Exam 15: Entities Overview

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

S corporations have more restrictive ownership requirements than other entities.

Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.

In certain circumstances, C corporations can elect to be treated as flow-through entities.

For the current year, Birch Corporation, a C corporation, reports taxable income of $400,000 before paying salary to its sole shareholder Elaine. Elaine's marginal tax rate on ordinary income is 33percent and 15 percent on dividend income. If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation, what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35percent and it always distributes all after-tax earnings to Elaine.

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

Which legal entity is generally best suited for going public?

What tax year-end must an unincorporated entity with only one owner adopt?

Cali Corp. (a C corporation) projects that it will have taxable income of $250,000 for the year before paying any fringe benefits. Stacey, Cali's sole shareholder, has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income. Assume Cali's tax rate is 34 percent.a. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 ofpre-benefit income if Cali Corp. does not pay out any fringe benefits and distributes all of its after-tax earnings to Stacey?b. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 ofpre-benefit income if Cali Corp. pays Stacey's adoption expenses of $50,000 and the payment is considered to be a qualified fringe benefit? Cali Corp. distributes all of its after-tax earnings to Stacey.c. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 ofpre-benefit income if Cali Corp. pays Stacey's adoption expenses of $50,000 and the payment is considered to be a nonqualified fringe benefit? Cali Corp. distributes all of its after-tax earnings to Stacey.

Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributingcorporation has sufficient earnings and profits.

Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income?

All unincorporated entities are generally treated as flow-through entities for tax purposes.

Emmy would like to organize PRK as either an LLC or as a corporation (taxed as a C corporation) generating a 15 percent annual before-tax rate of return on a $100,000 investment. Individual ordinary rates are 25 percent, corporate rates are 15 percent, and individual capital gains anddividends tax rates are 5 percent. PRK will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Emmy keep after taxes if PRK is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall tax rates (combined entity and owner level) if PRK is organized as either an LLC or a corporation (taxed as a C corporation)?

While a C corporation's losses cannot be used by their shareholders to offset personal income, a C corporation may carry back and carry forward losses to help offset thetaxable income a corporation had or will have. How are these net operating losses carried back and carried forward?

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

Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.

In the current year, DNS (a C corporation) had taxable income of $600,000 and distributed all of its after-tax earnings to Daniel, its sole shareholder. DNS's tax rate is 38 percent. Assuming Daniels' marginal tax rate on ordinary income is 28 percent and his dividend rate is 15 percent (he is notsubject to the net investment income tax), what is the overall tax rate (combined corporate level and shareholder level) on DNS's $600,000 of taxable income?

Both tax and nontax objectives should be considered when choosing an appropriatebusiness entity.

LLC members have more flexibility than corporate shareholders to alter their legalarrangements with respect to one another, the entity, and with outsiders.

Nancy purchased a building and then leased the building to ZML. Nancy is the sole shareholder of ZML. She leased the building to ZML for $2,500 per month. However, the IRS determined that the fair market value of the lease payment should only be $1,500 per month. How would the leasepayment be treated with respect to both Nancy and ZML?