Question 1

If a new business organized as a C Corporation incurs start-up losses, the tax benefits of those losses will be recognized in the current tax year.

Accepted Answer

Start-up losses for a C Corporation can be carried forward to future tax years and used to offset future taxable income, but they cannot be recognized in the current tax year.

Question 2

Limited liability companies (LLCs) provide owners the tax advantages of a passthrough entity and the limited liability protection of corporations.

Accepted Answer

Limited liability companies (LLCs) do offer owners the tax advantages of a passthrough entity, such as not being subject to double taxation, and also provide limited liability protection similar to corporations.

Question 3

A family partnership can be used to shift a portion of the income from an accounting practice to a taxpayer's young children.

Accepted Answer

False

Question 4

After-tax cash flow from a passthrough entity will always exceed after-tax cash flow from a taxable corporation.

Accepted Answer

Passthrough entities and taxable corporations have different tax treatments, and the after-tax cash flow from one exceeding the other depends on various factors such as the tax rates applicable to the business and the individual, deductions, and income levels.

Question 5

Both individual general partners and S corporation shareholders must pay self-employment tax on their share of the entity's ordinary business income.

Accepted Answer

Individual general partners must pay self-employment tax on their share of the entity's ordinary business income, but S corporation shareholders do not pay self-employment tax on their share of the corporation's income; instead, they may be subject to income tax on their share of the corporation's profits and payroll taxes on any salary they receive from the corporation.

Question 6

Typically, family-owned businesses are operated as passthrough entities.

Accepted Answer

Family-owned businesses are typically operated as passthrough entities, meaning that the business's income is passed through to the owners and reported on their personal tax returns. This is in contrast to a corporation, which is taxed as a separate entity from its owners.

Question 7

Owners of a small business often minimize tax costs and maximize cash flow by operating as a passthrough entity.

Accepted Answer

This statement is true. Passthrough entities, such as sole proprietorships, partnerships, and S corporations, do not pay federal income tax at the business level. Instead, the business income is passed through to the owners and taxed on their individual tax returns. This can result in lower tax costs and increased cash flow for the business.

Question 8

If a business is operated as a passthrough entity, the startup losses of the business may be deducted against the current taxable income of the owner.

Accepted Answer

Passthrough entities, such as partnerships, sole proprietorships, and S corporations, allow the business income and losses to pass through to the owner's personal tax return. This means that the owner can deduct their share of the startup losses against their personal taxable income.

Question 9

If a business is formed as a C Corporation, the income may be subject to double taxation.

Accepted Answer

C Corporations are subject to corporate income tax on their profits. When profits are distributed to shareholders as dividends, shareholders must also pay individual income tax on those dividends, resulting in double taxation.

Question 10

Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.

Accepted Answer

Family partnerships do attempt to divide the income of a business among family members to reduce the overall tax burden of the family unit. This is because each member can benefit from their own personal income tax bracket and other tax deductions.

Question 11

A family partnership can be used to shift a portion of the income from a capital-intensive manufacturing business to a taxpayer's young children.

Accepted Answer

By creating a family partnership, the parents can transfer a portion of the business ownership to their children, on which the children would receive income. Since children typically have lower tax rates than their parents, this strategy can effectively shift a portion of the business income to lower tax brackets. However, it's important to note that this strategy should be implemented carefully, with the advice of a tax professional, to ensure compliance with tax laws and regulations.

Question 12

Following the rate reductions of the Tax Cuts and Jobs Act, it is not possible for after-tax cash flow from a taxable corporation to exceed after-tax cash flow from a passthrough entity.

Accepted Answer

While the Tax Cuts and Jobs Act has reduced tax rates for corporations and passthrough entities, the after-tax cash flow comparison between the two depends on a variety of factors such as deductions, credits, and individual circumstances. Therefore, it is possible for after-tax cash flow from a taxable corporation to exceed after-tax cash flow from a passthrough entity.

Question 13

Family partnerships are generally created when the owner of a business makes a gift of an equity interest in the business to a relative.

Accepted Answer

This is generally how family partnerships are created, although there may be other methods as well.

Question 14

Transfers of equity interests to family members may result in gift tax liability.

Accepted Answer

Transfers of equity interests to family members are considered gifts and may be subject to gift tax liability. The current annual gift tax exclusion is $15,000 per recipient, and any gift exceeding this amount may be subject to gift taxes.

Question 15

A family partnership can shift taxable income to younger family members without any corresponding shift of cash flow to those family members.

Accepted Answer

The answer of A family partnership can shift taxable income...

Question 16

Bart owns 100% of an S corporation that had a net operating loss in the current year. If there is sufficient basis in the stock, he will carry this loss back to reduce taxes in a prior S corporation tax year.

Accepted Answer

S corporations pass their income, deductions, credits, and losses through to their shareholders annually. Shareholders may use these losses to offset other income on their personal tax returns, but losses cannot be carried back to reduce taxes in prior years; they can only be carried forward.

Question 17

Partnerships offer more flexibility in allocating income among owners than S corporations.

Accepted Answer

Partnerships allow for more flexibility in allocating income among owners, as they can determine profit-sharing arrangements and allocate income and losses according to each partner's contribution, whereas S corporations have limitations on allocating income based on each shareholder's percentage of ownership.

Question 18

The net operating losses of a C corporation can be carried forward to reduce its taxable income in future tax years.

Accepted Answer

This is true. C corporations can carry forward the net operating losses for up to 20 years to offset future taxable income. However, they cannot carry the losses back to previous years.

Question 19

A family partnership can shift taxable income to younger family members only if these family members own a partnership interest.

Accepted Answer

To shift taxable income to younger family members, they must own a partnership interest and receive a portion of the partnership's profits. Without owning a partnership interest, they cannot receive this tax benefit.

Question 20

After-tax cash flow is minimized when a business operates as a passthrough entity rather than a taxable corporation.

Accepted Answer

This statement is incorrect. After-tax cash flow can be impacted by multiple factors, including tax rates, deductions, and credits. Depending on the specifics of the situation, operating as a taxable corporation may result in a lower after-tax cash flow due to higher tax rates, while operating as a passthrough entity may result in a lower after-tax cash flow due to fewer deductions and credits available.

Quiz 12: The Choice of Business Entity