Question 1

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 2

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 as many unrelated shareholders as it wants.
- An S corporation is limited to 100 unrelated shareholders.
- A partnership can have an unlimited number of partners.

Question 3

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 $300,000 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.
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 4

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

The excess loss limitations only apply to owners of entities taxed as partnerships and single-member LLCs owned by an individual taxpayer. They do not apply to C corporations or S corporations.

Question 5

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) Two of the above

Accepted Answer

Owners of S corporations can receive deductible compensation for working for the entity, unlike sole proprietorships and partnerships where owners' draws and distributions are not considered deductible compensation.

Question 6

In 2019, BYC Corporation (a C corporation) had an NOL carryover from 2017 in the amount of $40,000. How much tax will BYC pay in 2019 if it reports taxable income from operations of $35,000 in 2019 before the NOL deduction?

Accepted Answer

The answer of In 2019, BYC Corporation (a C corporation)...

Question 7

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 8

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 all 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 9

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

Accepted Answer

C corporations do not allow for personal income tax deductions for business losses, so losses incurred by the corporation cannot be offset against income from other sources. The other options, LLC, general partnership, and S corporation, all allow for pass-through taxation, meaning the losses can be passed through to the individual owners and offset against their income from other sources.

Question 10

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 11

Stacy would like to have SST (a business entity) organized 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 have SST (a...

Question 12

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

All of these choices are correct. The compensation paid to an owner of an entity taxed as a partnership who works for the entity is deductible by the entity, it is considered self-employment income to the owner-worker, and the entity is not required to withhold FICA tax on the compensation paid to the owner.

Question 13

In its first year of existence (2018), Aspen Corp. (a C corporation) reported a loss for tax purposes of $60,000. In 2019, it reports a $40,000 loss. For 2020, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3?

Accepted Answer

The answer of In its first year of existence (2018),...

Question 14

Corporation A owns 10 percent of Corporation C. The marginal tax rate on nondividend income for both A and C is 21 percent. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income, and distributes the remainder proportionately to its shareholders as a dividend. In addition, Corporation A owns 40 percent of Partnership P, which earns $500 million in the current year. Given this fact pattern, answer the following questions:
a. How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend, assuming Corporation A is eligible for the 50 percent dividends received deduction?
b. If Partnership P distributes all of its current-year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership?
c. If you were to replace Corporation A with Individual A [her marginal tax rate on ordinary income is 37 percent and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does Individual A have from the Corporation C dividend after all taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that Corporation C distributes all of its after-tax income to its shareholders.

Accepted Answer

The answer of Corporation A owns 10 percent of Corporation...

Question 15

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) S corporation and C corporation.

Accepted Answer

Partnerships are generally preferred for tax purposes when a liquidating distribution occurs and the entity has appreciated assets because partnerships can distribute appreciated property to their partners without triggering a tax at the entity level. This contrasts with C corporations, where liquidating distributions of appreciated assets can result in double taxation (once at the corporate level and again at the shareholder level). S corporations can also distribute appreciated assets without triggering a corporate-level tax, but there are limitations and potential tax consequences under certain circumstances that make partnerships more favorable.

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

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 18

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 are correct.

Accepted Answer

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

Question 19

Rodger owns 100 percent of the shares in Trevor Inc., a C corporation. Assume the following for the current year:
  Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

Accepted Answer

The answer of Rodger owns 100 percent of the shares...

Question 20

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) Partnership.
B) S corporation.
C) LLC.
D) Partnership and S corporation.
E) S corporation and LLC.

Accepted Answer

The answer of From a tax perspective, which entity choice...

Quiz 4: Entities Overview

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?

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?

The excess loss limitations apply to owners of all of the following entities except which of the following?

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

In 2019, BYC Corporation (a C corporation) had an NOL carryover from 2017 in the amount of $40,000. How much tax will BYC pay in 2019 if it reports taxable income from operations of $35,000 in 2019 before the NOL deduction?

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

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?

In its first year of existence (2018), Aspen Corp. (a C corporation) reported a loss for tax purposes of $60,000. In 2019, it reports a $40,000 loss. For 2020, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3?

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

What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property distribution to a shareholder?

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?

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

Rodger owns 100 percent of the shares in Trevor Inc., a C corporation. Assume the following for the current year: Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

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