Question 1

Because of conflicts of interest, shareholders are usually prohibited by law from serving as corporate officers and executives.

Accepted Answer

A) True 
 B)False  False

Question 2

During a recent IRS audit, the revenue agent decided that Roger used his closely-held corporation, Dodger Inc., to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Dodger's taxable income for the year was $500,000 and it paid no dividends. 
-Compute Dodger's accumulated earnings tax, assuming that it had accumulated $130,000 after-tax income in prior years.

Accepted Answer

A)  $0 
B)  $100,000 
C)  $76,000 
D)  $50,000 
A)  $0 
B)  $100,000 
C)  $76,000 
D)  $50,000 C

Question 3

If a corporation has a high debt-to-equity ratio, the IRS may reclassify deductible interest payments as nondeductible dividends.

Accepted Answer

A) True 
 B)False  True

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Marcia is a shareholder in an S corporation and also works for the corporation. This year, her share of ordinary income was $250,000 and her compensation was $100,000. Which of the following accurately describes her tax consequences from these earnings?

Accepted Answer

A)  Both the ordinary income and the compensation are subject to income tax and self-employment tax. 
B)  Both the ordinary income and the compensation are subject to income tax and the compensation is subject to payroll tax. 
C)  Both the ordinary income and the compensation are subject to income tax and the compensation is subject to self-employment tax.
D )The ordinary income is subject to income and self-employment tax; the compensation is subject to income and payroll tax. 
A)  Both the ordinary income and the compensation are subject to income tax and self-employment tax. 
B)  Both the ordinary income and the compensation are subject to income tax and the compensation is subject to payroll tax. 
C)  Both the ordinary income and the compensation are subject to income tax and the compensation is subject to self-employment tax.
D )The ordinary income is subject to income and self-employment tax; the compensation is subject to income and payroll tax.

Question 6

Bart owns 100% of an S corporation that had a net operating loss in the current year. If there is sufficient basis in the stock, he will carry this loss back to reduce taxes in a prior S corporation tax year.

Accepted Answer

A) True 
 B)False

Question 7

Transfers of equity interests to family members may result in gift tax liability.

Accepted Answer

A) True 
 B)False

Question 8

Mrs Jansen is the sole shareholder of Mimeo Corporation. She also owns the office building that serves as corporate headquarters. Last year, Mimeo paid $200,000 annual rent to Mrs Jansen for use of the building. Mimeo's marginal tax rate was 21% and Mrs Jansen's marginal tax rate on ordinary income was 37%. The revenue agent who audited Mimeo's return concluded that the fair rental value of the office building was $150,000. 
-Compute the net impact of this audit conclusion on Mimeo's income tax liability.

Accepted Answer

A)  $10,500 increase 
B)  $10,500 decrease 
C)  $8,500 increase 
D)  $8,500 decrease 
A)  $10,500 increase 
B)  $10,500 decrease 
C)  $8,500 increase 
D)  $8,500 decrease

Question 9

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

Accepted Answer

A)  C corporation 
B)  S corporation 
C)  Limited partnership 
D)  LLC 
A)  C corporation 
B)  S corporation 
C)  Limited partnership 
D)  LLC

Question 10

Which of the following statements regarding the accumulated earnings tax is true?

Accepted Answer

A)  The accumulated earnings tax is imposed instead of the regular corporate income tax. 
B)  The accumulated earnings tax is intended to coerce corporations to pay dividends. 
C)  The accumulated earnings tax is calculated by the corporation and paid on its annual corporate income tax return. 
D)  All of the above statements are true. 
A)  The accumulated earnings tax is imposed instead of the regular corporate income tax. 
B)  The accumulated earnings tax is intended to coerce corporations to pay dividends. 
C)  The accumulated earnings tax is calculated by the corporation and paid on its annual corporate income tax return. 
D)  All of the above statements are true.

Question 11

During a recent IRS audit, the revenue agent decided that the Emig family used their closely held corporation, Gamekeeper, to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Gamekeeper's taxable income was $800,000, it paid no dividends, and it had no business need to retain any income. Compute Gamekeeper's accumulated earnings tax assuming that it had accumulated $2 million of after-tax income in prior years.

Accepted Answer

Because Gamekeeper accumulated more than

Question 12

Betsy Williams is the sole shareholder of Kurt Corporation. She also owns the office building that serves as corporate headquarters for Kurt. Last year, Kurt paid $200,000 annual rent to Betsy for use of the building. Kurt's marginal tax rate was 21 percent and Betsy's marginal tax rate was 37 percent. The revenue agent who audited Kurt's return concluded that the fair rental value of the office building was $140,000.
a. What effect does this conclusion have on Betsy's personal income tax liability?
b. What effect does this conclusion have on Kurt's corporate income tax liability?

Accepted Answer

a. If $60,000 of the payment to Betsy is

Question 13

One disadvantage of the creation of a family-owned entity is that there is dilution of control with respect to the original business owners.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)  Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
B)  Start-up losses of a business organized as a partnership are deductible by the partners, potentially generating immediate tax savings. 
C)  Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
D)  Start-up losses of a business organized as an S corporation are deductible by the shareholders, potentially generating immediate tax savings. 
A)  Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
B)  Start-up losses of a business organized as a partnership are deductible by the partners, potentially generating immediate tax savings. 
C)  Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
D)  Start-up losses of a business organized as an S corporation are deductible by the shareholders, potentially generating immediate tax savings.

Question 15

During a recent IRS audit, the revenue agent decided that Roger used his closely-held corporation, Dodger Inc., to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Dodger's taxable income for the year was $500,000, and it paid no dividends. 
-Compute Dodger's accumulated earnings tax, assuming that it had accumulated $2 million after-tax income in prior years.

Accepted Answer

A)  $100,000 
B)  $400,000 
C)  $50,000 
D)  $0 
A)  $100,000 
B)  $400,000 
C)  $50,000 
D)  $0

Question 16

Family partnerships are generally created when the owner of a business makes a gift of an equity interest in the business to a relative.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?

Accepted Answer

A)  Corporate tax, $21,000; individual tax, $37,000 
B)  Corporate tax, $21,000; individual tax, $0 
C)  Corporate tax, $0; individual tax, $37,000 
D)  Corporate tax, $21,000; individual tax, $15,800 
A)  Corporate tax, $21,000; individual tax, $37,000 
B)  Corporate tax, $21,000; individual tax, $0 
C)  Corporate tax, $0; individual tax, $37,000 
D)  Corporate tax, $21,000; individual tax, $15,800

Question 20

Both individual general partners and S corporation shareholders must pay self-employment tax on their share of the entity's ordinary business income.

Accepted Answer

A) True 
 B)False

Because of conflicts of interest, shareholders are usually prohibited by law from serving as corporate officers and executives.

If a corporation has a high debt-to-equity ratio, the IRS may reclassify deductible interest payments as nondeductible dividends.

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

Marcia is a shareholder in an S corporation and also works for the corporation. This year, her share of ordinary income was $250,000 and her compensation was $100,000. Which of the following accurately describes her tax consequences from these earnings?

Bart owns 100% of an S corporation that had a net operating loss in the current year. If there is sufficient basis in the stock, he will carry this loss back to reduce taxes in a prior S corporation tax year.

Transfers of equity interests to family members may result in gift tax liability.

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

Which of the following statements regarding the accumulated earnings tax is true?

One disadvantage of the creation of a family-owned entity is that there is dilution of control with respect to the original business owners.

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

Family partnerships are generally created when the owner of a business makes a gift of an equity interest in the business to a relative.

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

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.

A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?

Both individual general partners and S corporation shareholders must pay self-employment tax on their share of the entity's ordinary business income.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes as Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income from Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships

The Corporate Taxpayer

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

Exam 12: The Choice of Business Entity

Because of conflicts of interest, shareholders are usually prohibited by law from serving as corporate officers and executives.

If a corporation has a high debt-to-equity ratio, the IRS may reclassify deductible interest payments as nondeductible dividends.

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

Marcia is a shareholder in an S corporation and also works for the corporation. This year, her share of ordinary income was $250,000 and her compensation was $100,000. Which of the following accurately describes her tax consequences from these earnings?

Bart owns 100% of an S corporation that had a net operating loss in the current year. If there is sufficient basis in the stock, he will carry this loss back to reduce taxes in a prior S corporation tax year.

Transfers of equity interests to family members may result in gift tax liability.

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

Which of the following statements regarding the accumulated earnings tax is true?

One disadvantage of the creation of a family-owned entity is that there is dilution of control with respect to the original business owners.

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

Family partnerships are generally created when the owner of a business makes a gift of an equity interest in the business to a relative.

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

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.

A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?

Both individual general partners and S corporation shareholders must pay self-employment tax on their share of the entity's ordinary business income.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes as Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income from Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships

The Corporate Taxpayer

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters