Exam 12: The Choice of Business Entity

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

If a new business organized as a C corporation incurs start-up losses, the tax benefits of those losses will be recognized immediately.

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?

Which of the following statements regarding the personal holding company tax is false?

Gerry is the sole shareholder and president of Garmon Corporation. He also owns the office building that serves as the corporation's headquarters. Last year, Garmon paid Gerry $250,000 for the use of the building. Garmon's MTR was 21% and Gerry's was 37%. The revenue agent who audited Garmon's return has concluded that the fair rental value of the office building was $200,000. What is the net impact of this audit conclusion on Gerry and Garmon's combined income tax liability?

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

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?

The net operating losses of a C corporation can be carried forward to reduce its taxable income in future tax years.

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

Which of the following statements regarding the tax burden imposed on business entities is true?

Chou, who is in the 37 percent marginal tax bracket, is the sole shareholder of Liu Corporation. This year, Liu earned $200,000 of taxable income and distributed $50,000 to Ms. Chou. Calculate the combined tax cost for Liu and Ms. Chou.

Which of the following benefits does not occur when owner-shareholders accumulate earnings of their closely-held corporations at the entity level and later sell their stock at an increased value?

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.

A family partnership can shift taxable income to younger family members without any corresponding shift of cash flow to those family members.

Which of the following is not a permissible reason for a regular corporation to accumulate earnings at the entity level and avoid the imposition of the accumulated earnings tax?

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?

When the personal holding company tax was originally enacted, its purpose was to discourage individuals from incorporating their investment portfolios.

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:

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.

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 Mrs Jansen's income tax liability.