Federal Taxation Discussion Questions – Unit 1

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  • Why would December 31 be an inappropriate year-end for a ski
    resort?
  1. In the case of a profitable S corporation, what would be the advantage
    to using a tax year ending January 31 if this was permissible?
  2. A medical practice was incorporated on January 1, 20X7, and expects to
    earn $25,000 per month before deducting the doctor’s salary. The doctor owns
    100% of the stock. The corporation and the doctor 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 doctor (a
    calendar year taxpayer) will equal the corporation’s net income before salary expense. If the corporation could choose any tax year it
    wished and pay the doctor’s salary at the time that would be the
    most tax efficient (but at least once every 12 months), what tax year should the
    corporation choose, and when should the salary be paid each year?
  3. Pale Motel, Inc., was a C corporation using a fiscal year ending April
    30 for tax purposes for all tax years through April 30, 20X7. In May 20X7, the
    corporation made an S election. What are the implications of the election for
    Pale’s tax year?
  4. A cash basis taxpayer owns rental properties. The insurance on the
    properties is renewed each January 1. On December 30, 20X7, the
    taxpayer paid the premium of $24,000 for the period January 1, 20X8, through
    December 31, 20X8. Can the taxpayer deduct the premium of $24,000
    in 20X7?
  5. Compare the cash basis and accrual basis of accounting as applied to
    the following:

    1. Fixed Assets
    2. Prepaid rent income
    3. Prepaid interest expense
  6. Edgar uses the cash method to report the income from his software
    consulting business. A large publicly held corporation has offered to invest in
    Edgar’s business as a limited partner. What tax accounting complications would
    be created if Edgar and the corporation become partners?
  7. The Eagle Corporation builds yachts. All vessels are practically
    identical and sell for more than $2 million. Production does not begin until the
    company has a contract to sell the vessel. The company has recently changed its
    production techniques to reduce the time for producing a yacht from 15 months to
    9 months. What are the accounting method implications of the change?
  8. How can a company using LIFO for tax purposes disclose to
    shareholders the net income for the tax year computed under FIFO
    without violating the LIFO conformity provisions?
  9. What accounting method (cash or accrual) would you recommend for
    the following businesses?

    1. An incorporated medical practice with annual gross receipts of $12
      million
    2. A hardware store with annual gross receipts of less than $1
    3. A building contractor, who builds single-family houses, with annual
      gross receipts of $3 million.
    4. A grocery store with annual gross receipts of $4.5 million.

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