Exam 4: Business Entities Overview

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

S corporation shareholders are legally responsible for paying the S corporation's debts because S corporations are treated as flow-through entities for tax purposes.

David would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $384,000 investment. David's marginal tax rate is 24 percent and the corporate tax rate is 21 percent. David's marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, David's business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business), and the business income allocation would qualify for the deduction for qualified business income. (Round your intermediate calculations and final answer to whole number dollar amount.)a. How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation?b. What are the overall tax rates (combined owner and entity level) if HOS is organized as either an S corporation or a C corporation?

The C corporation tax rate is lower than the top individual marginal tax rate.

Stacy would like to organize SST (a business entity) as either an LLC (taxed as a partnership) or as a corporation (taxed as a C corporation) generating a 10 percent annual before-tax return on a $600,000 investment. Stacy's marginal tax rate on ordinary income is 37 percent. Stacy's marginal tax rate on individual capital gains and dividends is 23.8 percent, including the net investment income tax. SST will pay out its after-tax earnings every year to either its members or its shareholders. If SST is taxed as a partnership, Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax. Assume that SST's income is not qualified business income for purposes of the qualified business income deduction. How much would Stacy have after taxes if SST is organized as either an LLC or a C corporation?

Jorge is a 100-percent owner of JJ LLC (taxed as an S corporation). He works full time for JJ and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?

Unincorporated entities with only one individual owner are taxed as sole proprietorships.

An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.

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

If individual taxpayers are the shareholders of PST Corporation and PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pretax income potentially exposed to?

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

If a C corporation incurs a net operating loss in 2020, it may carry the loss back two years and forward 20 years to offset income in those years.

General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed.

Owners of which of the following entity types receive deductible compensation from the entity for working for the entity?

Unincorporated entities are typically treated as flow-through entities for tax purposes.

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

If a C corporation incurs a net operating loss in 2020 and carries the loss forward to 2021, the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation.

S corporations have more restrictive ownership requirements than other entities.

Which tax classifications can potentially apply to LLCs?