Chapter 2 Questions/Problems 8, 11, 12, 13 15.

8. Under the check-the-box Regulations, LLCs are be taxed as follows. A single-member LLC is taxed as a proprietorship unless an election is made on Form 8832 to be taxed as a corporation. An LLC with more than one owner is taxed as a partnership unless an election is made on Form 8832 to be taxed as corporation. Entities that are incorporated under state law or required to be taxed as corporations under Federal law (e.g., certain publicly traded partnerships) cannot make an election under the check-the-box Regulations. p. 2-8
11. A PSC is a corporation that has as its principal activity the performance of personal services, and such services are substantially performed by shareholder-employees. The performance of services must be in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. In general, a PSC must adopt a calendar year. However, a PSC can elect a fiscal year under any of the following conditions: • A business purpose for the year can be demonstrated.
• A § 444 election is made that provides for a three month or less deferral period. The deduction limitations of § 280H will apply to the PSC.
• An election was made under § 444 to retain its fiscal year ending 1987.
p. 2-10
12. In general, a corporation is not allowed to use the cash method of accounting for Federal tax purposes. However, S corporations, qualified personal service corporations, and
C corporations engaged in the trade or business of farming or timber are exceptions to this rule. Further, a C corporation with $5 million or less of average gross receipts over the past three years is allowed to use the cash method. a. Red Corporation has $5.1 million of average gross receipts over the 2008-2010 period. Thus, Red must use the accrual method of accounting (unless it satisfies one of the other exceptions). b. White Corporation has $4.7 million of average gross receipts over the 2008-2010 period. Thus, White satisfies the gross receipts exception and may use the cash method of accounting. p. 2-11
13. A corporation that uses the accrual method cannot claim a deduction for an expense involving a related party (e.g., a more than 50% shareholder) until the recipient reports that amount as income. Wang, a cash basis taxpayer, must report the $35,000 interest income in 2012, the year she receives the payment. The corporation may deduct the $35,000 interest expense in 2012, the year Wang is required to report it as income. p. 2-11 and Example 12
15. John and Eagle Corporation each net the $6,000 STCG against the $8,000 LTCL, resulting in a $2,000 net capital loss. John reports the capital transactions on his individual tax return, and deducts the $2,000 net capital loss in the current year. Eagle reports the capital transactions on its the corporate tax return, but none of the $2,000 net capital loss is deductible in the current year. Instead, Eagle carries back a $2,000 STCL three years and, if necessary, forward 5 years, to be offset against capital gains in such years. p. 2-12