Exam 12: The Choice of Business Entity

A business generates profits of $150,000.The owner currently has a 32% marginal tax rate.What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.

Mr.Olsen has a marginal tax rate on ordinary income of 37 percent.He currently earns $100,000 per year through a business operated as a sole proprietorship.If Mr.Olsen does not require current cash from the business,calculate the potential increase or decrease in his annual tax liability if he incorporates and operates the business through a regular corporation.

Partnerships offer more flexibility in allocating income among owners than S corporations.

Loretta plans to start a small business,operated through a corporation.In year 0,she expects the corporation to generate a loss of $100,000.Subsequently,she expects the corporation to be profitable,and projects profit of $150,000 in year 1,and $250,000 in year 2.Loretta's personal marginal tax rate on ordinary income is 37%.Using Appendix A and a 10% discount rate,calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business makes an S corporation election.Assume the excess business loss limitation does not apply.

Because of conflicts of interest,shareholders are usually prohibited by law from serving as corporate officers and executives.

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

Ms.Chou,who is in the 37 percent marginal tax bracket,is the sole shareholder of Liu Corporation.This year,Liu earned $200,000 of taxable income and distributed $50,000 to Ms.Chou.Calculate the combined tax cost for Liu and Ms.Chou.

Which of the following statements regarding the tax treatment of start-up losses is false?

The IRS may conclude that a CEO/shareholder of a closely held corporation has been paid a nondeductible constructive dividend rather than a deductible salary.

Mrs.Jansen is the sole shareholder of Mimeo Corporation.She also owns the office building that serves as corporate headquarters.Last year,Mimeo paid $200,000 annual rent to Mrs.Jansen for use of the building.Mimeo's marginal tax rate was 21% and Mrs.Jansen's marginal tax rate on ordinary income was 37%.The revenue agent who audited Mimeo's return concluded that the fair rental value of the office building was $150,000.Compute the net impact of this audit conclusion on Mimeo's income tax liability.

During a recent IRS audit,the revenue agent decided that the Emig family used their closely held corporation,Gamekeeper,to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business.Gamekeeper's taxable income was $800,000,it paid no dividends,and it had no business need to retain any income.Compute Gamekeeper's accumulated earnings tax assuming that it had accumulated $2 million of after-tax income in prior years.

A business generates profit of $100,000.The owner has a 37% marginal tax rate.What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?

Mr.Allen,whose marginal tax rate is 37%,owns an office building that generates $100,000 annual taxable income.He plans to create a family partnership by giving each of his three children a 15% interest in the building.Mr.Allen will retain a 55% interest.Mr.Allen will manage the building,and receive a guaranteed payment of $20,000.If Mr.Allen's children are in the 12% tax bracket,compute the annual tax savings from this income-shifting arrangement.

Typical family-owned businesses are operated as passthrough entities.

For the current tax year,Cuddle Corporation's $500,000 of taxable income is all considered to be personal holding company income.The corporation did not pay dividends.Which of the following statements is true?

Limited liability companies (LLCs)provide owners the tax advantages of a passthrough entity and the limited liability protection of corporations.

The IRS may recharacterize salary payments to the owners of a closely-held corporation as constructive dividends if it concludes that the amount of the payment is unreasonable in light of the facts and circumstances.

Platte River Corporation is a calendar year S corporation.At the beginning of the year,Mr.Reeves owned 100% of Platte River's outstanding stock.On June 30 of the current year,he gave 25% of the stock to his son Mark and 10% of the stock to his daughter Megan.Platte River's ordinary income for the year was $220,000.What portion of this income must each shareholder report?

Which of the following statements regarding partnerships versus S corporations is false?