Question 1

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)General partnership.
B)S corporation.
C)Limited partnership
D)All of the above receive the same tax treatment on liquidating distributions.

Accepted Answer

An S corporation is preferred because it allows shareholders to recognize a loss on the liquidating distribution if the fair market value of the distributed property is less than its adjusted basis. This can provide a tax benefit by offsetting other income.

Question 2

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 is correct.

Accepted Answer

The answer of For which type of entity does the...

Question 3

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

Business income allocations from an S corporation to a shareholder who actively participates in the business, like Jorge, are not subject to self-employment tax or the net investment income tax. This is because S corporation distributions are considered pass-through income and are taxed at the shareholder's individual income tax rate, not as self-employment income or investment income.

Question 4

P corporation owns 60 percent of the stock of S corporation. If S corporation distributes a dividend to P corporation, what is the 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 5

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)Both S corporation and C corporation

Accepted Answer

Partnerships are generally preferred for liquidating distributions involving appreciated assets because they can distribute these assets to their partners without triggering a tax event, unlike C corporations, which may face double taxation (corporate level and then at the shareholder level upon distribution), and S corporations, which have certain restrictions and potential tax implications on distributions.

Question 6

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

As a passive investor in JJ LLC, Jorge's business income allocations are not subject to self-employment tax. Self-employment tax is only applicable to active partners who participate in the management and operation of the LLC. While Jorge's share of business income is subject to ordinary income tax rates, it is not subject to self-employment tax.

Question 7

Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated. Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light generated a $126,050 profit companywide made up of a $75,300 profit from the Sacramento store, a ($25,750)loss from the San Francisco store, and a combined $76,500 profit from the remaining stores. If Bright Light is taxed as a partnership and it is decided that both Roberto and Reagan will be allocated 70 percent of his own store's profit, with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan in total?
A)($25,052.50).
B)($18,025.00).
C)$4,816.25.
D)$20,236.25.

Accepted Answer

The answer of Roberto and Reagan are both 25-percent owner/managers...

Question 8

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

The answer of If you were seeking an entity with...

Question 9

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 half 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

Half of the self-employment tax is deductible for adjusted gross income (AGI) to offset the fact that employers would normally pay half of the Social Security and Medicare taxes for their employees. However, the additional Medicare tax is not deductible for AGI.

Question 10

Owners of which of the following entity types receive deductible compensation from the entity for working for the entity?
A)Sole proprietorship
B)Entity taxed as a partnership
C)S corporation
D)Both Entity taxes as a partner and S corporation

Accepted Answer

An S corporation is a pass-through entity, meaning that the income and losses of the corporation are passed through to the shareholders. The shareholders are then responsible for paying taxes on their share of the income. However, S corporation shareholders are also considered employees of the corporation and can receive deductible compensation for working for the corporation.

Question 11

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 $312,000 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. (Round your intermediate calculations and final answer to whole number dollar amount.)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 12

Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated. Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000)loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and it is decided that both Roberto and Reagan will be allocated 70 percent of his own store's profit, with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan in total?
A)($25,000)
B)($17,500)
C)$5,000
D)$20,000

Accepted Answer

Reagan's allocation from the San Francisco store is 70% of a ($25,000) loss, which equals ($17,500). The total company profit is $125,000. After allocating the specific store profits (70% of Sacramento's $75,000 profit to Roberto and 70% of San Francisco's ($25,000) loss to Reagan), there's a remaining profit of $125,000 - $52,500 (70% of $75,000) + $17,500 (70% of the $25,000 loss) = $90,000 to be distributed among all owners. As a 25-percent owner, Reagan's share of the remaining $90,000 profit is 25%, which equals $22,500. Therefore, Reagan's total income allocation is his share of the San Francisco loss plus his share of the remaining profit: ($17,500) + $22,500 = $5,000.

Question 13

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

- A C corporation can have an unlimited number of shareholders.
- An S corporation can have up to 100 shareholders, all of whom must be U.S. citizens or permanent residents and meet certain other qualifications.
- A partnership can have an unlimited number of partners.

Question 14

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 these choices are correct.

Accepted Answer

A) The compensation paid to an owner of an entity taxed as a partnership who works for the entity is deductible by the entity as a business expense.
B) The compensation is considered as self-employment income to the owner-worker and is subject to self-employment tax.
C) The entity is not required to withhold FICA tax on the compensation it pays to the owner as the owner's share of net earnings from self-employment is subject to self-employment tax rather than FICA tax.

Therefore, all of these choices are correct.

Question 15

When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?
A)FICA tax only.
B)Self-employment tax only.
C)FICA  and self-employment tax.
D)Income tax.
E)None of the choices are correct.

Accepted Answer

Income from an S corporation passed through to an employee/shareholder is subject to income tax but not to FICA or self-employment taxes. S corporation distributions are generally not considered earned income for the purposes of self-employment tax.

Question 16

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

When a C corporation or an S corporation makes a noncash property distribution to a shareholder, the corporation recognizes gain but not loss. This is because the distribution is treated as if the corporation sold the property at its fair market value. If the fair market value exceeds the corporation's basis in the property, a gain is recognized. However, a loss is not recognized in such distributions.

Question 17

Stacy would like to organize SST (a business entity)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 organize SST (a...

Question 18

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)Limited partnership
C)General partnership.
D)S corporation.

Accepted Answer

A C corporation would not allow you to offset the entity losses against your income from other sources. C corporations operate as separate legal entities from their owners, and any losses incurred by the corporation can only be offset against future profits of the corporation. Therefore, if you plan to report a substantial amount of income from other sources during the first three years, you would not be able to use those losses to offset your income if you choose to start a C corporation. Limited partnerships, general partnerships, and S corporations, on the other hand, are pass-through entities that allow the losses to be reported on the owners' individual tax returns and used to offset income from other sources.

Question 19

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

Excess loss limitations generally do not apply to C corporations. They are designed to limit the ability of individual taxpayers to use business losses to offset other types of income, and thus typically apply to pass-through entities like S corporations, partnerships, and single-member LLCs, where the business income or loss passes through to the individual owners' tax returns. C corporations, on the other hand, are taxed at the entity level, so the concept of excess loss limitations doesn't apply in the same way.

Question 20

The excess loss limitations apply to owners of all of the following entities except which of the following (answer for tax years other than 2020)?
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 limitations apply to owners of S corporations, entities taxed as partnerships, and single-member LLCs (owned by an individual taxpayer), but not to owners of C corporations. This is because the losses of C corporations are not passed through to shareholders and are instead retained by the corporation.

Quiz 15: Entities Overview

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

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

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?

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

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

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

Owners of which of the following entity types receive deductible compensation from the entity for working for the entity?

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?

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?

When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?

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?

The excess loss limitations apply to owners of all of the following entities except which of the following (answer for tax years other than 2020) ?