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Exam 15: Entities Overview

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Question 1

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Which of the following legal entities are generally classified as C corporations for tax purposes?

A) Sole proprietorship.
B) S corporations.
C) Limited Liability Company.
D) Limited partnerships.
E) None of the choices are correct.

F) C) and E)
G) All of the above

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Question 2

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Jamal Corporation, a C corporation, projects that it will have taxable income of $500,000 before incurring any lease expenses. Jamal's tax rate is 34 percent. Ali, Jamal's sole shareholder, has a marginal tax rate of 33percent on ordinary income and 15 percent on dividend income. Jamal always distributes all of its after-tax earnings to Ali.a. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp. distributes all of its after-tax earnings to its sole shareholder Ali (ignore the 3.8% net investment income tax)?b. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000pre-lease expense income if Jamal leases equipment from Ali at a cost of $120,000 for the year (ignore the3.8% net investment income tax)?c. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000pre-lease expense income if Jamal Corp. leases equipment from Ali at a cost of $120,000 for the year but theIRS determines that the fair market value of the lease payments is $80,000 (ignore the 3.8% net investment income tax)?

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Question 3

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Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume Military Gear Inc has a $100,000 loss for the year, Logan's tax basis in his Military Gear Inc. stock was$150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal regular income tax rate is15%, how much more tax will Logan pay currently if Military Gear Inc. is a Ccorporation compared to the tax he would pay if it were an S corporation?

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

For tax purposes, only unincorporated entities can be considered to be disregarded entities.

On which tax form do LLCs with more than one owner generally report their income and losses?

General partnerships are legally formed by filing a partnership agreement with the statein which the partnership will be formed.

Corporations are legally formed by filing articles of organization with the state in whichthe corporation will be created.

Generally, which of the following flow-through entities can elect to be treated as a Ccorporation?

Which of the following legal entities file documents with the state to be formally recognized by the state?

Sole proprietorships are not treated as legal entities separate from their individualowners.

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of$35,000 in year 2 before any loss carryovers?

S corporation shareholders are legally responsible for paying the S corporation's debtsbecause S corporations are treated as flow-through entities for tax purposes.

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

Tuttle Corporation (a C corporation) projects that it will have taxable income for the year of $300,000 before incurring any interest expense. Assume Tuttle's tax rate is 35 percent.a. What is the amount of the combined corporate and shareholder level tax on the $300,000 of pre-interest expense earnings if Ruth, Tuttle's sole shareholder, lends Tuttle Corporation $100,000 at the beginning of the year, Tuttle pays Ruth $10,000 of interest on the loan (interest is considered to be reasonable), and Tuttle distributes all of its after-tax earnings to Ruth? Assume her ordinary marginal rate is 33 percent and dividend tax rate is 15 percent.b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $8,000. What is the amount of the combined corporate and shareholder level tax on Tuttle Corporation's pre-interest expense earnings?

On which tax form does a single member LLC with one individual owner report its income and losses?

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)?

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

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)?

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