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Exam 4: Business Entities Overview

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Question 41

True/False

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

A) True
B) False

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Question 42

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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 pretax income?

A) 18.8%
B) 23.8%
C) 21%
D) 39.8%
E) 44.8%

F) A) and D)
G) A) and C)

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Question 43

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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?

Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2020?

Logan, a 50-percent shareholder in Military Gear Incorporated (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?

Jorge is a 100-percent owner of JJ LLC (taxed as an S corporation) . He works full time 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?

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

Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.

Losses from C corporations are never available to offset a shareholder's personal income.

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

Which of the following statements is true regarding compensation paid to an owner of an entity taxed as a partnership who works for the entity?

If individual taxpayers are the shareholders of PST Corporation and PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pretax income potentially exposed to?

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

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.

Logan, a 50-percent shareholder in Military Gear Incorporated (MG) , is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $103,000 tax loss for the year, Logan's tax basis in his MG stock was $151,500 at the beginning of the year, and he received $76,500 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?

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

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

A Corporation owns 10 percent of D Corporation. D Corporation 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, A Corporation owns 40 percent of Partnership P. Partnership P earns $500 million in the current year. Given this fact pattern, answer the following questions: a. How much cash from the D Corporation dividend remains for A Corporation after A pays the tax on the dividend, assuming A Corporation 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 A Corporation have after paying taxes on its share of income from the partnership? c. If you were to replace A Corporation with Individual A [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 D Corporation dividend after all taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that D Corporation distributes all of its after-tax income to its shareholders.

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.

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.