Question

Problem 12-12 (LO. 1) In the current year, Riflebird Company had operating income of $220,000, operating expenses of $175,000, and a long- term capital loss of $10,000. How do Riflebird Company and Roger, the sole owner of Riflebird, report this information on their respective Federal income tax returns for the current year under the following assumptions? If an amount is zero, enter "0" a. Riflebird Company is a proprietorship (Roger did not make any withdrawals from the business) Roger reports $ net operating profit and $ long-term capital loss on his tax 45,000 10,000 3,000X deduction for qualified business income. Riflebird Company, as a return. Roger would claim a $ proprietorship, files no entity Federal income tax return for the year. b. Riflebird Company is a C corporation (no dividends were paid during the year). net operating profit and s 0 long-term capital loss on his tax Roger reports $ return. Riflebird Company will report taxable income of $ 45,000 on its Form 1120

Answer 1

Roger reports a net operating profit of $45,000 on his personal tax return for his sole proprietorship, with a long-term capital loss that can carry forward but not offset operating profits. As a C corporation, Riflebird Company files Form 1120 showing taxable income of $210,000; Roger reports no income from the corporation personally.

Step-by-step explanation:

Understanding Sole Proprietorship and C Corporation Tax Reporting

For part a, when Riflebird Company is considered a sole proprietorship, the company itself does not file a separate tax return. Instead, Roger, as the sole proprietor, reports all business income and expenses on his personal tax return. Roger would report a net operating profit of $45,000, which is the difference between the operating income ($220,000) and operating expenses ($175,000). The long-term capital loss of $10,000 cannot be deducted against the operating profit; rather, it may only offset capital gains. If Roger has no capital gains, he could carry forward this loss to future tax years. Consequently, Roger might also be able to claim a qualified business income deduction, which could further reduce his taxable income.

For part b, when Riflebird Company is a C corporation, it is treated as a separate entity for tax purposes and must file a corporate tax return using Form 1120. Roger, as the shareholder, does not report any of the corporation's income on his personal return unless he receives dividends, which he did not in this scenario. Thus, Roger would report $0 of net operating profit and $0 of long-term capital loss from the corporation on his personal tax return. Riflebird Company would report taxable income of $210,000 on its Form 1120, which is the operating income ($220,000) minus the operating expenses ($175,000) and the long-term capital loss ($10,000), recognizing the capital loss against its corporate income.