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Exam 4: Entities Overview

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Question 1

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Roberto and Reagan are both 25-percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and it is decided that both Roberto and Reagan will be allocated 70 percent of his own store's profit, with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?

A) ($25,000)
B) ($17,500)
C) $5,000
D) $20,000

E) None of the above
F) B) and C)

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Question 2

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

A) Recognizes either gain or loss.
B) Does not recognize gain or loss.
C) Recognizes gain but not loss.
D) Recognizes loss only.

E) A) and B)
F) A) and C)

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Question 3

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

Stacy would like to have SST (a business entity) organized as either an LLC (taxed as a partnership) or as a corporation (taxed as a C corporation) generating a 10 percent annual before-tax return on a $600,000 investment. Stacy's marginal tax rate on ordinary income is 37 percent. Stacy's marginal tax rate on individual capital gains and dividends is 23.8 percent, including the net investment income tax. SST will pay out its after-tax earnings every year to either its members or its shareholders. If SST is taxed as a partnership, Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax. Assume that SST's income is not qualified business income for purposes of the qualified business income deduction. How much would Stacy have after taxes if SST is organized as either an LLC or a C corporation?

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

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.

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?

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?

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?

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

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

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

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.

P corporation owns 60 percent of the stock of S corporation. If S corporation distributes a dividend to P corporation, what is the tax rate on the dividend after the dividends received deduction (DRD) if P is entitled to a 65 percent DRD?

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.

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

Tax rules require that entities be classified the same way for tax purposes as they are classified for legal purposes.

What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have, respectively?

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

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