Question 1

A business generates profit of $100,000. The owner has a 39.6% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?
A) Corporate tax, $22,250; individual tax, $39,600
B) Corporate tax, $22,250; individual tax, $0
C) Corporate tax, $0; individual tax, $39,600
D) Corporate tax, $22,250; individual tax, $15,550

Accepted Answer

An S corporation is a pass-through entity, meaning that the income is passed through to the shareholders and taxed on their individual tax returns. Therefore, there would be no corporate income tax paid by the S corporation. The individual owner would pay income tax on their share of the profits, which in this case would be $100,000. With a 39.6% marginal tax rate, the individual tax would be $39,600.

Question 2

Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 39.6%.
A) 35%
B) 60.8%
C) 44.5%
D) 39.6%

Accepted Answer

The answer of Kyrsten Haas expects her S corporation to...

Question 3

The progressive corporate tax rate schedule is applied once to the aggregate taxable income of a controlled group.

Accepted Answer

This statement is true. A controlled group is viewed as a single taxpayer for federal income tax purposes, and therefore, the progressive corporate tax rate schedule is applied once to the group's aggregate taxable income.

Question 4

A business generates profits of $150,000. The owner currently has a 28% MTR. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?
A) Corporate tax, $41,250; individual tax, $3,000
B) Corporate tax, $33,950; individual tax, $5,600
C) Corporate tax, $41,750; individual tax, $5,600
D) Corporate tax, $0; Individual tax, $42,000

Accepted Answer

The answer of A business generates profits of $150,000. The...

Question 5

Gwen and Travis organized a new business as an LLC in which they own equal interests. The new business generated a $10,000 operating loss its first year. If Gwen's marginal tax rate is 35%, her tax savings from the first-year LLC loss is:
A) $3,500
B) $1,750
C) $5,000
D) $3,250

Accepted Answer

As an LLC, the operating loss will flow through to the individual members' tax returns. Gwen's share of the operating loss is $5,000 ($10,000 multiplied by her 50% interest in the LLC). This loss can be used to offset income from other sources on her individual tax return. The tax savings will be equal to the amount of the loss multiplied by Gwen's marginal tax rate of 35%, which is $1,750. Therefore, the correct answer is choice B.

Question 6

Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's marginal tax rate is 25%, and Ben's marginal tax rate is 28%.
A) $12,300
B) $8,800
C) $35,200
D) $0

Accepted Answer

The income generated by JAB partnership will be divided equally between the four partners. Hence, each partner will receive $10,000 ($40,000/4).

Now, each partner's share of the income will be taxed at their respective marginal tax rates.

Mr. and Mrs. Johnson's combined share of the income is $20,000 ($10,000 each). Their marginal tax rate is 35%. Therefore, their tax cost will be 35% of $20,000, which is $7,000.

Alice's share of the income is $10,000. Her marginal tax rate is 25%. Therefore, her tax cost will be 25% of $10,000, which is $2,500.

Ben's share of the income is also $10,000. His marginal tax rate is 28%. Therefore, his tax cost will be 28% of $10,000, which is $2,800.

Hence, the total tax cost associated with JAB partnership's income is $7,000 + $2,500 + $2,800 = $12,300. Therefore, the answer is A) $12,300.

Question 7

Loretta plans to start a small business, operated through a corporation. In year 0, she expects the corporation to generate a loss of $100,000. Subsequently, she expects the corporation to be profitable, and projects profit of $150,000 in year 1, and $250,000 in year 2. Loretta's personal marginal tax rate on ordinary income is 39.6%. Using a 10% discount rate, calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election.
A) $73,518 total tax cost
B) $88,250 total tax cost
C) $115,406 total tax cost
D) $118,800 total tax cost

Accepted Answer

The answer of Loretta plans to start a small business,...

Question 8

Which of the following statements regarding the tax burden imposed on business entities is true?
A) The tax burden imposed on corporate earnings is always lower if the corporation makes an S election.
B) Business owners desiring current cash flow can maximize annual after-tax cash flow by operating as a regular corporation.
C) Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary, interest, or rental income.
D) All of the above statements are true.

Accepted Answer

While an S election can result in tax savings under certain circumstances, it is not always the case that the tax burden on corporate earnings will be lower. Additionally, operating as a regular corporation may not necessarily maximize annual after-tax cash flow, as there are various factors to consider. However, it is true that the current tax cost associated with shareholder cash flow received as dividends may be lower than other forms of cash flow, such as salary, interest, or rental income, due to the preferential tax treatment of qualified dividends.

Question 9

Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.

Accepted Answer

The answer of Individual shareholders who create a brother-sister controlled...

Question 10

Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?
A) $120,800
B) $90,188
C) $111,000
D) $151,438

Accepted Answer

The answer of Bryan Houlberg expects his C corporation to...

Question 11

Loretta plans to start a small business, operated through a corporation. In year 0, she expects the corporation to generate a loss of $100,000. Subsequently, she expects the corporation to be profitable, and projects profit of $150,000 in year 1, and $250,000 in year 2. Loretta's personal marginal tax rate on ordinary income is 39.6%. Using a 10% discount rate, calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business makes an S corporation election.
A) $118,800 total tax cost
B) $99,169 total tax cost
C) $99,772
D) $0

Accepted Answer

To calculate the present value of expected tax savings and costs, we need to calculate the tax on the earnings assuming the business is taxed as a C corporation and then subtract the tax on the earnings assuming the business makes an S corporation election. The difference is the tax savings or costs.

Assuming the business is taxed as a C corporation:
- Year 0: tax savings of $0 (loss carryforward)
- Year 1: tax of $58,200 ($150,000 * 39.6%)
- Year 2: tax of $99,000 ($250,000 * 39.6%)

Total tax cost as a C corporation = $157,200

Assuming the business makes an S corporation election:
- Year 0: tax savings of $39,600 (loss pass-through to Loretta)
- Year 1: tax of $0 (pass-through of loss carryforward from year 0)
- Year 2: tax of $54,600 ($250,000 - $100,000 * 35% = $122,500 * 39.6%)

Total tax cost as an S corporation = $94,200

To calculate the present value, we use the formula:

PV = CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3

PV_C = -$157,200/(1+0.1)^1 +(0)/(1+0.1)^2 +(-$58,200)/(1+0.1)^3 +(-$99,000)/(1+0.1)^4 = -$270,444.77
PV_S = -$39,600/(1+0.1)^1 +(0)/(1+0.1)^2 +(-$0)/(1+0.1)^3 +(-$54,600)/(1+0.1)^4 = -$70,275.22

PV of tax savings = PV_C - PV_S = -$270,444.77 - (-$70,275.22) = -$200,169.55

Therefore, the present value of expected tax savings and costs is $200,169.55, which is equivalent to a total tax cost of $99,169. Option B is the correct answer.

Question 12

Which of the following statements regarding the tax treatment of start-up losses is false?
A) Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit.
B) Start-up losses of a business organized as a partnership are deductible by the partners, potentially generating immediate tax savings.
C) Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit.
D) Start-up losses of a business organized as an S corporation are deductible by the shareholders, potentially generating immediate tax savings.

Accepted Answer

S corporations pass through their income, deductions, losses, and credits to their shareholders for federal tax purposes. Therefore, start-up losses of an S corporation are directly deductible by the shareholders on their personal tax returns, not carried forward as NOLs by the corporation itself.

Question 13

Which of the following is not exclusively a benefit of a passthrough entity?
A) Avoiding double taxation.
B) Ability to diffuse ownership.
C) Deductibility of start up losses.
D) All of the above are exclusive benefits of a passthrough entity.

Accepted Answer

The answer of Which of the following is not exclusively...

Question 14

A business generates profit of $100,000. The owner has a 39.6% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?
A) Corporate tax, $22,250; individual tax, $39,600
B) Corporate tax, $22,250; individual tax, $0
C) Corporate tax, $0; individual tax, $39,600
D) Corporate tax, $22,250; individual tax, $15,550

Accepted Answer

The answer of A business generates profit of $100,000. The...

Question 15

Gwen and Travis organized a new business as an LLC in which they own equal interests. The new business generated a $10,000 operating loss its first year. Travis has no other taxable income for the current year, but had sufficient taxable income in prior years to pay tax in the 28% tax bracket. Which of the following statements regarding Travis' tax savings from the current LLC loss is true?
A) Travis can carry his share of LLC loss back two years as a net operating loss, and request an immediate tax refund of $1,400.
B) Travis can only carry his share of LLC loss forward, and will get tax savings only when the LLC generates future income.
C) Travis can only use his share of the LLC loss in the current year, and will receive no tax savings.
D) The LLC will reallocate Travis share of the loss to Gwen, who can claim $1,750 of additional tax savings.

Accepted Answer

The answer of Gwen and Travis organized a new business...

Question 16

Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?
A) 35%
B) 59.6%
C) 44.5%
D) 39.6%

Accepted Answer

The answer of Bryan Houlberg expects his C corporation to...

Question 17

Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true?
A) If the business is a C corporation, it will not have a regular tax liability during the first two years.
B) If the business is a general partnership, it will owe income tax in Year 2.
C) If the business is an S corporation, the Year 1 loss can be allocated entirely to Sandy.
D) If the business is a C corporation, it will owe income tax in Year 2.

Accepted Answer

The answer of Sandy, Sue, and Shane plan to open...

Question 18

Kyrsten Haas expects her S corporation to generate a profit of $200,000. Kyrsten's marginal tax rate on ordinary income is 39.6%. What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?
A) $0
B) $(79,200)
C) $120,800
D) $(120,800)

Accepted Answer

Since no cash is distributed, Kyrsten does not receive any after-tax cash flow from the S corporation. However, she will still owe taxes on the profits generated by the S corporation.

Kyrsten's share of the S corporation's profits will be included in her personal income tax return and taxed at her marginal tax rate of 39.6%.

Therefore, Kyrsten's tax liability on the profits generated by the S corporation will be:

Tax liability = $200,000 x 39.6% = $79,200

So, her after-tax cash flow will be negative, equal to her tax liability of $79,200. Hence, the correct answer is (B) $(79,200).

Question 19

Parent-subsidiary and brother-sister controlled corporate groups are eligible to file consolidated income tax returns.

Accepted Answer

The answer of Parent-subsidiary and brother-sister controlled corporate groups are...

Question 20

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.

Accepted Answer

A brother-sister controlled group is a common term used in tax law to describe a group of corporations that are controlled by the same set of individuals. These individuals are usually siblings or closely related family members. The group is treated as a single taxpayer for tax purposes and must file a single tax return.

Quiz 12: The Choice of Business Entity

A business generates profit of $100,000. The owner has a 39.6% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?

Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 39.6%.

The progressive corporate tax rate schedule is applied once to the aggregate taxable income of a controlled group.

A business generates profits of $150,000. The owner currently has a 28% MTR. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

Gwen and Travis organized a new business as an LLC in which they own equal interests. The new business generated a $10,000 operating loss its first year. If Gwen's marginal tax rate is 35%, her tax savings from the first-year LLC loss is:

Which of the following statements regarding the tax burden imposed on business entities is true?

Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.

Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?

Which of the following statements regarding the tax treatment of start-up losses is false?

Which of the following is not exclusively a benefit of a passthrough entity?

A business generates profit of $100,000. The owner has a 39.6% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?

Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?

Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true?

Kyrsten Haas expects her S corporation to generate a profit of $200,000. Kyrsten's marginal tax rate on ordinary income is 39.6%. What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?

Parent-subsidiary and brother-sister controlled corporate groups are eligible to file consolidated income tax returns.

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.