Question 1

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

Accepted Answer

Transfers of equity interests to family members may be considered as gifts, and therefore may result in gift tax liability.

Question 2

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

Accepted Answer

False

Question 3

If a new business organized as a C corporation incurs start-up losses, the tax benefits of those losses will be recognized immediately.

Accepted Answer

Start-up losses incurred by a C corporation cannot be recognized immediately. They must be carried forward and used to offset future profits.

Question 4

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 setting up a family partnership, the parents can transfer a portion of the ownership of the business to their children, who may not yet have a high tax liability due to their low income. The children receive an allocation of the business's income, which will be taxed at their lower rate, thus reducing the overall tax liability for the family.

Question 5

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 need to own a partnership interest, otherwise they won't be able to receive any income from the partnership.

Question 6

Typical family-owned businesses are operated as passthrough entities.

Accepted Answer

Passthrough entities are those where the income is reported on the owner's personal tax return, such as partnerships, sole proprietorships, and S-corporations. Family-owned businesses are often operated as passthrough entities.

Question 7

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 according to the tax code. C corporations can carry forward net operating losses for up to 20 years and use them to offset taxable income in future years.

Question 8

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

Accepted Answer

This statement is true. LLCs are a type of business entity that combines the tax benefits of partnership or sole proprietorship with the limited liability protection of corporations. The owners of LLCs are called members, and their personal assets are protected from any liabilities or debts incurred by the business. At the same time, LLCs are not taxed as a separate entity but instead, the profits and losses of the business are passed through to the members' personal tax returns.

Question 9

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

Family partnerships can be created through gifts of equity interests in a business to a relative. This allows the relative to become a co-owner of the business and potentially benefit from its profits and growth.

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

This is true. Family partnerships are often used as a tax planning strategy by business-owning families. The income from the business is distributed among the family members, who may be in lower tax brackets than the owner. This can result in a lower overall tax burden for the family unit.

Question 11

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

The answer of A family partnership can be used to...

Question 12

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 13

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

It is possible for after-tax cash flow from a taxable corporation to exceed after-tax cash flow from a passthrough entity, depending on various factors such as income level, deductions, and credits.

Question 14

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

Accepted Answer

In a regular corporation, the income is subject to corporate income tax at the corporate level and then again as personal income tax when distributed as dividends to shareholders. This results in double taxation.

Question 15

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

Accepted Answer

After-tax cash flow is generally higher for taxable corporations than for passthrough entities because taxable corporations have access to corporate tax rates and deductibility of certain expenses that passthrough entities do not have. Therefore, a business operating as a taxable corporation would typically experience lower tax liabilities and higher after-tax cash flows than if it were structured as a passthrough entity.

Question 16

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.

Accepted Answer

The answer of Start-up losses of a new business operation...

Question 17

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

Accepted Answer

Passthrough entities, such as sole proprietorships, partnerships, and S corporations, do not pay income tax at the entity level. Rather, the income or losses pass through to the owners' personal tax returns, where they are taxed at the individual level. This allows for potential tax savings and increased cash flow for the business owners.

Question 18

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

This is true. As a passthrough entity, the business's profits and losses "pass through" to the owner's personal tax return. This means that the owner can deduct startup losses against their personal taxable income.

Question 19

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 20

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.

Quiz 12: The Choice of Business Entity