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A law practice was incorporated on January 1, 2015, and expects to earn $25,000 per month before deducting the lawyer’s salary. The lawyer owns 100% of the stock.

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. A law practice was incorporated on January 1, 2015, and expects to earn $25,000 per month before deducting the lawyer’s salary. The lawyer owns 100% of the stock. The corporation and the lawyer both use the cash method of accounting. The corporation does not need to retain any of the earnings in the business; thus, the salary of the lawyer (a calendar year taxpayer) will equal the corporation’s net income before salary expense. If the corporation could choose any tax year and pay the lawyer’s salary at the time that would be most tax efficient (but at least once every 12 months, what tax year should the corporation choose? When should the salary be paid each year?

South-western Federal Taxation 2016 (chapter 18, pp. 3-4). (2015). Cengage Learning

 

4. Art Funkel started his incorporated medical practice on June 1, 2015. He immediately made an S election for the corporation. Art would like the corporation to adopt a tax year ending May 31 so that a full 12 months of income would be included in the first tax year. Can the

South-western Federal Taxation 2016 (chapter 18, pp. 5). (2015). Cengage Learning

 

5. Fred, a cash basis taxpayer, received a $15,000 bonus from his employer in 2015. The bonus was based on the company’s profits from 2014. In 2016, the company discovered that its 2014 profits were incorrectly computed. As a result, Fred received an additional $10,000 with respect to 2014 profits. Fred’s marginal tax rate in 2015 was 15%, and it was 35% in 2016. Sue, also a cash basis taxpayer, received a $35,000 bonus in 2016 that was based on 2015 profits. In 2016, the company discovered that it had overstated its profits in 2015. As a result Sue was required to repay $10,000 of her bonus in 2016. Sue was in the 35% marginal tax bracket in 2015 and in the 15% marginal bracket in 2016. What special tax treatment is available to Fred and Sue as a result of their employer’s errors?

South-western Federal Taxation 2016 (chapter 18, pp. 10). (2015). Cengage Learning

 

6. Under what condition would the cash method of accounting be advantageous as compared with the accrual basis?

South-western Federal Taxation 2016 (chapter 18, pp. 12). (2015). Cengage Learning

 

7. In December 2015, Nell, Inc., an accrual basis taxpayer, paid $12,000 for insurance premiums for her business for 2016 calendar year. How much of the premiums can Nell, Inc., deduct in 2015?

South-western Federal Taxation 2016 (chapter 18, pp. 15). (2015). Cengage Learning

 

40. The Cardinal Wholesale Company is an S corporation that began business on March 1, 2015. Robert, a calendar year taxpayer, owns 100% of the Carinal Stock. He has $400,000 taxable income from other sources each year. Robert will work approximately 30 hours a week for the corporation. Cardinal sells swimming pool supplies, and its natural business year ends in September. Approximately 80% of Cardinal’s gross receipts occur in June through September.

a. What tax year should Cardinal elect, assuming that Robert anticipates the company will produce a net profit for all years?

b. What tax year should Cardinal elect, assuming that it will lose $10,000 a month for the first 12 months and an average of $5,000 a month for the next 12 months? In the third year, the corporation will earn taxable income.

South-western Federal Taxation 2016 (chapter 18, pp. 5, 39). (2015). Cengage Learning

 

41. Zorn conducted his professional practice through Zorn, Inc. The corporation uses a fiscal year ending September 30 even though the business purpose test for a fiscal year cannot be satisfied. For the year ending September 30, 2015, the corporation paid Zorn a salary of $180,000, and during the period January through September 2015, the corporation paid him a salary of $150,000.

a. How much salary should Zorn receive during the period October 1 through December 31, 2015?

b. Assume that Zorn received only $24, 000 Salary during the period October 1 through

South-western Federal Taxation 2016 (chapter 18, pp.5, 6). (2015). Cengage Learning

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