Problem 1. Unreasonable compensation can be reclassified as a nondeductible dividend payment to the shareholder.
Problem 2. The corporation cannot deduct as a business expense interest payments to creditors who are also shareholders.
Problem 3. The IRS determines that compensation is unreasonable by comparing how much is paid by similar corporations to officers who are not controlling shareholders.
Problem 4. Revenue agents who audit S corporations are on the alert for shareholder/employee salaries that are unreasonably low.
Problem 5. An investment's net present value is the sum of the present values of all cash inflows and outflows associated with it.
Problem 6. In current value terms, the ability to defer making a payment decreases a taxpayer's cost for that expenditure.
Problem 7. An ordinary annuity is a stream of periodic cash flows to be received at the end of each period for a specified number of periods.
Problem 8. The marginal tax rate is the rate that applies to the next dollar of taxable income for the year.
Problem 9. A natural business year is one in which gross receipts in the last two months of the year exceed 25% of total yearly receipts.
Problem 10. An S corporation can use any taxable year it wishes.
Problem 11. A majority interest taxable year is the taxable year of one or more partners that own more than 50 percent of partnership capital and profits.
Problem 12. If a partnership does not have a majority interest taxable year, a principal partner taxable year, or a natural business year, it must use the taxable year resulting in the least aggregate deferral of income to its partners.
Problem 13. A principal partner is any partner who owns more than 25 percent of partnership capital or profits.
Problem 14. A taxable C corporation cannot be a shareholder in an S corporation.
Problem 15. For Year 2003, the maximum expense allowed under Section 179 of the Internal Revenue Code, for those companies not doing business in any empowerment zone or enterprise community, is $25,000.
Problem 16. The costs associated with drilling a new oil and gas well can be expensed in the year incurred, rather than being capitalized and depleted over the productive life of the well.
Problem 17. Percentage depletion is based on the annual revenue derived from a natural resource.
Problem 18. Henry Inc. bought equipment for $125,000 this year. The company expects to have net loss before cost recovery deductions of $(85,000). The company can take full advantage of the Sec. 179 expensing election this year.
Problem 19. Jackson Company placed $450,000 of property subject to Sec. 179 expensing in service this year. Its business income before cost recovery deductions is expected to be $220,000. Jackson will be able to take full advantage of the expensing election this year.
Problem 20. Most tax elections concerning the computation of taxable income for a passthrough entity are made by the entity.
Problem 21. Darden Partnership purchased business equipment in 2003 and elected to expense the maximum amount allowed under Section 179. This amount is deducted by the partnership in computing the partnership ordinary business income.
Problem 22. Credits earned by a partnership or S corporation are passed through to the partners or shareholders for use in their own personal tax returns.
Problem 23. Partners' capital accounts are decreased by their shares of loss items.
Problem 24. Cash distributed during the year has no effect on partners' capital accounts.