Question 1

Gwen and Travis organized a new business as an LLC in which they own equal interests.The new business generated a $10,000 operating loss its first year.If Gwen's marginal tax rate is 35%,her tax savings from the first-year LLC loss is:
A)$3,500
B)$1,750
C)$5,000
D)$3,250

Accepted Answer

The answer of Gwen and Travis organized a new business...

Question 2

When the personal holding company tax was originally enacted,its purpose was to discourage individuals from incorporating their investment portfolios.

Accepted Answer

The personal holding company tax was enacted in 1937 and its purpose was to discourage individuals from incorporating their investment portfolios to avoid paying personal income tax on their investment income.

Question 3

Kyrsten Haas expects her S corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%.
A)21%
B)58%
C)36.8%
D)37%

Accepted Answer

S corporations pass their profits directly to their shareholders, who then report the income on their personal tax returns. Therefore, the effective tax rate on the $200,000 would be Kyrsten's marginal tax rate of 37%.

Question 4

Gwen and Travis organized a new business as an LLC in which they own equal interests.The new business generated a $10,000 operating loss its first year.Travis has no other taxable income for the current year,but expects to have sufficient taxable income in future years to pay tax in the 24% tax bracket.Which of the following statements regarding Travis' tax savings from the current LLC loss is true?
A)Travis can carry his share of LLC loss back two years as a net operating loss,and request an immediate tax refund of $1,200.
B)Travis can carry his share of LLC loss forward,and will get tax savings only when he generates future income.
C)Travis can only use his share of the LLC loss in the current year,and will receive no tax savings.
D)The LLC will reallocate Travis share of the loss to Gwen,who can claim $1,750 of additional tax savings.

Accepted Answer

As an LLC, the business is considered a pass-through entity for tax purposes, meaning that the profits and losses flow through to the owners' individual tax returns. Travis can use his share of the LLC loss to offset any future income generated by the business or other sources. This is known as carrying the loss forward. He cannot carry the loss back to previous years since he has no taxable income for those years. Therefore, the correct answer is B.

Question 5

Mr.and Mrs.Johnson and their two children,Alice and Ben,are the four equal partners in JAB Partnership.This year,JAB generated $40,000 of ordinary income.Compute the tax cost associated with this income if Mr.and Mrs.Johnson's marginal tax rate is 35%,Alice's marginal tax rate is 24%,and Ben's marginal tax rate is 32%.
A)$12,600
B)$8,800
C)$35,200
D)$0

Accepted Answer

The $40,000 of ordinary income generated by JAB Partnership will be divided equally among the four partners, giving each partner $10,000 of income to report. The tax cost for each partner is then calculated based on their individual marginal tax rates: Mr. and Mrs. Johnson (35% of $10,000) = $3,500 each, Alice (24% of $10,000) = $2,400, and Ben (32% of $10,000) = $3,200. Adding these amounts together gives a total tax cost of $12,600.

Question 6

Which of the following statements regarding the tax treatment of start-up losses is false?
A)Start-up losses of a business organized as a C corporation create NOL carryforwards,deductible in future years when the business generates a profit.
B)Start-up losses of a business organized as a partnership are deductible by the partners,potentially generating immediate tax savings.
C)Start-up losses of a business organized as an S corporation create NOL carryforwards,deductible in future years when the business generates a profit.
D)Start-up losses of a business organized as an S corporation are deductible by the shareholders,potentially generating immediate tax savings.

Accepted Answer

S corporations pass through their income, deductions, losses, and credits to their shareholders for federal tax purposes. Therefore, start-up losses of an S corporation are directly deductible by the shareholders on their personal tax returns, not carried forward as NOLs by the corporation itself.

Question 7

A business generates profit of $100,000.The owner has a 37% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?
A)Corporate tax,$21,000; individual tax,$37,000
B)Corporate tax,$21,000; individual tax,$0
C)Corporate tax,$0; individual tax,$37,000
D)Corporate tax,$21,000; individual tax,$15,800

Accepted Answer

If the business is a regular corporation (also known as a C corporation), it pays corporate income tax on its profits. The owner pays individual income tax only on income that is distributed to them, such as dividends. Since no income is distributed in this scenario, the owner pays no individual income tax. The corporate tax rate would apply to the $100,000 profit, but the specific rate isn't provided in the options. Option B is correct because it reflects corporate tax being paid with no individual tax due to no income distribution.

Question 8

Loretta plans to start a small business,operated through a corporation.In year 0,she expects the corporation to generate a loss of $100,000.Subsequently,she expects the corporation to be profitable,and projects profit of $150,000 in year 1,and $250,000 in year 2.Loretta's personal marginal tax rate on ordinary income is 37%.Using Appendix A and a 10% discount rate,calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business makes an S corporation election.Assume the excess business loss limitation does not apply.
A)$52,910 total tax cost
B)$94,350 total tax cost
C)$99,772 total tax cost
D)$0

Accepted Answer

The answer of Loretta plans to start a small business,operated...

Question 9

Kyrsten Haas expects her S corporation to generate a profit of $200,000.Kyrsten's marginal tax rate on ordinary income is 37%.What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?
A)$0
B)($74,000)
C)$126,000
D)($126,000)

Accepted Answer

The answer of Kyrsten Haas expects her S corporation to...

Question 10

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?
A)$120,800
B)$90,188
C)$126,400
D)$158,000

Accepted Answer

The answer of Bryan Houlberg expects his C corporation to...

Question 11

A business generates profit of $100,000.The owner has a 37% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?
A)Corporate tax,$21,000; individual tax,$37,000
B)Corporate tax,$21,000; individual tax,$0
C)Corporate tax,$0; individual tax,$37,000
D)Corporate tax,$21,000; individual tax,$15,800

Accepted Answer

S corporations are pass-through entities, meaning the income is passed through to the owners and taxed at their individual tax rates. There is no corporate tax, so the individual tax on $100,000 at a 37% rate would be $37,000.

Question 12

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?
A)21%
B)58%
C)36.8%
D)37%

Accepted Answer

- The corporate tax rate for a C corporation with a taxable income of $200,000 is 21%, which equals to $42,000 ($200,000 x 21%).
- After paying the corporate tax, the corporation has $158,000 ($200,000 - $42,000) left for distribution.
- As a dividend recipient, Bryan has to pay 20% dividend tax rate on the $158,000, which equals to $31,600 ($158,000 x 20%).
- Bryan also has to pay his marginal tax rate of 37% on the $158,000 dividend, which equals to $58,460 ($158,000 x 37%).
- Therefore, the total tax paid on the $200,000 profit is $131,060 ($42,000 + $31,600 + $58,460), which is an effective tax rate of 65.53% ($131,060 / $200,000).
- However, the effective tax rate only on the amount distributed as a dividend to Bryan is 36.8% ($90,060 / $158,000), which is the closest option to the correct answer.

Question 13

Which of the following statements regarding S corporations is true?
A)If an S corporation's election terminates,the corporation is forced to liquidate.
B)All states treat the S corporation as a taxable corporation for corporate franchise tax purposes.
C)Generally,the transfer of property by a controlling shareholder to a newly-formed S corporation in exchange for stock is a nontaxable event.
D)The owners of a new business should be indifferent between operating as an S corporation and a partnership.

Accepted Answer

Generally, the transfer of property by a controlling shareholder to a newly-formed S corporation in exchange for stock is a non-taxable event. This is because the shareholder is considered to have exchanged property for stock in a tax-free transaction under the IRC Section 351. The other statements are not true or accurate about S corporations. If an S corporation's election terminates, it doesn't force the corporation to liquidate. All states do not treat the S corporation as a taxable corporation for corporate franchise tax purposes. Lastly, the owners of a new business should not be indifferent between operating as an S corporation and a partnership as both have different tax implications and benefits.

Question 14

Loretta plans to start a small business,operated through a corporation.In year 0,she expects the corporation to generate a loss of $100,000.Subsequently,she expects the corporation to be profitable,and projects profit of $150,000 in year 1,and $250,000 in year 2.Using Appendix A and a 10% discount rate,calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election.
A)$52,910 total tax cost
B)$88,250 total tax cost
C)$94,350 total tax cost
D)$118,800 total tax cost

Accepted Answer

The present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election is $52,910. This is calculated by taking the present value of the tax savings in year 1 and year 2, and subtracting the present value of the tax cost in year 0. The tax savings in year 1 is $150,000 * 0.35 = $52,500. The tax savings in year 2 is $250,000 * 0.35 = $87,500. The tax cost in year 0 is $100,000 * 0.35 = $35,000. The present value of the tax savings in year 1 is $52,500 / (1 + 0.1)^1 = $47,727.27. The present value of the tax savings in year 2 is $87,500 / (1 + 0.1)^2 = $75,187.97. The present value of the tax cost in year 0 is $35,000 / (1 + 0.1)^0 = $35,000. Therefore, the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election is $47,727.27 + $75,187.97 - $35,000 = $52,910.

Question 15

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

Accepted Answer

The personal holding company tax is an additional tax imposed on certain corporations to discourage the accumulation of passive income and ensure that income is distributed to shareholders and taxed at the individual level.

Question 16

Sandy,Sue,and Shane plan to open Friends,an upscale restaurant.They project that the business will incur a $90,000 operating loss in Year 1,and $75,000 of profit in Year 2.Which of the following statements is true?
A)If the business is a C corporation,it will not owe regular tax liability during the first two years.
B)If the business is a general partnership,it will owe income tax in Year 2.
C)If the business is an S corporation,the Year 1 loss can be allocated entirely to Sandy.
D)If the business is a C corporation,it will owe income tax in Year 2.

Accepted Answer

As the business is projected to have a profit in Year 2, if it is structured as a C corporation, it will owe income tax in Year 2. Additionally, a C corporation does not pass through losses to shareholders or owners, so it would not be able to offset the Year 1 operating loss with the Year 2 profit.

Question 17

A business generates profits of $150,000.The owner currently has a 32% marginal tax rate.What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?
A)Corporate tax,$31,500; individual tax,$3,000
B)Corporate tax,$48,000; individual tax,$6,400
C)Corporate tax,$31,500; individual tax,$6,400
D)Corporate tax,$0; Individual tax,$48,000

Accepted Answer

The answer of A business generates profits of $150,000.The owner...

Question 18

Which of the following statements regarding the tax burden imposed on business entities is true?
A)The tax burden imposed on corporate earnings is always lower if the corporation makes an S election.
B)Business owners desiring current cash flow can maximize annual after-tax cash flow by operating as a regular corporation.
C)Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary,interest,or rental income.
D)All of the above statements are true.

Accepted Answer

Dividends may be taxed at a lower rate than ordinary income, such as salary or interest, due to preferential tax treatment for qualified dividends.

Question 19

Which of the following is not exclusively a benefit of a passthrough entity?
A)Avoiding double taxation.
B)Ability to diffuse ownership.
C)Deductibility of start-up losses.
D)All of the above are exclusive benefits of a passthrough entity.

Accepted Answer

The ability to diffuse ownership is not exclusive to passthrough entities; it can also be a feature of corporations.

Question 20

Which of the following is not a good reason to form a family partnership?
A)Income can be shifted to lower-tax-rate individuals
B)A buy-sell agreement can ensure that all ownership interests are retained in the family
C)No gift tax is due on the transfer
D)Non-voting interests can be given to younger family members to ensure the older generation maintains operational control

Accepted Answer

Gift taxes may still apply to transfers within a family partnership, depending on the amount and circumstances of the transfer. The other options (A, B, D) are considered benefits or reasons to form a family partnership.

Quiz 12: The Choice of Business Entity

Gwen and Travis organized a new business as an LLC in which they own equal interests.The new business generated a $10,000 operating loss its first year.If Gwen's marginal tax rate is 35%,her tax savings from the first-year LLC loss is:

When the personal holding company tax was originally enacted,its purpose was to discourage individuals from incorporating their investment portfolios.

Kyrsten Haas expects her S corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%.

Which of the following statements regarding the tax treatment of start-up losses is false?

A business generates profit of $100,000.The owner has a 37% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?

Kyrsten Haas expects her S corporation to generate a profit of $200,000.Kyrsten's marginal tax rate on ordinary income is 37%.What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

A business generates profit of $100,000.The owner has a 37% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

Which of the following statements regarding S corporations is true?

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

Sandy,Sue,and Shane plan to open Friends,an upscale restaurant.They project that the business will incur a $90,000 operating loss in Year 1,and $75,000 of profit in Year 2.Which of the following statements is true?

A business generates profits of $150,000.The owner currently has a 32% marginal tax rate.What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

Which of the following statements regarding the tax burden imposed on business entities is true?

Which of the following is not exclusively a benefit of a passthrough entity?

Which of the following is not a good reason to form a family partnership?