T/F regarding business taxation questions
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1. Unreasonable compensation can be reclassified as a nondeductible dividend payment to the shareholder.
2. The corporation cannot deduct as a business expense interest payments to creditors who are also shareholders.
3. The IRS determines that compensation is unreasonable by comparing how much is paid by similar corporations to officers who are not controlling shareholders.
4. Revenue agents who audit S corporations are on the alert for shareholder/employee salaries that are unreasonably low.
5. An investment's net present value is the sum of the present values of all cash inflows and outflows associated with it.
6. In current value terms, the ability to defer making a payment decreases a taxpayers cost for that expenditure.
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.
8. The marginal tax rate is the rate that applies to the next dollar of taxable income for the year.
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.
10. An S corporation can use any taxable year it wishes.
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Solution Summary
The questions are answered with an explanation of the rationale for each. Several of the responses are conditional based on further facts and circumstances or results which have been determined based on case law.
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1. True, which makes the amount subject to double taxation by not allowed it as a deduction for the corporation.
2. Generally false, but there are a variety of circumstances where interest cannot be deducted. Example would be an accrual-basis corporation where interest was acrued but not paid to the ...
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