Question 1

If a C corporation incurs a net operating loss in 2019,it may carry the loss back two years and forward 20 years to offset income in those years.

Accepted Answer

As of the Tax Cuts and Jobs Act of 2017, net operating losses for C corporations incurred in 2018 and beyond can no longer be carried back to previous years but can be carried forward indefinitely to offset future income, subject to a limitation of 80% of taxable income for losses arising in tax years beginning after December 31, 2020.

Question 2

If a C corporation incurs a net operating loss in 2019 and carries the loss forward to 2020,the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

Accepted Answer

The answer of If a C corporation incurs a net...

Question 3

Due to recent tax law changes,C corporations are no longer subject to double taxation.

Accepted Answer

This statement is false. C corporations are still subject to double taxation where corporate profits are taxed at the corporate level and then again when distributed to shareholders as dividends. The recent tax law changes did not eliminate this form of taxation.

Question 4

An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.

Accepted Answer

An S corporation shareholder can only deduct losses up to the extent of their adjusted basis in the S corporation stock plus any direct loans made by the shareholder to the corporation. If the loss exceeds this basis, the excess loss cannot be deducted in the current year.

Question 5

Which legal entity provides the least flexible legal arrangement for owners?
A)Corporation.
B)LLC.
C)Partnership.
D)Sole proprietorship.

Accepted Answer

A corporation generally provides the least flexible legal arrangement for owners because it involves a complex structure with strict rules and regulations, as well as more formalities and paperwork. The owners (shareholders) do not have as much control over the day-to-day operations compared to other entities, and there are fewer options for distributing profits and losses.

Question 6

What document must an LLC file with the state to organize its business?
A)Articles of incorporation.
B)Certificate of LLC.
C)Articles or a certificate of organization.
D)Partnership agreement.
E)None of the choices are correct.An LLC does not have to file with the state to organize its business.

Accepted Answer

An LLC must file either articles or a certificate of organization with the state to organize its business. This document includes important information such as the LLC's name, address, purpose, and management structure. It is required by state law and establishes the LLC's legal existence.

Question 7

Which of the following legal entities files documents with the state to be formally recognized by the state?
A)Limited liability company.
B)General partnership.
C)Sole proprietorship (non LLC).
D)None of the choices are correct.

Accepted Answer

A limited liability company (LLC) is a legal entity formed under state law by filing articles of organization with the state. This formal recognition by the state gives the LLC certain legal protections and rights, such as limited liability for its owners and the ability to sue and be sued in its own name. General partnerships and sole proprietorships may register with the state for certain licenses or permits, but they are not considered separate legal entities and do not file articles of organization.

Question 8

S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments.

Accepted Answer

S corporation shareholders who work for the company receive compensation in the form of salaries or wages, not guaranteed payments. Guaranteed payments are a characteristic of partnerships and LLCs taxed as partnerships, where they are used to compensate members for services or capital.

Question 9

If an individual forms a sole proprietorship,which nontax factor will be of greatest benefit to the sole proprietor?
A)Liability protection.
B)Legal flexibility in defining rights and responsibilities of owners.
C)Facilitation of initial public offerings.
D)Minimal time and cost to organize.

Accepted Answer

The minimal time and cost to organize is the greatest benefit for a sole proprietorship. It is easy and inexpensive to set up compared to other business structures.

Question 10

For tax purposes,sole proprietorships pay sole proprietors guaranteed payments as compensation for their services.

Accepted Answer

Sole proprietorships do not pay guaranteed payments to the owner; instead, the owner directly takes the business's profits as personal income and reports it on their personal tax returns. Guaranteed payments are more commonly associated with partnerships and LLCs treated as partnerships for tax purposes, where they are used to compensate members for services or capital.

Question 11

The C corporation tax rate is significantly lower than the top individual marginal tax rate.

Accepted Answer

The current C corporation tax rate is 21%, while the top individual marginal tax rate is 37%. Therefore, the statement is true.

Question 12

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?
A)LLC - LLC members.
B)Corporation - Corporation.
C)General partnership - Partnership.
D)Limited partnership - General partner.
E)Corporation - Corporation and Limited partnership - General partner.

Accepted Answer

Corporations are legal entities separate from their shareholders, meaning the corporation itself is responsible for its liabilities. In a limited partnership, general partners have unlimited liability for the partnership's debts, making them ultimately responsible.

Question 13

Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation.

Accepted Answer

Passive investors in an S corporation may be subject to the 3.8 percent net investment income tax on their share of the company's income.

Question 14

If a C corporation incurred a net operating loss in 2017,it could carry the loss back two years and forward 20 years to offset income in those years.However,it may offset only 80 percent of the taxable income before the NOL deduction in those years.

Accepted Answer

Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, C corporations could carry back net operating losses (NOLs) two years and forward 20 years to offset 100% of taxable income. The TCJA then changed the rules, eliminating carrybacks for losses arising in tax years ending after December 31, 2017, and allowing losses to be carried forward indefinitely, but limiting the deduction to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.

Question 15

Losses from C corporations are never available to offset a shareholder's personal income.

Accepted Answer

C corporation losses are retained within the corporation and cannot be passed through to shareholders to offset their personal income, unlike losses from S corporations or partnerships which can flow through to the individual shareholders or partners.

Question 16

Which legal entity is generally best suited for going public?
A)Corporation.
B)LLC.
C)Limited liability partnership.
D)General partnership.
E)All of these entities are equally suited for going public.

Accepted Answer

Corporations are generally best suited for going public as they have the ability to issue stocks and raise capital from a large number of investors. They also have a well-defined management structure and limited liability protection, which appeals to potential investors. LLCs and partnerships, on the other hand, lack the ability to issue stocks and may have a less defined management structure, which can make going public more challenging.

Question 17

S corporation shareholders are subject to self-employment tax on business income allocations from the S corporation if they are actively involved in the S corporation's business.

Accepted Answer

S corporation shareholders are generally not subject to self-employment tax on their share of the business's income. Instead, they pay income tax on their share of the corporation's profits, but those profits are not subject to self-employment taxes.

Question 18

Owners who work for entities taxed as a partnership receive guaranteed payments as compensation.The guaranteed payments are not self-employment income.

Accepted Answer

Guaranteed payments to owners who work for entities taxed as a partnership are considered self-employment income and are subject to self-employment taxes.

Question 19

Business income allocations to owners from an LLC that is taxed as a partnership are subject to self-employment tax if the owners are significantly involved in the entity's business activities.

Accepted Answer

Owners who are actively involved in the business activities of an LLC taxed as a partnership are subject to self-employment tax on their share of the business income. This is because the LLC does not pay taxes itself, but rather passes through its income and deductions to the owners, who report them on their personal tax returns. The self-employment tax is a tax on net earnings from self-employment, and it applies at a rate of 15.3% to the first $137,700 of net self-employment income for 2020. Therefore, owners who receive income from an LLC taxed as a partnership may need to plan for self-employment tax in addition to income tax.

Question 20

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

Accepted Answer

The deduction for qualified business income applies to owners of flow-through entities such as sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs), but not to C corporation owners.

Quiz 15: Entities Overview