C-corp Tax

[OldJack]

You have been engaged to prepare a C-corp tax return.
Use only these Facts and calculations thereof:

1. Corporation has been a C-corp for 4 years and owns a warehouse that it does not use except to rent to an unrelated party. No other revenue, product or service activity.

2. Income statement shows the following Current Income:
2a. $4,000 Dividend Income.
2b. $4,500 Interest Income.
2c. $80,000 Gross Rent Income.

3. Income statement shows the following Current Expenses:
3a. $1,000 Rent Expenses (property land rent).
3b. $1,200 Real Estate Taxes on Property.
3c. $2,000 Mortgage Interest Expense.
3d. $10,000 Building Depreciation.
3e. $5,000 Other Deductible Business Expenses.(office supplies, misc etc.)

4. $69,300 Taxable Income from items 2 and 3 above.

5. Balance Sheet at year end shows only the following Items:
5a. $120,000 Cash.
5b. $102,000 Net Book Value of Building and Land.
5c. $222,000 Total Assets.

5c. $500 Common Stock.
5d. $152,200 Retained Earnings-Prior Years.
5e. $69,300 Current Year Profit.
5f. $222,000 Total Equity.

Poll Question: How to calculate corp tax to get the correct tax?

1. Only regular corp tax (brackets/rate).
2. Max regular tax rate-Personal Service Corp.
3. Regular tax + Personal Holding Co tax.
4. Regular tax + Accumulated Earnings tax.
5. None of the above.

[Unregistered]

Who is winning?

[OldJack]

Who is winning?

Good question. There are so many people waiting to vote at the last minute that its hard to say the outcome.

I think some must think its a trick question or that someone will know how they vote. Its not a big deal.

[Bees Knees]

It is a trick question. The obvious answer is wrong.

[OldJack]

I didn't intend for the answer to be obvious or a trick, rather an example that other tax preparers might benefit from or learn something. The options include all possibilities and the example is a real situation of one of my clients that as accountant I had to question, recognize, and determine the appropriate tax. I realize software can give anyone the correct answer and that is why I made the question not about the amount of tax, rather a question as what tax or taxes were appropriate.

Everyone knows that you would have the correct answer Bees Knees, why not go ahead and tell us your vote and analysis as the voting appears to be over. no big deal.

[jainen]

I voted

I voted so many times on the last poll I figured this one was already covered.

[OldJack]

I voted so many times on the last poll I figured this one was already covered.

Obviously I needed your vote this time as the results reflect poorly on my ability to stir the mind.

[jainen]

Not at all

Not at all--you are excellent. It just so happens that my mind is already quite thoroughly stirred.

[Black Bart]

Jack,

Not at all--you are excellent. It just so happens that my mind is already quite thoroughly stirred.

Don't worry about the quality of the test. If the Santa Cruz savant says it's excellent, then you can take that to the bank, even if his mind is quite thoroughly "stirred" (I would say more like "disturbed"). He's not known for giving out praise lightly or for his compassionate compliments and the boy is certifiably as knowledgeable about taxes as anybody in this neck of the woods (tip: if you want to deduct something, whatever you do, don't mention it to him--just do it). I, too, voted (as unregistered--sorry), but didn't have a clue what the answer is, so just guessed. How about makin' the next one a true-false instead of multiple choice so I can improve my chances of hittin' the jackpot? Never mind answerin' if you're still mad at me. Thanks.

Best regards / BB

P.S. Yo -- jainen! I saw where you got into a tiff with a couple of boys on the other board about your characterization of their responses to a land valuation question. Let's see; how'd it go? "...both of these approaches are ridiculous, absolutely irresponsible..." Yeah, I think that was it. Well, anyway; just wanted you to know that I don't agree at all with their completely unjustified comeback ("Hey, jainen c you are rude"), but I do have a suggestion. I feel it would be kinder (and gentler) if you'd stop "letting them down easy." Instead, why not just tell them straight out that their answers stink without trying to soften the blow? Sincerely / BB

[jainen]

question marks

>>a tiff with a couple of boys on the other board<<

I just shrugged off their unreasonable complaints, but I think I damaged my credibility over there. My next post was a lovely explanation of why there isn't any capital gains tax when you have to pay off a mortgage, and the only response was a polite "I agree with your thesis." So I whined about that, and somebody else chimed in with -- well, I couldn't figure out what he was saying, but it ended in a negative two question marks.

[OldJack]

BB I am not mad at you or anyone else, sorry if it appeared that way. Everyone has a right to their opinion and I can't help it if they are wrong. Considering the lack of interest in polls and the suspicion of trick questions...I doubt I will be offering any more. I thought it might generate discussion but instead it evidently just came across that I was trying to impress someone. I am to old and long past the need to impress anyone, however, Jainen's comment was nice and brought a smile to my face.

[Unregistered]

C Corporation Taxation Question Posed

My vote goes for the "regular corporation - brackets taxation"

If the poll is over...do we have a "correct answer"?

[OldJack]

Correct Answer

Answer:
1. The correct answer is option 1, “Only regular corp tax (brackets/rate)”.
2. The corporation is not a Personal Service Corporation as the revenue is not from owner services.
3. The corporation is not subject to Personal Holding Company (PHC) tax as will be explained below and by the attached worksheet file. (note: Also S-corp earnings are not subject to PHC tax.)
4. A C-corp does not pay Accumulated Earnings Tax unless assessed by the IRS. Also the retained earnings is under $250,000 the amount allowed without question [Code §535(c)(2)].
5. "None of the above" is incorrect as option 1 is correct.

The obvious question, in this case, is with dividends, interest, and rent income.. is the C-corp a personal holding company (PHC)? A C-corp is not a PHC if it meets a certain 60% or less income test OR a certain 50% or less ownership test. All three types of income are PHC type income, but Rent Income may be excluded from the 60% test if it meets a certain 50% and 10% test. In this case the Rent Income meets the test to be excluded and therefore also meets the 60% or less test that determines the corp is not a PHC (see the PHC-Calc.pdf file attached). Note that if the dividend or interest income is increased by $389, or more, the Rent Income cannot be excluded and it would be a PHC.

The PHC-Calc program is available in “PHC-Calc.htm” format that opens in an internet browser. With the program you can calculate and print but not save data. I would have attached my .htm program to this post but the forum does not allow .htm type files, so I made it a .pdf file. I will email it to anyone that wants a copy if you give me your email address.

PS: I uploaded and attached the file "PHC-Calc.pdf" but the link doesn't appear for some reason unknown.. sorry.

[Bees Knees]

I thought it was a good poll. At first glance, I thought it was obvious it was a PHC situation. But then I thought that was too obvious, so I looked up the code and was suprised it wasn't a PHC.

I think it is good to have polls like this to keep us on our toes. Don't stop now.

[Black Bart]

Bees Knees / Old Jack

BB I am not mad at you or anyone else, sorry if it appeared that way. Everyone has a right to their opinion and I can't help it if they are wrong. Considering the lack of interest in polls and the suspicion of trick questions...I doubt I will be offering any more. I thought it might generate discussion but instead it evidently just came across that I was trying to impress someone. I am to old and long past the need to impress anyone, however, Jainen's comment was nice and brought a smile to my face.

Boys! Boys! Y'all need to make up. This is like a pain in the bowels--you just cain't hardly live with it. You know, it's been one of the great disappointments of my life to note that most people nowadays are unable to give or accept an apology. They just want (like those WWF "Raw" wrestlers) to smash somebody in the face. A few points, if I may be so bold:

Bees Knees: You're a smart guy--you realize that, as a moderator with the power to throw somebody off the board, you've gotta be somethin' like a cop--you're held to a higher standard than the ordinary person and have to rise above what would be the normal reaction to a slight. I know it's pretty hard to maintain your cool when you're bein' called names, but, if it's any consolation, everybody on this board know that you're not a cheater. You've helped people here get desperately-needed answers when nobody else (colleagues/IRS/books) would or could. You and Beau are our "court of last resort" and we (not you, jainen) badly need you to fall back on. Now; having said that, it was a bit much to cut Jack's second poll off at the knees (pun intended) by immediately posting the answer right below it. But even after that, he had managed to overlook it and resume regular posting and it was going alright right up until you slapped him with the "trick question" retort. Bees, you can't afford a temper like a regular poster can--Jack's a good, smart board member and they're scarce--much better to just reply that you're not a -- whatever-- (everybody that's anybody already knows that) and go on about your business instead of slappin' back. Look at it like the Godfather does right before he has somebody killed; "it's nothing personal, it's just business." To give you credit, you did apologize previous to that.

Old Jack: See how you felt when he accused you of putting up a trick question? It's an unjust accusation and you got mad. That's the same way he felt when you called him a cheater and that's why he slapped you across the face with that poll cut-off and the "trick question" jab. As the owner of the board, maybe he shouldn't have, but everybody has faults and that's the risk you run when you throw those sort of indictments out there loosely and lightly. You rushed to judgment and jumped to conclusions that he was "fixing" results, but your poll was the first one we've ever had here--he has a tech guy to handle stuff like that and nobody knew unregistereds could vote (BTW, I was wrong earlier about voting that way because I remember now I had to sign in before it would let me vote). Bees is an ethical person--just look at some of his postings all the way back and you can't help but agree he's not out to "cheat" anybody out of anything--he does nothing but help others with problems. Now, by the same token, your tone, demeanor, and the manner of your posts makes it obvious that you're a "good board citizen" who's very much interested in the welfare of other members and, of course, had no intention whatever of "tricking" anyone, much less trying to impress anybody. I'm not so sure there's a lack of interest in your polls. Everybody was interested in the smilies, of course, and the people here know a lot about corporations. Maybe they just didn't want to get in the middle of a squabble--but if there is a lack of intellectual curiosity about corporate taxation, well then, let the asteroid strike the earth. Why don't you give it another shot sometime--actually, I was quite interested when you "discovered" the poll feature. Look here, now; you're a Missouri CPA, so you've gotta be a smart guy too. Don't challenge Bees to a duel over it 'cause he's a Minnesota Yankee--they're not known for modesty and manners and besides he's just a youngster (late forties). Also, disregard my "ingrate" comment--that was, like the lawyers say, irrelevant, immaterial, and somethin'-or-another else. Oh, about jainen; yeah, he's pretty impressive sometimes, isn't he? He's a little bit sensitive, though, so don't let on to him if you know about the funny stuff that goes on out there in California (didja know they "swing" in the bedroom?--cain't imagine why they don't just put the swing set up in the yard like ever'body else).

Well, that's all. Blessed are the peacemakers, for they shall inherit a big mess. No long-winded (like this) replies necessary. Why don't y'all just post a line saying "I plead no contest" or something and we can call it a draw?