Aug 10th, 2016
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CHAPTER 2: CORPORATIONS: INTRODUCTION AND OPERATINGRULES1. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current yearboth businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year.For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is notrequired to report any income from the corporation on her individual tax return.a. Trueb. FalseANSWER:TrueRATIONALE: Proprietorship profits flow through to the owner and are reported on the owners individualincome tax return. It does not matter how much of the profit is withdrawn from theproprietorship. Thus, Tomas must report the net profit of $60,000 on his Form 1040 (ScheduleC). Shareholders are required to report income from a C corporation only to the extent ofdividends received. Consequently, Lucy has no income to report from the corporation for thecurrent year.2. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of$75,000 ($250,000 gross income $175,000 operating expenses) and distributed $25,000 to each partner.Peach must pay tax on $75,000 of income.a. Trueb. FalseANSWER:FalseRATIONALE: A partnership is not a taxpaying entity. Its profit (loss) and separate items flow through to thepartners. The partnerships Form 1065 reports net profit of $75,000. Carol and Candace bothreceive a Schedule K-1 reporting net pr

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