Question 1

S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments.

Accepted Answer

S corporation shareholders who work for the company receive compensation in the form of salaries or wages, not guaranteed payments. Guaranteed payments are a characteristic of partnerships and LLCs taxed as partnerships, where they are used to compensate members for services or capital.

Question 2

If a C corporation incurs a net operating loss in 2020 and carries the loss forward to 2021, the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

Accepted Answer

Due to changes made by the Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, for tax years beginning after 2020, the net operating loss (NOL) carryover can only offset up to 80% of a corporation's taxable income (before the net operating loss deduction).

Question 3

Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation.

Accepted Answer

This is true. Passive investors in an S corporation are subject to the 3.8 percent net investment income tax on their allocated business income. Active shareholders who materially participate in the S corporation's business are not subject to this tax.

Question 4

Which of the following entity characteristics are generally key factors for small business owners in deciding which entity to choose?
A)Rate at which income from entity will be taxed.
B)Required accounting period.
C)Liability protection.
D)Both the rate at which income from entity will be taxed and the required accounting period.
E)Both the rate at which income from entity will be taxed and liability protection.

Accepted Answer

The rate at which income from the entity will be taxed and liability protection are key factors for small business owners when deciding which entity to choose. Taxation affects the business's net income, and liability protection is crucial for safeguarding the owner's personal assets.

Question 5

For tax purposes, sole proprietorships pay sole proprietors guaranteed payments as compensation for their services.

Accepted Answer

Sole proprietorships do not pay guaranteed payments to the owner; instead, the owner directly takes the business's profits as personal income and reports it on their personal tax returns. Guaranteed payments are more commonly associated with partnerships and LLCs treated as partnerships for tax purposes, where they are used to compensate members for services or capital.

Question 6

An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.

Accepted Answer

An S corporation shareholder can only deduct losses up to the extent of their adjusted basis in the S corporation stock plus any direct loans made by the shareholder to the corporation. If the loss exceeds this basis, the excess loss cannot be deducted in the current year.

Question 7

If a C corporation incurs a net operating loss in 2020, it may carry the loss back two years and forward 20 years to offset income in those years.

Accepted Answer

Under the CARES Act, net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 can be carried back five years and carried forward indefinitely, changing the previous limitation of carrying back two years and forward 20 years.

Question 8

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?
A)Liability protection.
B)Legal flexibility in defining rights and responsibilities of owners.
C)Facilitation of initial public offerings.
D)Minimal time and cost to organize.

Accepted Answer

Forming a sole proprietorship requires minimal time and cost to organize, which is beneficial for an individual starting a small business with limited resources. Liability protection and legal flexibility are not significant benefits of a sole proprietorship, and facilitation of initial public offerings is not relevant as sole proprietorships are not designed for raising capital through stock markets.

Question 9

Which legal entity is generally best suited for going public?
A)Corporation.
B)LLC.
C)Limited liability partnership.
D)General partnership.
E)All of these entities are equally suited for going public.

Accepted Answer

Corporations are the most suitable legal entities for going public because of their ability to issue stocks, which makes it easier to raise large amounts of capital from the general public. They also have limited liability protection for shareholders, which reduces risk for investors. LLCs, limited liability partnerships, and general partnerships do not have stock, and going public requires issuing stocks, so they are not well-suited for this purpose.

Question 10

Due to recent tax law changes, C corporations are no longer subject to double taxation.

Accepted Answer

C corporations are still subject to double taxation; first, the corporation pays tax on its income, and then shareholders pay taxes on dividends received from the corporation.

Question 11

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?
A)LLC - LLC members.
B)Corporation - Shareholders..
C)General partnership - Partnership.
D)Limited partnership - General partner.

Accepted Answer

In a limited partnership, the general partner(s) bear the ultimate responsibility for the entity's liabilities, while limited partners have liability only up to the amount of their investment.

Question 12

On which form is income from a single-member LLC with one corporate (C corporation)owner reported?
A)Form 1120 used by C corporations to report their income.
B)Form 1120S used by S corporations to report their income.
C)Form 1065 used by partnerships to report their income.
D)Form 1040, Schedule C used by sole proprietorships to report their income.
E)None of the choices are correct.

Accepted Answer

A single-member LLC with one corporate (C corporation) owner would report its income on Form 1120, which is the form used by C corporations to report their income. This is because the LLC is disregarded as an entity separate from its owner for federal income tax purposes, and the corporate owner would report the LLC's income as its own.

Question 13

If a C corporation incurred a net operating loss in 2017, it could carry the loss back two years and forward 20 years to offset income in those years. However, it may offset only 80 percent of the taxable income before the NOL deduction in those years.

Accepted Answer

Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, C corporations could carry back net operating losses (NOLs) two years and forward 20 years to offset 100% of taxable income. The TCJA then changed the rules, eliminating carrybacks for losses arising in tax years ending after December 31, 2017, and allowing losses to be carried forward indefinitely, but limiting the deduction to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.

Question 14

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

Accepted Answer

The deduction for qualified business income applies to owners of flow-through entities, such as partnerships, S corporations, and sole proprietorships, but not to C corporation owners.

Question 15

Business income allocations to owners from an LLC that is taxed as a partnership are subject to self-employment tax if the owners are significantly involved in the entity's business activities.

Accepted Answer

Income allocations to owners from an LLC that is taxed as a partnership are generally subject to self-employment tax if the owners are actively involved in the business. This is because the owners are considered to be self-employed and must pay both the employer and employee portion of Social Security and Medicare taxes.

Question 16

Which legal entity provides the least flexible legal arrangement for owners?
A)Corporation.
B)LLC.
C)Partnership.
D)Sole proprietorship.

Accepted Answer

A corporation provides the least flexible legal arrangement for owners as it requires more complex formalities and regulations, including regular shareholder meetings and the appointment of a board of directors. Additionally, the owners (shareholders) have limited control over the company's operations and decision-making processes.

Question 17

What document must an LLC file with the state to organize its business?
A)Articles of incorporation.
B)Certificate of LLC.
C)Articles (or a certificate)of organization.
D)Partnership agreement.
E)None of the choices is correct. An LLC does not have to file with the state to organize its business.

Accepted Answer

An LLC must file either Articles of Organization or a Certificate of Organization with the state to legally organize its business.

Question 18

S corporation shareholders are subject to self-employment tax on business income allocations from the S corporation if they are actively involved in the S corporation's business.

Accepted Answer

S corporation shareholders are generally not subject to self-employment tax on their share of the business's income. Instead, they pay income tax on their share of the corporation's profits, but those profits are not subject to self-employment taxes.

Question 19

Owners who work for entities taxed as a partnership receive guaranteed payments as compensation. The guaranteed payments are not self-employment income.

Accepted Answer

Guaranteed payments to owners who work for entities taxed as a partnership are considered self-employment income and are subject to self-employment taxes.

Question 20

The C corporation tax rate is lower than the top individual marginal tax rate.

Accepted Answer

The current C corporation tax rate is 21% while the top individual marginal tax rate is 37%.

Quiz 15: Entities Overview

S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments.

If a C corporation incurs a net operating loss in 2020 and carries the loss forward to 2021, the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation.

Which of the following entity characteristics are generally key factors for small business owners in deciding which entity to choose?

For tax purposes, sole proprietorships pay sole proprietors guaranteed payments as compensation for their services.

An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.

If a C corporation incurs a net operating loss in 2020, it may carry the loss back two years and forward 20 years to offset income in those years.

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

Which legal entity is generally best suited for going public?

Due to recent tax law changes, C corporations are no longer subject to double taxation.

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

On which form is income from a single-member LLC with one corporate (C corporation) owner reported?