Question 1

Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would not allow you to offset the entity losses against your income from other sources?
A) C corporation.
B) LLC.
C) General partnership.
D) S corporation.

Accepted Answer

A C corporation's losses must be used at the entity level. That is, the losses don't flow-through to owners to offset their income from other sources.

Question 2

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?
A) Partnership.
B) S corporation.
C) C corporation.
D) S corporation and C corporation.

Accepted Answer

Partnerships and their owners generally don't recognize any gain during a liquidating distribution. Conversely, both S corporations and C corporations must recognize gain when appreciated assets are distributed in a liquidating distribution.

Question 3

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?

Accepted Answer

The answer of In its first year of existence, BYC...

Question 4

What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property distribution to a shareholder?
A) Recognizes either gain or loss.
B) Does not recognize gain or loss.
C) Recognizes gain but not loss.
D) Recognizes loss only.

Accepted Answer

Gains must be recognized on distributed appreciated property for both taxable corporations and S corporations. However, losses are not allowed if the distributed property has depreciated in value.

Question 5

The excess loss limitations apply to owners of all of the following entities except which of the following?
A) C corporations.
B) S corporations.
C) Entities taxed as partnerships.
D) Single member LLCs (owned by an individual taxpayer).

Accepted Answer

The excess loss limitation does not apply to C corporation shareholders because those losses stay at the entity level.

Question 6

In its first year of existence (2018) Aspen Corp. (a C corporation) reported a loss for tax purposes of $60,000. In 2019, it reports a $40,000 loss. For 2020, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3?

Accepted Answer

The answer of In its first year of existence (2018)...

Question 7

Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?
A) Both the self-employment tax and the additional Medicare tax are deductible for AGI in full.
B) Half of the self-employment tax and all of the additional Medicare tax are deductible for AGI.
C) Half of the self-employment tax and none of the additional Medicare tax are deductible for AGI.
D) None of the self-employment tax and none of the additional Medicare tax are deductible for AGI.

Accepted Answer

Fifty-percent of the self-employment tax is deductible for AGI. The additional Medicare tax is not deductible.

Question 8

P corporation owns 60 percent of the stock of S corporation. If S corporation distributes a dividend to P corporation, what is tax rate on the dividend after the dividends received deduction (DRD) if P is entitled to a 65 percent DRD?

Accepted Answer

The answer of P corporation owns 60 percent of the...

Question 9

David would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $300,000 investment. David's marginal tax rate is 24 percent and the corporate tax rate is 21 percent. David's marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, David's business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business) and the business income allocation would qualify for the deduction for qualified business income.
a. How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation?
b. What are the overall tax rates (combined owner and entity level) if HOS is organized as either an S corporation or a C corporation?

Accepted Answer

The answer of David would like to organize HOS (a...

Question 10

Stacy would like to have SST (a business entity) organized as either an LLC (taxed as a partnership) or as a corporation (taxed as a C corporation) generating a 10 percent annual before-tax return on a $600,000 investment. Stacy's marginal tax rate on ordinary income is 37 percent. Stacy's marginal tax rate on individual capital gains and dividends is 23.8 percent, including the net investment income tax. SST will pay out its after-tax earnings every year to either its members or its shareholders. If SST is taxed as a partnership, Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax. Assume that SST's income is not qualified business income for purposes of the qualified business income deduction. How much would Stacy have after taxes if SST is organized as either an LLC or a C corporation?

Accepted Answer

The answer of Stacy would like to have SST (a...

Question 11

Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year:
  Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

Accepted Answer

The answer of Rodger owns 100% of the shares in...

Question 12

Corporation A owns 10% of Corporation C. The marginal tax rate on non-dividend income for both A and C is 21%. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income and distributes the remainder proportionately to its shareholders as a dividend. In addition, Corporation A owns 40% of partnership P that earns $500 million in the current year. Given this fact pattern, answer the following questions:
a. How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend assuming Corporation A is eligible for the 50 percent dividends received deduction?
b. If Partnership P distributes all of its current year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership?
c. If you were to replace Corporation A with individual A [her marginal tax rate on ordinary income is 37% and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does individual A have from the Corporation C dividend after all taxes assuming the dividends are qualified dividends? Consistent with the original facts, assume that Corporation C distributes all of its after-tax income to its shareholders.

Accepted Answer

The answer of Corporation A owns 10% of Corporation C....

Question 13

If you were seeking an entity with the most favorable tax treatment regarding (1) the number of owners allowed, (2) the flexibility to select your accounting period, and (3) the availability of preferential capital gains rates when selling your ownership interest, which entity should you decide to use?
A) C corporation.
B) S corporation.
C) Partnership.
D) Sole proprietorship.

Accepted Answer

These three tax considerations are most favorable for a company that chooses to be taxed as a taxable corporation. There is no limit to the number of owners allowed, no restrictions on what accounting period to use, and all of the gains from selling shares in a C corporation are capital gains.

Question 14

Jorge is a 60 percent owner of JJ LLC (taxed as a partnership). He is a passive investor in JJ (he doesn't perform any work for JJ) and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?
A) Business income allocations are not subject to self-employment tax.
B) Business income allocations are not subject to the net investment income tax.
C) Business income allocations are subject to the additional Medicare tax.
D) Business income allocations are taxed at a maximum 23.8 percent tax rate.

Accepted Answer

Because Jorge is a passive investor in JJ, the business income allocated to him from JJ are not subject to self-employment tax.

Question 15

Which of the following statements is true regarding compensation paid to an owner of an entity taxed as a partnership who works for the entity?
A) The compensation is deductible by the entity.
B) The compensation is self-employment income to the owner-worker.
C) The entity is not required to withhold FICA tax on the compensation it pays to the owner.
D) All of the choices are correct.

Accepted Answer

The entity can deduct the compensation payments, called guaranteed payments, and is not required to withhold any taxes on the payments because it is self-employment income to the owner-worker.

Question 16

Owners of which of the following entity types could potentially increase their after-tax cash flow from the entity by reducing the compensation they receive in order to increase the amount of business income that flows-through to them from the entity?
A) Sole-proprietorship.
B) Entity taxed as a partnership.
C) S corporation.
D) "Entity taxed as a partnership" and "S corporation".

Accepted Answer

This applies to owners of entities taxed as partnerships and S corporations but not sole proprietorships because sole proprietorships don't pay compensation to owners.

Question 17

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?
A) Partnership.
B) S corporation.
C) LLC.
D) Partnership and S corporation.
E) S corporation and LLC.

Accepted Answer

When assets that have declined in value are distributed in liquidation, S corporations may immediately deduct losses from the assets (and pass them through to shareholders) whereas these losses are typically deferred if the distributing entity is taxed as a partnership.

Question 18

Jorge is a 100 percent owner of JJ LLC (taxed as an S Corporation). He works full-time for JJ and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?
A) Business income allocations are subject to self-employment tax.
B) Business income allocations are not subject to the net investment income tax.
C) Business income allocations are subject to the additional Medicare tax.
D) Business income allocations are taxed at a maximum 23.8 percent tax rate.

Accepted Answer

Because Jorge is not a passive investor, the business income allocations from JJ are not subject to the net investment income tax.

Question 19

What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have respectively?
A) 100; no limit; no limit
B) no limit; 100; 2
C) no limit; 100; no limit
D) 100; 100; no limit

Accepted Answer

An S corporation is the only type of entity that has a limit on the maximum number of owners it may have. S corporations may have up to 100 unrelated shareholders.

Question 20

For which type of entity does the entity not pay compensation to an owner who is working for the entity?
A) S corporation.
B) C corporation.
C) Entity taxed as a partnership.
D) None of the choices are correct.

Accepted Answer

Only sole-proprietorships don't pay compensation to owners because the entity and the owner are the same taxpayer.

Quiz 15: Entities Overview

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?

What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property distribution to a shareholder?

The excess loss limitations apply to owners of all of the following entities except which of the following?

In its first year of existence (2018) Aspen Corp. (a C corporation) reported a loss for tax purposes of $60,000. In 2019, it reports a $40,000 loss. For 2020, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3?

Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?

P corporation owns 60 percent of the stock of S corporation. If S corporation distributes a dividend to P corporation, what is tax rate on the dividend after the dividends received deduction (DRD) if P is entitled to a 65 percent DRD?

Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year: Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

Which of the following statements is true regarding compensation paid to an owner of an entity taxed as a partnership who works for the entity?

Owners of which of the following entity types could potentially increase their after-tax cash flow from the entity by reducing the compensation they receive in order to increase the amount of business income that flows-through to them from the entity?

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

Jorge is a 100 percent owner of JJ LLC (taxed as an S Corporation) . He works full-time for JJ and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?

What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have respectively?

For which type of entity does the entity not pay compensation to an owner who is working for the entity?