Exam 12: The Choice of Business Entity

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?

The use of a corporation as a tax shelter is most effective when the individual tax rate is significantly higher than the corporate tax rate.

Which of the following would not be a successful means of avoiding double tax on the earnings of a closely-held corporation?

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.

The three Crosby children intend to form a business. The business will borrow $900,000 from a local bank. Which of the following statements is true?

Which of the following statements regarding partnerships versus S corporations is false?

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.

Mrs. Fuente, who has a 37% marginal tax rate on ordinary income, is the sole shareholder and CEO of Furey Inc. She also holds a $1 million interest-bearing note issued by Furey. 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 Mrs. Fuente's tax on her income from Furey. (Ignore payroll taxes in your calculations.)

Typically, family-owned businesses are operated as passthrough entities.

A partner in a limited liability partnership (LLP) is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.

Mr. Olsen has a marginal tax rate on ordinary income of 37 percent. He currently earns $100,000 per year through a business operated as a sole proprietorship. If Mr. Olsen does not require current cash from the business, calculate the potential increase or decrease in his annual tax liability if he incorporates and operates the business through a regular corporation.

Gwen and Travis organized a new business as an LLC in which they own equal interests. The new business generated a $10,000 operating loss its first year. Travis has no other taxable income for the current year, but expects to have sufficient taxable income in future years to pay tax in the 24% tax bracket. Which of the following statements regarding Travis' tax savings from the current LLC loss is true?

Which of the following items might an IRS agent seek to recharacterize as a constructive dividend?

The accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.

A family partnership can shift taxable income to younger family members only if these family members own a partnership interest.

After-tax cash flow from a passthrough entity will always exceed after-tax cash flow from a taxable corporation.

The IRS may conclude that a CEO/shareholder of a closely-held corporation has been paid a nondeductible constructive dividend rather than a deductible salary.

Following the rate reductions of the Tax Cuts and Jobs Act, it is not possible for after-tax cash flow from a taxable corporation to exceed after-tax cash flow from a passthrough entity.

Which of the following statements regarding the tax treatment of start-up losses is false?

The revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 21%, and Ms. Lewis' marginal tax rate is 32%. Which of the following is not a consequence of the recharacterization?