Exam 12: The Choice of Business Entity

Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900,000 salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable income will:

Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

Mr. Eddy loaned his solely-owned corporation $3,000,000. The corporation paid a market rate of interest annually. Upon audit, the IRS reclassified some of the debt as equity. Which of the following statements is true?

Homer currently operates a successful S corporation. He would like to bring his two teenage children into the business. If he gives each child 10% of the stock, which of the following statements is true?

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:

A family partnership can be used to shift a portion of the income from a capital-intensive manufacturing business to a taxpayer's young children.

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

Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.

Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.

Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's marginal tax rate is 24%, and Ben's marginal tax rate is 32%.

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

If a business is operated as a passthrough entity, the startup losses of the business may be deducted against the current taxable income of the owner.

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

Mrs. Ford, who has a 37% marginal tax rate, is the sole shareholder and CEO of Fast Inc. She also holds a $1 million interest-bearing note issued by Fast. The corporation's current-year financial records show the following: Sales revenue \1 ,879,000 Mrs. Fuente's salary (160,000) Other operating expenses (414,000) Interest paid on Mrs. Fuente's note (60,000) Dividend distributed to Mrs. Fuente (100,000) Compute Fast's taxable income.

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

Mr. and Mrs. Maxwell are equal partners in Family partnership. The Maxwell's marginal tax rate is 35%. Next year, the partnership is expected to generate $200,000 of ordinary income. The Maxwells are considering transferring 20% interests in the partnership to each of their children. Their daughter, Melissa, has a 12% marginal tax rate. Their son, Mark, has a 22% marginal tax rate. Calculate the expected annual tax savings to the family from the proposed transfer of partnership interests.

Loretta plans to start a small business, which will operate as 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.

Which of the following statements regarding S corporations is true?

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 sole individual shareholder?

Which of the following is not exclusively a benefit of a passthrough entity?