Question

12. The tax system Provisions of the U.S. Tax Code for Corporations and Individuals From a corporation's point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing? Debt financing Equity financing To offset taxable income in a given year, ordinary corporate operating losses can be Carried back for 2 years and carried forward for 20 years Carried back for 5 years and carried forward for 10 years Cute Camel Woodcraft Company owns 201,000 shares in the Lazy Zebra Furniture. If Lazy Zebra has 300,000 shares of common stock outstanding, can Cute Camel file a single income tax return that reports the incomes and expenses of both companies? No, because Cute Camel Woodcraft Company's ownership stake in Lazy Zebra is less than or equal to 79%, whereas 80% or more is required by the U.S. Tax Code. No, because Oute Camel Woodcraft Company's ownership stake in Lazy Zebra is less than or equal to 40%, whereas 50% or more is required by the U.S. Tax Code. Yes, because Oute Camel Woodcraft Company's ownership stake in Lazy Zebra is greater than or equal to 80%, as required by the U.S. Tax Code. Assume that the tax rate on corporate taxable income up to $50,000 is 15%, and 25% for income levels between $50,001 and $75,000. If the Clumsy Chihuahua Music Company has a taxable income of $57,000, then it has a tax liability of and an average tax rate of Suppose you want to invest $10,000. You have two options: Option #1: Invest in municipal bonds with an expected return of 10.00%, or Option #2: Invest in the corporate bonds of Jefferson & Alexander Inc. which are offering an expected return of 13.50%

Answer 1

12.

• Debt Financing
• Carried back for 2 years and carried forward for 20 years.
• No, because Cute Camel Woodcraft Company's ownership stake in Lazy Zebra is less than or equal to 79%, whereas 80% or more is required by the U.S. tax code.
• 25.93%
• As a capital gain that will be taxed as the capital gains tax rate.