Exam 12: The Choice of Business Entity

Glover,Inc.had $350,000 of taxable income,all of which was personal holding company income.The corporation paid a dividend of $350,000 in November.The corporation will owe a personal holding company tax for the year.

During a recent IRS audit,the revenue agent decided that Roger used his closely-held corporation,Dodger Inc.,to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business.Dodger's taxable income for the year was $500,000,and it paid no dividends.Compute Dodger's accumulated earnings tax,assuming that it had accumulated $2 million after-tax income in prior years.

Kyrsten Haas expects her S corporation to generate a profit of $200,000.Kyrsten's marginal tax rate on ordinary income is 37%.What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?

Cathy is the President and sole shareholder of Boxer,Inc.,a regular corporation.The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary.If the IRS disallowed $550,000 of the salary as unreasonable compensation,the corporation's regular income tax will change by a:

The net operating losses of a C corporation can be carried forward to reduce its taxable income in future tax years.

Family partnerships are generally created when the owner of a business makes a gift of an equity interest in the business to a relative.

Which of the following is a consequence of establishing a family partnership or a family-owned S corporation?

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 Mrs.Jansen's income tax liability.

Which of the following statements regarding alternative business forms is true?

Sunny Daze,Inc.,a publicly held company,has $9,000,000 of retained earnings and no financial justification for retaining the earnings.Therefore,it must calculate and pay an accumulated earnings tax on its annual corporate tax return.

Bart owns 100% of an S corporation that had a net operating loss in the current year.If there is sufficient basis in the stock,he will carry this loss back to reduce taxes in a prior S corporation tax year.

When a corporation is thinly capitalized,the IRS is more likely to reclassify a portion of the corporation's debt as equity.

Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.

Mr.and Mrs.Maxwell and their two children (Alicia and Percy)are the four equal partners in MAP Partnership.This year,MAP generated $52,000 ordinary income.Compute the tax cost for the business if Mr.and Mrs.Maxwell's marginal rate is 37 percent,Alicia's marginal rate is 24 percent,and Percy's marginal rate is 12 percent.(Ignore SE tax consequences.)

Following the Tax Cuts and Jobs Act of 2017,it is no longer possible to use a corporation as a tax shelter.

If a business is formed as a regular corporation,the income may be subject to double taxation.

A family partnership can be used to shift a portion of the income from an accounting practice to a taxpayer's young children.

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 a regular corporation and no income is distributed?

Which of the following statements regarding S corporations is true?