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Exam 12: Entities Overview

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Question 31

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

A) Limited partnership.
B) Limited liability company.
C) General partnership.
D) All of these choices are correct.

E) B) and D)
F) B) and C)

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Question 32

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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.

A) True
B) False

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Question 33

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

What kind of deduction is the deduction for qualified business income?

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

If C corporations retain their after-tax earnings, when will their shareholders who are individuals be taxed on the retained earnings?

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

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.

Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year ending in 2017?

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 percent, 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?

If a C corporation incurs a net operating loss in 2019 and carries the loss forward to 2020, the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

Corporation A owns 10 percent of Corporation C.The marginal tax rate on nondividend income for both A and C is 21 percent.Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income, and distributes the remainder proportionately to its shareholders as a dividend.In addition, Corporation A owns 40 percent of Partnership P, which earns $500 million in the current year.Given this fact pattern, answer the following questions: a.How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend, assuming Corporation A is eligible for the 50 percent dividends received deduction? b.If Partnership P distributes all of its current-year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership? c.If you were to replace Corporation A with Individual A [her marginal tax rate on ordinary income is 37 percent and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does Individual A have from the Corporation C dividend after all taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that Corporation C distributes all of its after-tax income to its shareholders.

Jorge is a 60-percent owner of JJ LLC (taxed as a partnership) .He is a passive investor in JJ (he doesn't perform any work for JJ) and his marginal ordinary tax rate is 37 percent.Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?

Which legal entity provides the least flexible legal arrangement for owners?

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.

Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.

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

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

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?

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