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.

Question

Quizplus · Accepted Answer

If the business is a C corporation, it will owe income tax in Year 2, regardless of the Year 1 operating loss. C corporations are taxed as separate entities and are subject to income tax on their net income each year. The loss in Year 1 can be carried forward to offset future profits, but it cannot be used to eliminate tax liability in Year 2.

Sandy, Sue, and Shane Plan to Open Friends, an Upscale