Exam 12: The Choice of Business Entity

In today's tax environment, the opportunity for individuals to exploit the difference between the individual and the corporate rate structure is greater than ever.

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

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?

Platte River Corporation is a calendar year S corporation. At the beginning of the year, Mr Reeves owned 100% of Platte River's outstanding stock. On June 30 of the current year, he gave 25% of the stock to his son Mark and 10% of the stock to his daughter Megan. Platte River's ordinary income for the year was $220,000. What portion of this income must each shareholder report?

Following the Tax Cuts and Jobs Act of 2017, it is no longer possible to use a corporation as a tax shelter.

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

The accumulated earnings tax is imposed on a partnership formed for or availed of for the purpose of avoiding the income tax with respect to its owners by permitting earnings and profits to accumulate instead of being divided or distributed.

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

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.

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.)

A family partnership can be used to shift a portion of the income from an accounting practice to a taxpayer's young children.

For the current tax year, Cuddle Corporation's $500,000 of taxable income is all considered to be personal holding company income. The corporation did not pay dividends. Which of the following statements is true?

Which of the following statements regarding S corporations is true?

Which of the following is not a good reason to form a family partnership?

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.

Mr and Mrs Maxwell and their two children (Alicia and Percy) are the four equal partners in MAP Partnership. This year, MAP generated $52,000 ordinary income. Compute the tax cost for the business if Mr and Mrs Maxwell's marginal rate is 37 percent, Alicia's marginal rate is 24 percent, and Percy's marginal rate is 12 percent. (Ignore SE tax consequences.)

Which of the following is a consequence of establishing a family partnership or a family-owned S corporation?

The IRS may recharacterize salary payments to the owners of a closely-held corporation as constructive dividends if it concludes that the amount of the payment is unreasonable in light of the facts and circumstances.

Limited liability companies (LLCs) provide owners the tax advantages of a passthrough entity and the limited liability protection of corporations.

Mr Longwood and Mrs Kennett are the equal shareholders in LK Corporation. Both shareholders have a 37 percent marginal tax rate on ordinary income. LK's financial records show the following: Gross income from sales $ 875,000 Operating expenses (420,000 ) Interest paid on debt to shareholders (75,000 ) Dividend distributions: Mr Longwood (50,000 ) Mrs Kennett (50,000 ) a. Compute the combined tax cost for LK, Mr Longwood, and Mrs Kennett attributable to LK's operations. b. How would your computation change if the interest on the shareholder debt was $175,000 and LK paid no dividends?