Question 1

Corporations can use a 52- to 53-week fiscal year end,but the year must end on Saturday each year.

Accepted Answer

Corporations can use a 52- to 53-week fiscal year end, but the year does not have to end on a Saturday. It can end on any day that corresponds to the nearest end of the month.

Question 2

A sole proprietor
I.Can be an employee of the business.
II.Has limited liability for the debts of the business.
​

Accepted Answer

A sole proprietor cannot be an employee of the business because they are the owner and directly responsible for all aspects of the business. They also have unlimited liability for the debts of the business, not limited liability.

Question 3

Start-up and organizational costs can be expensed or capitalized and amortized over 60 months based on the election of the taxpayer.

Accepted Answer

False

Question 4

Partnership debts assumed by a partner is deemed to be a cash contribution and increases the partner's basis in the partnership.

Accepted Answer

When a partner assumes partnership debts, their basis in the partnership increases by the amount of the debt assumed. This increase in basis is considered to be a cash contribution.

Question 5

Sole proprietors are allowed to deduct owner-employee salaries and fringe benefits.

Accepted Answer

Sole proprietors cannot deduct salaries paid to themselves as they are not considered employees of their business. Instead, their income is directly reported on their personal income tax return.

Question 6

S corporation status is attained when a qualifying corporation elects this status.

Accepted Answer

S corporation status is only granted by filing Form 2553 with the IRS and meeting all eligibility requirements.

Question 7

Paris is a CPA and a partner in a small firm.To limit her liability from the negligence or misconduct of her partners,they can form the firm as a Limited Liability Partnership.

Accepted Answer

By forming the firm as a Limited Liability Partnership, Paris can limit her personal liability from the negligence or misconduct of her partners. This means that her personal assets will not be at risk if her partners are sued for wrongdoing.

Question 8

Once a corporation is formed,an exchange of the corporation's stock for property is always a nontaxable event.

Accepted Answer

Exchange of the corporation's stock for property may or may not be a taxable event depending on various factors such as the type of property exchanged, the value of the property, and the terms of the exchange.

Question 9

Limited liability refers to

Accepted Answer

Limited liability refers to the legal protection that shields individual shareholders or members in a business from personal financial responsibility for the company’s debts and obligations beyond the amount of money they invested in the company. In other words, their liability is limited to the amount of their investment. This protects their personal assets from business liabilities such as lawsuits, debt or bankruptcy. Therefore, option C is the best choice. Options A, B, and D are not related to limited liability.

Question 10

Nontax characteristics that should be considered in choosing an entity form include which of the following?
I.Number of owners.
II.Limited liability for owners.
III.Ability to participate in management.
IV.Transferability of ownership interests.
​

Accepted Answer

All of the statements are important factors to consider when choosing an entity form. The number of owners will determine whether a partnership or a corporation is a viable option, limited liability is important to protect personal assets from business liabilities, the ability to participate in management is relevant for those who want to have a say in decision-making, and transferability of ownership interests is important for those who may want to sell their ownership stake in the future. Therefore, all four statements are correct and should be considered in the decision-making process.

Question 11

General partners
I.Are liable for all debts of the partnership.
II.Are taxed on distributions received from the partnership.
​

Accepted Answer

General partners are personally liable for all debts and obligations of the partnership, so statement I is correct. Additionally, profits and losses from the partnership flow through to the partners' personal tax returns, and they are taxed on their share of the partnership's income. Therefore, statement II is incorrect.

Question 12

Partners have extensive flexibility in choosing their tax year-end for their partnership.

Accepted Answer

The IRS has specific rules that generally require partnerships to adopt a tax year-end based on the tax year-ends of their partners or a calendar year-end, limiting the flexibility in choosing any tax year-end.

Question 13

There must be at least one member of a Limited Liability Company who is personally liable for the debts of the business.

Accepted Answer

The whole point of a Limited Liability Company (LLC) is to provide protection for its members from personal liability for the debts and liabilities of the business. This means that the members' personal assets cannot be used to pay off the debts of the LLC. However, if the LLC does not follow the proper formalities, such as keeping separate records or co-mingling personal and business funds, a court may decide to hold one or more members personally liable.

Question 14

The shareholder of an S corporation can reduce income taxes by passing income to the owner-employee as a dividend rather than paying salary.

Accepted Answer

Shareholders of an S corporation cannot pass income to themselves in the form of dividends. They must pay themselves a reasonable salary for the work they perform for the corporation, and only the remaining profit can be distributed as a dividend. This is known as the "Salary vs. Dividend" issue and is closely monitored by the IRS to prevent abuse.

Question 15

A corporation in which the performance of personal activities is the principal pursuit,services are performed by owner-employees,and the owner-employees own 95% or more of the stock is taxed at a flat rate of 35%.

Accepted Answer

A personal service corporation (PSC) is a corporation in which the performance of personal activities is the principal pursuit, services are performed by owner-employees, and the owner-employees own 95% or more of the stock. PSCs are taxed at a flat rate of 35%.

Question 16

Corporations generally are required to use the accrual method of accounting.

Accepted Answer

This statement is true. According to the Internal Revenue Service (IRS), corporations with gross receipts of more than $25 million in a year are required to use the accrual method of accounting. However, there are certain exceptions for small corporations and specific industries.

Question 17

Continuity of life refers to whether an entity continues to operate or technically dissolves and ceases to exist in its present form when a change occurs in the ownership structure.

Accepted Answer

Continuity of life refers to whether an entity, such as a business or organization, continues to exist and operate regardless of changes in ownership or management. It is a fundamental concept in accounting and business valuation.

Question 18

As a limited partner in Technonics,Ltd. ,Dave is allowed to participate in the management of the business.

Accepted Answer

As a limited partner, Dave is not allowed to participate in the management of the business.

Question 19

A limited partner
I.Can lose any or all of their investment in the partnership.
II.Can participate in the management of the partnership.
​

Accepted Answer

A limited partner is not involved in the management of the partnership and their liability is restricted to the amount they've invested. Hence, statement I is correct and statement II is incorrect.

Question 20

A guaranteed payment is a payment made to a partner for specific services performed by the partner and is made without regard to the partnership's income.

Accepted Answer

A guaranteed payment is a payment made to a partner for specific services performed by the partner and is not dependent on the partnership's income.

Quiz 13: Choice of Business Entity -- General Tax and Nontax Factorsformation

Corporations can use a 52- to 53-week fiscal year end,but the year must end on Saturday each year.

A sole proprietor I.Can be an employee of the business. II.Has limited liability for the debts of the business. ​

Start-up and organizational costs can be expensed or capitalized and amortized over 60 months based on the election of the taxpayer.

Partnership debts assumed by a partner is deemed to be a cash contribution and increases the partner's basis in the partnership.

Sole proprietors are allowed to deduct owner-employee salaries and fringe benefits.

S corporation status is attained when a qualifying corporation elects this status.

Paris is a CPA and a partner in a small firm.To limit her liability from the negligence or misconduct of her partners,they can form the firm as a Limited Liability Partnership.

Once a corporation is formed,an exchange of the corporation's stock for property is always a nontaxable event.

Limited liability refers to

Nontax characteristics that should be considered in choosing an entity form include which of the following? I.Number of owners. II.Limited liability for owners. III.Ability to participate in management. IV.Transferability of ownership interests. ​

General partners I.Are liable for all debts of the partnership. II.Are taxed on distributions received from the partnership. ​

Partners have extensive flexibility in choosing their tax year-end for their partnership.

There must be at least one member of a Limited Liability Company who is personally liable for the debts of the business.

The shareholder of an S corporation can reduce income taxes by passing income to the owner-employee as a dividend rather than paying salary.

A corporation in which the performance of personal activities is the principal pursuit,services are performed by owner-employees,and the owner-employees own 95% or more of the stock is taxed at a flat rate of 35%.

Corporations generally are required to use the accrual method of accounting.

Continuity of life refers to whether an entity continues to operate or technically dissolves and ceases to exist in its present form when a change occurs in the ownership structure.

As a limited partner in Technonics,Ltd. ,Dave is allowed to participate in the management of the business.

A limited partner I.Can lose any or all of their investment in the partnership. II.Can participate in the management of the partnership. ​

A guaranteed payment is a payment made to a partner for specific services performed by the partner and is made without regard to the partnership's income.

A sole proprietor I.Can be an employee of the business. II.Has limited liability for the debts of the business.

Nontax characteristics that should be considered in choosing an entity form include which of the following? I.Number of owners. II.Limited liability for owners. III.Ability to participate in management. IV.Transferability of ownership interests.

General partners I.Are liable for all debts of the partnership. II.Are taxed on distributions received from the partnership.

A limited partner I.Can lose any or all of their investment in the partnership. II.Can participate in the management of the partnership.