Question 1

Larry and Laureen own LL Legal Services Corporation equally.The two owners are practicing attorneys employed by the corporation.The only business activity of the entity is the provision of legal services.During the current tax year,the corporation's taxable income is $100,000.What is the corporation's income tax liability?

Accepted Answer

The answer of Larry and Laureen own LL Legal Services...

Question 2

The Brooks Corporation,an S corporation,has a company health-care plan for all employees.Lars,an employee,owns 20% of the corporate stock.Dorothy,also an employee,owns 1%.The cost to the company of Lars' health plan is $2,800 and Dorothy's is $3,000.What amount of the health plan must Lars and Dorothy report as income?
$\begin{array}{ll}
\text { Lars } & \text { Dorothy } \
a.\$-0- & \$-0- \
b.\$-0- & \$ 200 \
c.\$ 2,800 & \$ 200 \
d.\$ 2,800 & \$-0- \
e.\$ 2,800 & \$ 3,000
\end{array}$

Accepted Answer

The answer of The Brooks Corporation,an S corporation,has a company...

Question 3

Personal Service Corporations (PSCs)have certain special characteristics.Which of the following describes a PSC?
I.A PSC is not permitted to reduce any of its income from portfolio investments with a passive activity loss.
II.The owner-employees aggregately own more than 95% of the corporate stock.
III.The performance of personal services by owner-employees is the principal activity.
IV.PSCs are subject to a flat income tax of 35% of taxable income.

Accepted Answer

The answer of Personal Service Corporations (PSCs)have certain special characteristics.Which...

Question 4

Santana Corporation operates a golf shop.It properly elected Subchapter S status on March 1 of the current year.Taxable income for the current year is $120,000.What is Santana Corporation's income tax liability?

Accepted Answer

The answer of Santana Corporation operates a golf shop.It properly...

Question 5

Rosen Group has a company health-care plan for all employees.Will,an employee,owns 10% of Rosen.The cost to Rosen for Will's health plan is $2,500.What amount must Will report as income if Rosen is a
$\begin{array}{ll}
\underline {\text { Corporation} } & \underline {\text { Partnership }} \
a.\$ 2,500 & \$ 2,500 \
b.\$-0- & \$-0- \
c.\$-0- & \$ 2,500 \
d.\$ 2,500 & \$-0-
\end{array}$

Accepted Answer

The answer of Rosen Group has a company health-care plan...

Question 6

"Double taxation" occurs

Accepted Answer

"Double taxation" occurs when corporations pay taxable dividends to shareholders. This is because the corporation has already paid taxes on its profits, and then the shareholders must pay taxes on the dividends they receive from those profits. This results in the same income being taxed twice.

Question 7

Bison Financial Group has a health-care plan for all employees.Dan,an employee,is single and owns 10% of Bison Financial.In 2013,the company paid $2,000 for Dan's health plan.Which of the following are correct statements?
I.If Bison Financial Group is an S corporation,Dan must report the $2,000 as income and can deduct the $2,000 as an itemized medical expense deduction.
II.If Bison Financial Group is a partnership,Dan must report the $2,000 as income and can deduct $2,000 as a deduction for AGI.

Accepted Answer

The answer of Bison Financial Group has a health-care plan...

Question 8

Which of the following entities can provide fringe benefits to owner/employees that are not taxable to the owner/employee?
I.Sole proprietorships
II.S corporations
III.Partnerships
IV.Corporations

Accepted Answer

Corporations can provide fringe benefits to owner/employees that are not taxable to the owner/employee under certain conditions, unlike sole proprietorships, S corporations, and partnerships where the rules for taxability of fringe benefits to owner/employees are more restrictive.

Question 9

Carlotta is the director of golf for Birck Enterprises,an electing S corporation.Carlotta owns a 20% interest in Birck.She receives a salary of $60,000 and fringe benefits costing $6,000.Birck's taxable income before considering the payments to and on behalf of Carlotta is $250,000.Birck's distributes a $50,000 dividend to its shareholders.How much income does Carlotta have from Birck?

Accepted Answer

Carlotta's total income from Birck includes her salary, the value of her fringe benefits, and her share of the S corporation's income and dividends. Her salary is $60,000, and the fringe benefits are valued at $6,000. The S corporation's income is $250,000, and Carlotta owns a 20% interest, so her share of the income is 20% of $250,000, which equals $50,000. S corporations distribute their income to shareholders, and it is taxed on the shareholders' personal income tax returns, not at the corporate level. Therefore, the $50,000 dividend distribution is not additional income to Carlotta; it's part of her share of the S corporation's income. Thus, her total income from Birck is her salary ($60,000) + fringe benefits ($6,000) + her share of the S corporation's income ($50,000), totaling $116,000. However, since none of the provided options match this calculation and considering the context of the question, it seems there might have been a misunderstanding in the calculation process regarding how S corporation distributions are treated. Given the options and the typical understanding of S corporation income distribution, the closest correct answer based on the provided information would be to consider her direct compensation and her share of the income, which was not directly provided as an option. Therefore, the correct response based on the standard treatment of S corporation income and the provided options would be to reevaluate the calculation or the understanding of the question's premise.

Question 10

June is a 20% owner-employee in the Woodbourne Corporation,an S corporation.She is not paid a salary and her share of the corporation's income is $57,000.
I.June must pay self-employment tax at the rate of 15.3% on her share of the S corporation's income.
II.June must pay Social Security at a rate of 7.65% on her share of the S corporation income.

Accepted Answer

Shareholders of an S corporation report their share of income on their personal tax returns, but this income is not subject to self-employment tax. S corporation distributions are generally considered passive income, not earned income, and thus are not subject to self-employment or Social Security taxes.

Question 11

Carmen owns 10% of the stock of Fitness Design Corporation,and is its manager.Fitness Design reports taxable income of $70,000 and pays $60,000 in dividends to shareholders before considering payments to Carmen.Carmen receives a $50,000 salary.What is Carmen's income from Fitness Design?

Accepted Answer

Carmen's income from Fitness Design consists of her salary and her share of the dividends.

Her share of the dividends is 10% of $60,000, which is $6,000.

Therefore, her total income is $50,000 (salary) + $6,000 (dividends) = $56,000.

So the correct answer is D.

Question 12

Leonor is the financial vice-president and owns 60% of Ruston Co.Ruston is an S corporation and reports taxable income of $200,000,before Leonor's salary.Leonor receives a $50,000 salary.What is Leonor's income from Ruston?

Accepted Answer

As a 60% owner of Ruston Co., Leonor's share of the taxable income before her salary is $200,000 x 60% = $120,000. She also receives a salary of $50,000 from the company. Therefore, her total income from Ruston Co. is $120,000 + $50,000 = $170,000. However, only the taxable income before her salary should be considered for this calculation, so the correct answer is C) $140,000 (which is $120,000 + $20,000, her share of Ruston's taxable income after deducting her salary).

Question 13

Claudia owns 10% of the stock of Fitness Design Corporation,an S corporation.She is also its controller.Fitness Design reports taxable income of $70,000 and pays $60,000 in dividends to shareholders before considering Claudia's salary.Claudia receives a $75,000 salary.What is Claudia's income from Fitness Design?

Accepted Answer

As a 10% owner of the S corporation, Claudia's share of the taxable income would be $7,000 ($70,000 x 10%). However, she also receives a $75,000 salary from the corporation. Her total income from the corporation would be $82,000 ($7,000 + $75,000). Since the corporation already paid out $60,000 in dividends to shareholders, this amount does not affect Claudia's income from the corporation. Therefore, the correct answer is B ($82,000 - her salary of $75,000 = $7,000 + her share of taxable income of $7,000 = $74,500).

Question 14

Moses is a 20% partner in an auto parts store where he works full-time.His share of the partnership income is $70,000,which is also his net-self-employment income.
I.Moses must pay self-employment tax at the rate of 15.3% on 92.35% of the partnership income.
II.Moses is allowed a deduction for AGI for 50% of the self-employment tax he pays during the year.

Accepted Answer

Statement I is correct as Moses is subject to self-employment tax on his share of partnership income. The rate of self-employment tax is 15.3% and only 92.35% of partnership income is subject to this tax, as the remaining 7.65% is deductible as a business expense.
Statement II is also correct, as self-employment tax paid during the year is allowed as a deduction for AGI up to 50% of the total self-employment tax paid. Therefore, Moses can deduct a portion of the self-employment tax he pays during the year on his tax return.

Question 15

Maria owns 30% of the stock of Marshmallow Inc.,an electing S corporation.Marshmallow reports taxable income of $100,000 and pays $80,000 in dividends to shareholders.What is Maria's income from Marshmallow?

Accepted Answer

As an S corporation shareholder, Maria must include in her personal income tax return her share of the corporation's taxable income, even if the corporation doesn't distribute any cash to her. Maria's share of the taxable income is $30,000 (30% of $100,000). Since Marshmallow paid out $80,000 in dividends, the full amount of the earnings was not retained by the corporation. Maria should report $30,000 on her return, and any tax she owes on this income will be offset by the amount of tax that Marshmallow paid (the company's taxable income is only taxed once).

Question 16

Danube Corporation operates a theatrical costume shop.Taxable income for the current year is $1,000,000.What is Danube's income tax liability?

Accepted Answer

The answer of Danube Corporation operates a theatrical costume shop.Taxable...

Question 17

Carlos is the contoller for Rooney Corporation.Carlos owns a 20% interest in Rooney.He receives a salary of $60,000 and fringe benefits costing $6,000.Rooney's taxable income before considering the payments to and on behalf of Carlos is $250,000.Rooney distributes a $50,000 dividend to its shareholders.How much income does Carlos have from Rooney?

Accepted Answer

The answer of Carlos is the contoller for Rooney Corporation.Carlos...

Question 18

Pomeroy Corporation has a company health-care plan for all employees.Albert,an employee,owns 15% of the stock.Philip,also an employee,owns 1% of the stock.The cost to the company of Albert's health plan is $3,000 and Philip's is $2,100.What amount of the health plan must Albert and Philip report as income?
$\begin{array}{lc}
  \text { Albert } &\text { Philip } \
a.\$-0- &\$-0- \
b.\$ 3,000 & \$ 2,100 \
c.\$ 3,000 & \$-0- \
d.\$-0- & \$ 2,100
\end{array}$

Accepted Answer

The answer of Pomeroy Corporation has a company health-care plan...

Question 19

Marty owns 30% of the stock of Myron Corporation.Myron reports taxable income of $100,000 and pays $80,000 in dividends to shareholders.What is Marty's income from Myron Corporation?

Accepted Answer

Marty's income from Myron Corporation includes his share of the dividends paid. Since he owns 30% of the stock, he receives 30% of the $80,000 in dividends, which amounts to $24,000.

Question 20

Jack owns a 50% interest in the Westhaven Partnership.Jack receives a distribution of $100,000 from Westhaven and is provided with medical insurance and a $50,000 group-term life insurance policy that costs the company $4,000.Westhaven's taxable income before considering the payments to and on behalf of Jack is $180,000.How much income does Jack have from Westhaven?

Accepted Answer

First, we need to determine the taxable income of the partnership after the payments to and on behalf of Jack. The $100,000 distribution to Jack is not deductible to the partnership, so it is added back to the partnership's taxable income. The $4,000 cost of the group-term life insurance is deductible to the partnership, so it reduces the taxable income of the partnership. Therefore, the taxable income of the partnership after the payments to and on behalf of Jack is:
$180,000 taxable income before the payments
+ $100,000 distribution to Jack 
- $4,000 group-term life insurance cost 
= $276,000 taxable income after the payments
Jack's share of the partnership's taxable income is 50%, so his income from Westhaven is:
$276,000 x 50% = $138,000
However, we need to also subtract the cost of the medical insurance provided to Jack, as this is considered a tax-free fringe benefit. The question does not provide the cost of the medical insurance, so we cannot calculate Jack's income precisely. However, we do know that the cost of the medical insurance will be less than $4,000 (the cost of the group-term life insurance), so we can eliminate answer choices A and B. Answer choice E is also too high, as it doesn't take into account any reduction for the cost of the medical insurance. Therefore, the best choice is answer choice C, $92,000, which is the closest to the expected range of Jack's income from Westhaven.

Quiz 13: Choice of Business Entity - General Tax and Nontax Factorsformation