Exam 13: Comparative Forms of Doing Business

Lime, Inc., has taxable income of $334,000. If Lime is a C corporation, its tax liability must be either $113,510 [($50,000 × 15%) + ($25,000 × 25%) + ($25,000 × 34%) + ($234,000 × 39%)] or $116,900.

Bev and Cabel each have 50% ownership in Finch Partnership. Bev's partnership interest has a basis of $225,000. Finch's taxable income for the current year is $100,000, and it distributes $180,000 to each partner. Bev's partnership interest basis at the end of the year is:

Match the following statements: -S corporations

Techniques that can be used to minimize the current period tax liability include:

Fred and Ella are going to establish a business. They expect the business to be very successful in the long-run, but project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is a requisite for the owners. Which form of business entity should they select?

Bev and Cabel each own one-half of the stock of Finch, Inc., an S corporation with no accumulated E & P. Bev's basis in the Finch stock is $225,000. Finch's taxable income for the current year is $100,000, and it distributes $180,000 to each shareholder. Bev's stock basis at the end of the year is:

Match the following statements: -C corporations

Match the following statements: -Sale of an ownership interest by a partner.

C corporations and their shareholders are subject to double taxation. S corporations and their shareholders typically are subject to single taxation. Therefore, for any given amount of corporate taxable income, the combined tax liability of a C corporation and its shareholders will exceed that of an S corporation and its shareholders.

Transferring funds to shareholders, that are deductible by the C corporation, can reduce or eliminate double taxation.

A sole proprietorship files Schedule C of Form 1040, a partnership files Form 1065, a C corporation files Form 1120, and an S corporation files Form 1120S.

Barb and Chuck each own one-half of the stock of Wren, Inc., a C corporation. Each shareholder has a stock basis of $175,000. Wren has accumulated E & P of $300,000. Wren's taxable income for the current year is $100,000, and it distributes $75,000 to each shareholder. Barb's stock basis at the end of the year is:

Actual dividends paid to shareholders result in double taxation. Likewise, deemed dividends (e.g., free use of corporate assets by a shareholder) result in double taxation.

Match the following attributes with the different forms. A particular attribute may apply to more than one entity form. -Sole proprietorship

In its first year of operations, a corporation projects losses of $400,000. Since losses are involved, the corporation definitely should elect S corporation status.

An S corporation election for Federal income tax purposes also is effective for all states' income tax purposes.

Match the following statements: -Sale of corporate stock by the C corporation shareholders.

To the extent of built-in gain or built-in loss at the time of contribution, partnerships may choose to allocate or not allocate this built-in gain or loss to the contributing partner on the sale of the contributed property by the partnership.

Match the following statements: -Sale of corporate stock by the S corporation shareholders.

If an S corporation distributes appreciated property as a dividend, it must recognize gain as to the appreciation.