Which of the following statements is true regarding the calculation of a C corporation's taxable income and tax liability? A. Business bad debts are allowed as an ordinary business deduction if the direct write-off method is used. B. Charitable contributions are considered a special deduction rather than part of ordinary business deductions. C. The foreign tax credit is applied to taxable income before multiplying by the tax rate to determine gross tax liability. D. The dividends received deduction is used to determine income before NOL and special deductions. 2. As the result of an IRS audit of a C corporation and its sole shareholder, the IRS agent proposes that a portion of the shareholder's salary is unreasonable. Because the corporation has significant earnings and profits, the agent has determined that the unreasonable portion of the salary is a dividend. Which of the following is correct regarding the impact of the proposed adjustment to both the corporation and its shareholder? A. Full disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and no effect on the shareholder since both salaries and dividends are taxable income. B. Partial disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and reclassification of the shareholder's salary to dividend treatment. C. Allowance of the full amount as salary expense to the corporation and reclassification of the unreasonable portion of the shareholder's salary to dividend treatment. D. Partial disallowance of salary expense, a corresponding increase in deductible dividends to the corporation, and no effect on the shareholder's return since both salaries and dividends are taxable income.
Which of the following statements is true regarding the calculation of a C corporation's taxable income and tax liability? A. Business bad debts are allowed as an ordinary business deduction if the direct write-off method is used. B. Charitable contributions are considered a special deduction rather than part of ordinary business deductions. C. The foreign tax credit is applied to taxable income before multiplying by the tax rate to determine gross tax liability. D. The dividends received deduction is used to determine income before NOL and special deductions. 2. As the result of an IRS audit of a C corporation and its sole shareholder, the IRS agent proposes that a portion of the shareholder's salary is unreasonable. Because the corporation has significant earnings and profits, the agent has determined that the unreasonable portion of the salary is a dividend. Which of the following is correct regarding the impact of the proposed adjustment to both the corporation and its shareholder? A. Full disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and no effect on the shareholder since both salaries and dividends are taxable income. B. Partial disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and reclassification of the shareholder's salary to dividend treatment. C. Allowance of the full amount as salary expense to the corporation and reclassification of the unreasonable portion of the shareholder's salary to dividend treatment. D. Partial disallowance of salary expense, a corresponding increase in deductible dividends to the corporation, and no effect on the shareholder's return since both salaries and dividends are taxable income.
Chapter22: S Corporations
Section: Chapter Questions
Problem 12DQ
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Question
Which of the following statements is true regarding the calculation of a C corporation's taxable income and tax liability?
A.
Business bad debts are allowed as an ordinary business deduction if the direct write-off method is used.
B.
Charitable contributions are considered a special deduction rather than part of ordinary business deductions.
C.
The foreign tax credit is applied to taxable income before multiplying by the tax rate to determine gross tax liability.
D.
The dividends received deduction is used to determine income before NOL and special deductions.
2.
As the result of an IRS audit of a C corporation and its sole shareholder, the IRS agent proposes that a portion of the shareholder's salary is unreasonable. Because the corporation has significant earnings and profits, the agent has determined that the unreasonable portion of the salary is a dividend. Which of the following is correct regarding the impact of the proposed adjustment to both the corporation and its shareholder?
A.
Full disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and no effect on the shareholder since both salaries and dividends are taxable income.
B.
Partial disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and reclassification of the shareholder's salary to dividend treatment.
C.
Allowance of the full amount as salary expense to the corporation and reclassification of the unreasonable portion of the shareholder's salary to dividend treatment.
D.
Partial disallowance of salary expense, a corresponding increase in deductible dividends to the corporation, and no effect on the shareholder's return since both salaries and dividends are taxable income.
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