Question 1

Danube Corporation operates a theatrical costume shop. Taxable income for the current year is $1,000,000. What is Danube's income tax liability?

Accepted Answer

Danube's income tax liability is $210,000, assuming the standard corporate tax rate of 21% applied to the taxable income of $1,000,000.

Question 2

Which of the following facts would prevent an S Corporation election?
I.Magnificent Corporation has 125 shareholders.
II.Simms Corporation, incorporated in Kansas, has only one class of common stock issued and outstanding.
​

Accepted Answer

An S Corporation can have no more than 100 shareholders, and they must all be U.S. citizens or residents. Therefore, statement I is correct and would prevent an S Corporation election. Statement II is incorrect since having only one class of stock is a requirement for S Corporation status.

Question 3

Rockhill Corporation operates a women's clothing boutique. Taxable income for the current year is $60,000. What is Rockhill's income tax liability?

Accepted Answer

Based on the 2021 tax tables for corporations, the tax liability for taxable income of $60,000 is $12,600. The calculation is as follows: 
- The first $50,000 is taxed at a rate of 21%, which equals $10,500. 
- The remaining $10,000 is taxed at a rate of 24%, which equals $2,400. 
- Adding these two amounts together gives a total tax liability of $12,600. Therefore, the correct answer is D.

Question 4

Claudia owns 10% of the stock of Fitness Design Corporation, an S corporation. She is also its controller. Fitness Design reports taxable income of $70,000 and pays $60,000 in dividends to shareholders before considering Claudia's salary. Claudia receives a $75,000 salary. What is Claudia's income from Fitness Design?

Accepted Answer

Claudia's income from Fitness Design is $74,500. This is calculated as follows:Taxable income: $70,000Dividends: $60,000Claudia's salary: $75,000Claudia's share of taxable income: 10% x $70,000 = $7,000Claudia's income from Fitness Design: $7,000 + $60,000 + $75,000 = $74,500

Question 5

Assume a corporation's status as an S corporation is revoked or terminated. How many years must the corporation wait before making a new S corporation election, in absence of IRS consent to an earlier election?

Accepted Answer

If an S corporation's status is revoked or terminated, the corporation must wait five years before making a new S corporation election without IRS consent to an earlier election.

Question 6

Which of the following will render a corporation ineligible for S corporation status?
I.The corporation has 95 stockholders.
II.One of the stockholders is a citizen- resident of Canada.
​

Accepted Answer

The answer of Which of the following will render a...

Question 7

Which of the following will render a corporation ineligible for S corporation status?
I.The corporation has 125 stockholders.
II.One of the stockholders is another corporation.
​

Accepted Answer

Both statements are correct. According to the IRS, S corporations can have no more than 100 shareholders, and they must all be individuals, estates, or certain trusts. Additionally, another corporation cannot be a shareholder in an S corporation. Therefore, a corporation with 125 stockholders and one of them being another corporation would be ineligible for S corporation status.

Question 8

Western Corporation began operations in 1999. Its fiscal year end is October 31. This date coincides with its natural business year. On June 2, 2018, Western elects S corporation status. All of the corporate shareholders consented to the election. The earliest date the corporation is recognized as an S corporation is

Accepted Answer

The S corporation election is effective at the start of the corporation's fiscal year if made within the first 2.5 months of the fiscal year. Since the election was made on June 2, 2018, it is effective for the fiscal year beginning November 1, 2018.

Question 9

Tax characteristics of corporations include which of the following?
I.At higher income levels, the lower tax rates phase out by the use of a surtax.
II.The corporate tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
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Accepted Answer

The corporate tax rate in the United States is a flat rate, not a progressive system with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% as described in statement II; those rates apply to individual income tax, not corporate tax. Additionally, the concept of a surtax phasing out lower tax rates at higher income levels does not apply to the current U.S. corporate tax structure, making statement I incorrect.

Question 10

Which of the following characteristics distinguish a corporation from other forms of businesses?
I.Centralization of management
II.Continuity of life
III.Free transferability of ownership interests
IV.Limited liability
V.Profit motive
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Accepted Answer

Statements II (Continuity of life), III (Free transferability of ownership interests), and IV (Limited liability) distinguish corporations from other forms of business. Centralization of management and profit motive are not unique to corporations.

Question 11

Carmen owns 10% of the stock of Fitness Design Corporation, and is its manager. Fitness Design reports taxable income of $70,000 and pays $60,000 in dividends to shareholders before considering payments to Carmen. Carmen receives a $50,000 salary. What is Carmen's income from Fitness Design?

Accepted Answer

Carmen's income from Fitness Design consists of her salary and her share of the dividends.

Her share of the dividends is 10% of $60,000, which is $6,000.

Therefore, her total income is $50,000 (salary) + $6,000 (dividends) = $56,000.

So the correct answer is D.

Question 12

Which of the following entities directly bear the burden of income taxes?
I.Limited Liability Company
II.Corporations
III.Partnerships
​

Accepted Answer

Only corporations directly bear the burden of income taxes. Limited Liability Companies and partnerships are pass-through entities where the tax burden is passed on to their owners or partners.

Question 13

Santana Corporation operates a golf shop. It properly elected Subchapter S status on March 1 of the current year. Taxable income for the current year is $120,000. What is Santana Corporation's income tax liability?

Accepted Answer

Santana Corporation, having elected Subchapter S status, does not pay income tax at the corporate level. Instead, its income is passed through to the shareholders who then report the income on their personal tax returns.

Question 14

Which of the following is/are correct with respect to limited liability companies (LLCs)?
I.An advantage of an LLC when compared to a regular corporation is the ability to pass through tax attributes to owners.
II.A disadvantage of a general partnership when compared with an LLC is the inability of owners to have limited liability.
​

Accepted Answer

Statement I is correct in that one of the advantages of an LLC is the ability to pass through tax attributes to owners, meaning that the business's income is only taxed at the individual owner's personal income tax rate. Statement II is also correct in that a general partnership does not provide limited liability for its owners, whereas an LLC does. Therefore, both statements are correct.

Question 15

Ricardo is the marketing manager and owns a 40% interest in the Fielder Partnership. Fielder's taxable income before considering payments to partners is $80,000. Ricardo withdraws $40,000 for his personal living expenses. How much income must Ricardo report from Fielder?

Accepted Answer

Ricardo must report his share of the partnership's taxable income, not the amount he withdraws for personal expenses. His share is 40% of $80,000, which equals $32,000.

Question 16

A partner in a limited liability partnership (LLP)
I.Has no liability for acts of malfeasance of any of the other partners.
II.Has no liability for the debts of the partnership.
​

Accepted Answer

Limited liability partnership (LLP) provides partners with limited liability for the debts and obligations of the partnership. Therefore, statement II is correct. Additionally, partners in an LLP are not personally liable for the malfeasance of any other partner in the LLP, unless they were involved in the wrongful act themselves. Therefore, statement I is also correct.

Question 17

Limited liability refers to an owner's liability for which of the following?
I.The amount invested in the entity.
II.The liabilities of the corporation that the owner has personally guaranteed.
III.All of the outstanding liabilities of the corporation.
IV.Only for the corporation's loans from financial institutions
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Accepted Answer

Limited liability means an owner's financial liability is limited to the amount they have invested in the entity. They are not personally responsible for the corporation's liabilities beyond their investment, unless they have personally guaranteed specific liabilities.

Question 18

Marty owns 30% of the stock of Myron Corporation. Myron reports taxable income of $100,000 and pays $80,000 in dividends to shareholders. What is Marty's income from Myron Corporation?

Accepted Answer

Marty's income from Myron Corporation includes his share of the dividends paid. Since he owns 30% of the stock, he receives 30% of the $80,000 in dividends, which amounts to $24,000.

Question 19

Certain taxpayers are eligible for a deduction for Qualified Business Income (QBI). Which of the following taxpayers are eligible for the QBI deduction?
I.A single taxpayer with taxable income of $100,000 who owns 100% of the stock of a regular corporation that manufactures rustic furniture.
II.A single taxpayer with taxable income of $250,000 who is a 50% partner in an accounting firm.
III.A single taxpayer with taxable income of $100,000 that operates an accounting business as a sole proprietorship.
IV.A single taxpayer with taxable income of $125,000 who owns 100% of the stock of an S Corporation that produces oak tables.
​

Accepted Answer

Only the taxpayers who operate a qualified trade or business are eligible for the QBI deduction. In this case, statements I and II are incorrect since regular corporations and service-oriented trades, such as accounting firms, are not considered qualified trades or businesses. Statement III is correct since the taxpayer operates an accounting business as a sole proprietorship, and statement IV is correct since the taxpayer owns a qualified S Corporation. Therefore, only statements III and IV are correct.

Question 20

Julian and Tanya each contribute $50,000 cash to form the M&T Partnership on January 4, 2018. Julian and Tanya share profits and losses in the ratio of 60% and 40%, respectively. During 2018, the partnership generates ordinary income of $80,000. A cash distribution of $5,000 is made to Julian in December 2018. How much income must Julian recognize from the partnership in 2018?

Accepted Answer

The answer of Julian and Tanya each contribute $50,000 cash...

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

Danube Corporation operates a theatrical costume shop. Taxable income for the current year is $1,000,000. What is Danube's income tax liability?

Which of the following facts would prevent an S Corporation election? I.Magnificent Corporation has 125 shareholders. II.Simms Corporation, incorporated in Kansas, has only one class of common stock issued and outstanding. ​

Rockhill Corporation operates a women's clothing boutique. Taxable income for the current year is $60,000. What is Rockhill's income tax liability?

Assume a corporation's status as an S corporation is revoked or terminated. How many years must the corporation wait before making a new S corporation election, in absence of IRS consent to an earlier election?

Which of the following will render a corporation ineligible for S corporation status? I.The corporation has 95 stockholders. II.One of the stockholders is a citizen- resident of Canada. ​

Which of the following will render a corporation ineligible for S corporation status? I.The corporation has 125 stockholders. II.One of the stockholders is another corporation. ​

Tax characteristics of corporations include which of the following? I.At higher income levels, the lower tax rates phase out by the use of a surtax. II.The corporate tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. ​

Which of the following characteristics distinguish a corporation from other forms of businesses? I.Centralization of management II.Continuity of life III.Free transferability of ownership interests IV.Limited liability V.Profit motive ​

Carmen owns 10% of the stock of Fitness Design Corporation, and is its manager. Fitness Design reports taxable income of $70,000 and pays $60,000 in dividends to shareholders before considering payments to Carmen. Carmen receives a $50,000 salary. What is Carmen's income from Fitness Design?

Which of the following entities directly bear the burden of income taxes? I.Limited Liability Company II.Corporations III.Partnerships ​

Santana Corporation operates a golf shop. It properly elected Subchapter S status on March 1 of the current year. Taxable income for the current year is $120,000. What is Santana Corporation's income tax liability?

Ricardo is the marketing manager and owns a 40% interest in the Fielder Partnership. Fielder's taxable income before considering payments to partners is $80,000. Ricardo withdraws $40,000 for his personal living expenses. How much income must Ricardo report from Fielder?

A partner in a limited liability partnership (LLP) I.Has no liability for acts of malfeasance of any of the other partners. II.Has no liability for the debts of the partnership. ​

Marty owns 30% of the stock of Myron Corporation. Myron reports taxable income of $100,000 and pays $80,000 in dividends to shareholders. What is Marty's income from Myron Corporation?

Which of the following facts would prevent an S Corporation election? I.Magnificent Corporation has 125 shareholders. II.Simms Corporation, incorporated in Kansas, has only one class of common stock issued and outstanding.

Which of the following will render a corporation ineligible for S corporation status? I.The corporation has 95 stockholders. II.One of the stockholders is a citizen- resident of Canada.

Which of the following will render a corporation ineligible for S corporation status? I.The corporation has 125 stockholders. II.One of the stockholders is another corporation.

Tax characteristics of corporations include which of the following? I.At higher income levels, the lower tax rates phase out by the use of a surtax. II.The corporate tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Which of the following characteristics distinguish a corporation from other forms of businesses? I.Centralization of management II.Continuity of life III.Free transferability of ownership interests IV.Limited liability V.Profit motive

Which of the following entities directly bear the burden of income taxes? I.Limited Liability Company II.Corporations III.Partnerships

A partner in a limited liability partnership (LLP) I.Has no liability for acts of malfeasance of any of the other partners. II.Has no liability for the debts of the partnership.