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Exam 4: Entities Overview

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Question 21

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In certain circumstances, C corporation shareholders can elect to change the entity to a flow-through entity for tax purposes.

A) True
B) False

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Question 22

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Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.

A) True
B) False

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Question 23

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

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?

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

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?

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

If a C corporation incurs a net operating loss in 2018, it may carry the loss back two years and forward 20 years to offset income in those years.

Unincorporated entities are typically treated as flow-through entities for tax purposes.

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $550,000. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pre-tax income?

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

Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.

LLC members have more flexibility than corporate shareholders to alter their legal arrangements with respect to one another, the entity, and with outsiders.

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.

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

Logan, a 50 percent shareholder in Military Gear Inc. (MG) , is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $100,000 tax loss for the year, Logan's tax basis in his MG 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 tax rate is 24%, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?

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?

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?

Both tax and nontax objectives should be considered when choosing the entity type for a new business.

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