Exam 15: Entities Overview

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

Jerry would like to organize FBC as either an LLC or as a corporation (taxed as a C corporation) generating an 8 percent annual before-tax rate of return on a $400,000 investment. Individual and corporate tax rates are both 35 percent and individual capital gains and dividends tax rates are 15 percent. FBC will pay out its after-tax earnings every year to either its members or its shareholders.a. Ignoring self-employment taxes, how much would Jerry keep after taxes if FBC 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 owner and entity level) tax rates if FBC is organized as either an LLC or as a corporation (taxed as a C corporation)?

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in SanFrancisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a$75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an Scorporation, how much income will be allocated to Roberto?

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.

Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would be least favorable?

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

Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an Scorporation, which type of investor group could Robert obtain capital from?

SNL corporation, a C corporation, reports $400,000 of taxable income in the current year. SNL's tax rate is 35 percent. Answer the following questions, assuming Keegan, SNL's sole shareholder, has a marginal tax rate of39.6 percent on ordinary income and 23.8 percent on dividend income (including the net investment income tax).a. Compute the first level of tax on SNL's taxable income for the year.b. Compute the second level of tax on SNL's income assuming that SNL currently distributes all of itsafter-tax earnings to Keegan. What is the overall (combined owner and entity level) tax rate on SNL's taxable income for the year?

In its first year of existence Aspen Corp. (a C corporation) reported a loss for tax purposes of$50,000. In year 2, it reports a $30,000 loss. For year 3, it reports taxable income from operations of$120,000. How much tax will Aspen Corp. pay for year 3? Consult the corporate tax rate table provided to calculate your answer. (Use Corporate Tax Rate Schedule.)