Question 1

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 2

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 the general way in which family partnerships are created in business. The owner gifts an equity interest to a relative such as a child, spouse, or sibling. This helps to transfer ownership and management of the business to the next generation while potentially reducing tax liabilities.

Question 3

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

Accepted Answer

When a business is formed as a regular corporation, the corporation is taxed on its income and then the shareholders are taxed on the dividends they receive. This results in double taxation.

Question 4

Contributions of property to S corporations are tax-free only if the contributing parties have control (80% ownership) immediately after the contribution.

Accepted Answer

This is known as the 80% control rule and is a requirement for tax-free contributions of property to S corporations. If control is not achieved, the contribution may trigger a taxable gain.

Question 5

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

Accepted Answer

This statement is false. After-tax cash flow can sometimes be maximized by operating as a passthrough entity, but it depends on the specific circumstances and factors involved. In some cases, a taxable corporation may actually result in a lower tax burden and higher after-tax cash flow.

Question 6

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 7

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

Accepted Answer

Partnerships offer more flexibility in allocating income among owners because they can distribute profits and losses in any way agreed upon by the partners, whereas S corporations are subject to specific allocation rules based on share ownership.

Question 8

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

Accepted Answer

Owners of a small business often choose to operate as a passthrough entity, such as a sole proprietorship, partnership, or S corporation, because the business's profits and losses are passed through to the owners' personal tax returns. This allows for taxation at the individual level, potentially resulting in lower tax rates and minimizing overall tax costs. Additionally, passthrough entities do not pay corporate income tax, which can also help maximize cash flow for the business.

Question 9

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

Pass-through entities, such as sole proprietorships, partnerships, and S corporations, pass their income and losses through to their owners for tax purposes. Owners can deduct any startup losses of the business against their personal income, reducing their taxable income for the current year.

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 are a common strategy for reducing taxes as they allow for the distribution of the business income among family members, who may be in lower tax brackets or have other deductions, thus reducing the overall tax liability for the family unit.

Question 11

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

Accepted Answer

C corporations are allowed to carry back net operating losses up to two years prior to the loss year, which can provide a refund of previously paid taxes or reduce taxable income in those prior years.

Question 12

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 13

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

Accepted Answer

In order to shift taxable income to younger family members through a family partnership, these family members must have an ownership interest in the partnership.

Question 14

Typical family-owned businesses are operated as passthrough entities.

Accepted Answer

Family-owned businesses are commonly structured as passthrough entities such as sole proprietorships, partnerships, or S corporations. This means that the business income is passed through to the owners' personal tax returns and taxed at their individual tax rates rather than being taxed at the business level.

Question 15

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 16

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 17

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) are a hybrid business structure that offer the tax benefits of a partnership or sole proprietorship while also providing limited liability protection to the owners, similar to a corporation. This means that the owners' personal assets are protected from the company's debts or legal liabilities. Additionally, the income and losses of the business pass through to the owners' personal tax returns, which can result in a lower tax burden overall.

Question 18

A partner in a limited liability partnership (LLP) is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.

Accepted Answer

In a limited liability partnership (LLP), each partner is protected from personal liability for certain obligations of the LLP, including malpractice claims arising from the professional misconduct or negligence of another partner, allowing only the assets of the LLP to be used to settle such claims.

Question 19

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

C corporations cannot deduct start-up losses in the current year, but instead must carry them forward to offset future taxable income.

Question 20

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

A family partnership allows for income splitting among partners, which can include parents and their young children. By distributing a portion of the income to the children, the family can potentially lower their overall tax liability.

Quiz 12: The Choice of Business Entity