as a proprietorship.Skylark is an LLC, and Toby does not withdraw any funds from the company during the year. How does Toby, the sole owner of Skylark Company, report this information on his individual income tax return under following assumptions?Ī. In addition, Skylark had a long-term capital loss of $20,000, and a charitable contribution of $5,000. During the current year, Skylark Company had operating income of $420,000 and operating expenses of $250,000. is incorrect because the wherewithal to pay concept does not apply in this situation because the $500 refund is in cash.ġ. 'If Lizzie itemized her deductions in 2020, she must amend her 2020 Federal income tax return to reduce her itemized deductions' and 'If Lizzie took the standard deduction on her 2020 Federal income tax return, Lizzie must amend her 2020 tax return' are incorrect because a cash basis taxpayer recognizes the expense when it is paid and recognizes the income when it is received. 'If Lizzie took the standard deduction on her 2020 Federal income tax return, Lizzie must include the $500 in her 2021 Federal gross income' is incorrect because she did not receive any tax benefit from deducting the state income tax on her Federal income tax return. In 'If Lizzie itemized her deductions in 2020 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $500, she must include the $500 in her 2021 Federal gross income', Lizzie received a tax benefit from the payment therefore, the refund was taxable. The income recognized from the refund results from the application of the tax benefit rule.

Four rules of the art of deduction