Question 1

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

Accepted Answer

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

Question 2

Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises.Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in SanFrancisco, CA. Bright Light generated a $125,000 profit companywide made up of a$75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?
A) $5,000.
B) ($17,500).
C) $20,000.
D) ($25,000).

Accepted Answer

Roberto's share of the profit is 70% of $75,000 = $52,500. Reagan's share of the profit is 30% of $75,000 = $22,500. However, since the San Francisco store had a loss of $25,000, Reagan's share of the profit is reduced by that amount, resulting in a net allocation of $22,500 - $25,000 = $5,000.

Question 3

What tax year-end must an unincorporated entity with only one owner adopt?
A) The entity may adopt any year-end except for a calendar year-end.
B) The entity must adopt a calendar year-end.
C) The entity must adopt the same year-end as its owner.
D) The entity is free to adopt any tax year-end.

Accepted Answer

An unincorporated entity with only one owner, such as a sole proprietorship, must adopt the same tax year-end as its owner, typically aligning with the owner's individual tax filing requirements.

Question 4

Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in SanFrancisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a$75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an Scorporation, how much income will be allocated to Roberto?
A) $125,000.
B) $31,250.
C) $75,000.
D) $62,500.

Accepted Answer

As a 25% owner of an S corporation, Roberto will be allocated 25% of the total companywide profit, which is $125,000. Therefore, his share is 25% of $125,000, which equals $31,250.

Question 5

Emmy would like to organize PRK as either an LLC or as a corporation (taxed as a C corporation) generating a 15 percent annual before-tax rate of return on a $100,000 investment. Individual ordinary rates are 25 percent, corporate rates are 15 percent, and individual capital gains anddividends tax rates are 5 percent. PRK will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Emmy keep after taxes if PRK is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall tax rates (combined entity and owner level) if PRK is organized as either an LLC or a corporation (taxed as a C corporation)?

Accepted Answer

The answer of Emmy would like to organize PRK as...

Question 6

Taylor would like to organize DRK as either an LLC or as a corporation (taxed as a C corporation) generating a 13 percent annual before-tax rate of return on a $250,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividends tax rates are 5 percent. DRK will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Taylor keep after taxes if DRK is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if DRK is organized as either an LLC or as a corporation (taxed as a C corporation)?

Accepted Answer

The answer of Taylor would like to organize DRK as...

Question 7

David would like to organize HOS as either an LLC or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $300,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividend tax rates are 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders.a. Ignoring self-employment taxes, how much would David keep after taxes if HOS is organized as either anLLC or a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) if HOS is organized as either an LLC or a corporation (taxed as a C corporation)?

Accepted Answer

The answer of David would like to organize HOS as...

Question 8

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) Sole proprietorship.
C) Partnership.
D) S corporation.

Accepted Answer

The answer of If you were seeking an entity with...

Question 9

What is the tax impact to a C corporation or an S corporation when it makes a property distribution to a shareholder?
A) Recognizes loss only.
B) Recognizes gain but not loss.
C) Recognizes either gain or loss.
D) Does not recognize gain or loss.

Accepted Answer

When a C corporation or an S corporation distributes property to a shareholder, it recognizes gain if the fair market value of the property exceeds its adjusted basis, but it does not recognize a loss if the adjusted basis exceeds the fair market value.

Question 10

When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation?
A) FICA and self-employment tax.
B) Self-employment tax only.
C) FICA tax only.
D) None of the choices are correct. This income will never be taxed.
E) None of the choices are correct. This income will, however, be subject to regular income tax.

Accepted Answer

Income allocations from an S corporation to a shareholder are subject to regular income tax but not to FICA or self-employment taxes.

Question 11

Jaron would like to organize TMZ as either an LLC or as a corporation (taxed as a C corporation) generating a 6 percent annual before-tax rate of return on a $200,000 investment. Individual and corporate tax rates are both 40 percent and individual capital gains and dividends tax rates are 10 percent. TMZ will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes (and the additional Medicare Tax), how much would Jaron keep after taxes if TMZ is organized as either an LLC or a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes (and the additional Medicare Tax), what are the overall tax rates (combined overall and entity level) if TMZ is organized as either an LLC or as a corporation (taxed as a C corporation)?

Accepted Answer

The answer of Jaron would like to organize TMZ as...

Question 12

SNL corporation, a C corporation, reports $400,000 of taxable income in the current year. SNL's tax rate is 35 percent. Answer the following questions, assuming Keegan, SNL's sole shareholder, has a marginal tax rate of39.6 percent on ordinary income and 23.8 percent on dividend income (including the net investment income tax).a. Compute the first level of tax on SNL's taxable income for the year.b. Compute the second level of tax on SNL's income assuming that SNL currently distributes all of itsafter-tax earnings to Keegan. What is the overall (combined owner and entity level) tax rate on SNL's taxable income for the year?

Accepted Answer

The answer of SNL corporation, a C corporation, reports $400,000...

Question 13

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?
A) S corporation and C corporation.
B) C corporation.
C) Partnership.
D) S corporation.

Accepted Answer

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

Question 14

Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an Scorporation, which type of investor group could Robert obtain capital from?
A) 30 different partnerships.
B) 90 nonresident individuals.
C) 10 different C corporations.
D) 120 unrelated resident individuals.
E) None of the choices are correct.

Accepted Answer

The answer of Robert is seeking additional capital to expand...

Question 15

Which of the following is not an effective strategy for mitigating the double tax associated with C corporations?
A) Borrowing money from a shareholder.
B) Paying a salary to a shareholder-employee.
C) Paying fringe benefits to a shareholder-employee.
D) Leasing property from a shareholder.
E) All of the choices are effective strategies for mitigating double taxation.

Accepted Answer

All of the choices are effective strategies for mitigating double taxation. Each of the options listed can help reduce the amount of corporate profits subjected to double taxation. Borrowing money from a shareholder, paying a salary to a shareholder-employee, paying fringe benefits to a shareholder-employee, and leasing property from a shareholder all allow for business expenses that reduce the amount of taxable income.

Question 16

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) no limit; 100; 2.
B) no limit; 100; no limit.
C) 100; 100; no limit.
D) 100; no limit; no limit.

Accepted Answer

A C corporation can have an unlimited number of shareholders. 
An S corporation can have up to 100 shareholders, all of whom must be US citizens or residents and not be corporations or partnerships. 
A partnership can have an unlimited number of partners.

Question 17

In the current year, DNS (a C corporation) had taxable income of $600,000 and distributed all of its after-tax earnings to Daniel, its sole shareholder. DNS's tax rate is 38 percent. Assuming Daniels' marginal tax rate on ordinary income is 28 percent and his dividend rate is 15 percent (he is notsubject to the net investment income tax), what is the overall tax rate (combined corporate level and shareholder level) on DNS's $600,000 of taxable income?

Accepted Answer

The answer of In the current year, DNS (a C...

Question 18

Jerry would like to organize FBC as either an LLC or as a corporation (taxed as a C corporation) generating an 8 percent annual before-tax rate of return on a $400,000 investment. Individual and corporate tax rates are both 35 percent and individual capital gains and dividends tax rates are 15 percent. FBC will pay out its after-tax earnings every year to either its members or its shareholders.a. Ignoring self-employment taxes, how much would Jerry keep after taxes if FBC is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) tax rates if FBC is organized as either an LLC or as a corporation (taxed as a C corporation)?

Accepted Answer

The answer of Jerry would like to organize FBC as...

Question 19

Becca would like to organize BMI as either an LLC or as a corporation (taxed as a C corporation) generating a 4 percent annual before-tax rate of return on a $450,000 investment. Individual ordinary rates are 28 percent, corporate rates are 15 percent, and individual capital gains anddividends tax rates are 15 percent. BMI will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Becca keep after taxes if BMI is organized as either aLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if BMI is organized as either an LLC or as a corporation (taxed as a C corporation)?

Accepted Answer

The answer of Becca would like to organize BMI as...

Question 20

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 be least favorable?
A) General partnership.
B) S corporation.
C) LLC.
D) C corporation.

Accepted Answer

The least favorable entity choice in this scenario would be a C corporation because it is subject to double taxation. This means that the corporation would pay income tax on its profits, and then shareholders would pay income tax on any dividends they receive. If the enterprise is expecting losses for the first three years, it would not be generating profits to distribute as dividends, and therefore the double taxation would be a disadvantage. The better choice in this scenario would be an LLC, as it offers the flexibility of a partnership with the limited liability protection of a corporation, while also allowing for pass-through taxation of profits and losses.

Quiz 15: Entities Overview

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

What tax year-end must an unincorporated entity with only one owner adopt?

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

When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation?

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

Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an Scorporation, which type of investor group could Robert obtain capital from?

Which of the following is not an effective strategy for mitigating the double tax associated with C corporations?

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?