Question 1

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

Accepted Answer

A)  Ordinary income allocated from both types of passthrough entities is subject to self-employment tax. 
B)  Partners are not permitted to be employees of their partnerships, but S corporation shareholders can be employees of their S corporation. 
C)  S corporation shareholders are not liable for entity debts, but general partners are liable for partnership debts. 
D)  Partnerships have more flexibility than S corporations in the manner in which items are allocated to the owners. 
A)  Ordinary income allocated from both types of passthrough entities is subject to self-employment tax. 
B)  Partners are not permitted to be employees of their partnerships, but S corporation shareholders can be employees of their S corporation. 
C)  S corporation shareholders are not liable for entity debts, but general partners are liable for partnership debts. 
D)  Partnerships have more flexibility than S corporations in the manner in which items are allocated to the owners.

Question 2

Bryan Houlberg expects his C corporation to generate a profit of $200,000. 
-What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

Accepted Answer

A)  21% 
B)  58% 
C)  36.8% 
D)  37% 
A)  21% 
B)  58% 
C)  36.8% 
D)  37%

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

Accepted Answer

A) True 
 B)False

Question 5

When a closely held business is formed as a regular corporation, earnings that are distributed to a shareholder-employee as dividends are taxed only once.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements regarding the use of a corporation as a tax shelter is false?

Accepted Answer

A)  In years in which the individual tax rates were significantly higher than the corporate rates, individuals could reduce the tax on business income by operating as a regular corporation rather than as a passthrough entity. 
B)  The combination of deferral of individual tax and conversion of ordinary income into capital gain enhanced the attractiveness of corporations as tax shelters. 
C)  When the top corporate and individual tax rates are equal, the opportunity for individuals to exploit differences between the individual and corporate rate structures is significant. 
D)  When the top corporate and individual tax rates are equal, corporations are effective tax shelters only if business income is very small and the owners are willing to forgo dividends for a long period of time. 
A)  In years in which the individual tax rates were significantly higher than the corporate rates, individuals could reduce the tax on business income by operating as a regular corporation rather than as a passthrough entity. 
B)  The combination of deferral of individual tax and conversion of ordinary income into capital gain enhanced the attractiveness of corporations as tax shelters. 
C)  When the top corporate and individual tax rates are equal, the opportunity for individuals to exploit differences between the individual and corporate rate structures is significant. 
D)  When the top corporate and individual tax rates are equal, corporations are effective tax shelters only if business income is very small and the owners are willing to forgo dividends for a long period of time.

Question 7

Bryan Houlberg expects his C corporation to generate a profit of $200,000. 
-What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

Accepted Answer

A)  $120,800 
B)  $90,188 
C)  $126,400 
D)  $158,000 
A)  $120,800 
B)  $90,188 
C)  $126,400 
D)  $158,000

Question 8

Loretta plans to start a small business, operated through a corporation. In year 0, she expects the corporation to generate a loss of $100,000. Subsequently, she expects the corporation to be profitable, and projects profit of $150,000 in year 1, and $250,000 in year 2. 
-Loretta's personal marginal tax rate on ordinary income is 37%. Using Appendix A and a 10% discount rate, calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business makes an S corporation election. Assume the excess business loss limitation does not apply.

Accepted Answer

A)  $52,910 total tax cost 
B)  $94,350 total tax cost 
C)  $99,772 total tax cost 
D)  $0 
A)  $52,910 total tax cost 
B)  $94,350 total tax cost 
C)  $99,772 total tax cost 
D)  $0

Question 9

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

Accepted Answer

A)  Having a shareholder lend money to the corporation at a reasonable rate of interest. 
B)  Having a shareholder lease warehouse space to the corporation at a reasonable rental rate. 
C)  Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns. 
D)  Having the corporation employ the shareholder at a reasonable compensation. 
A)  Having a shareholder lend money to the corporation at a reasonable rate of interest. 
B)  Having a shareholder lease warehouse space to the corporation at a reasonable rental rate. 
C)  Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns. 
D)  Having the corporation employ the shareholder at a reasonable compensation.

Question 10

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.

Accepted Answer

A) True 
 B)False

Question 11

When a corporation is thinly capitalized, the IRS is more likely to reclassify a portion of the corporation's debt as equity.

Accepted Answer

A) True 
 B)False

Question 12

Kyrsten Haas expects her S corporation to generate a profit of $200,000. 
-What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%.

Accepted Answer

A)  21% 
B)  58% 
C)  36.8% 
D)  37% 
A)  21% 
B)  58% 
C)  36.8% 
D)  37%

Question 13

Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900,000 salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable income will:

Accepted Answer

A)  Increase by $550,000 
B)  Decrease by $550,000 
C)  Increase by $900,000 
D)  Stay the same 
A)  Increase by $550,000 
B)  Decrease by $550,000 
C)  Increase by $900,000 
D)  Stay the same

Question 14

A business generates profits of $150,000. The owner currently has a 32% marginal tax rate. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

Accepted Answer

A)  Corporate tax, $31,500; individual tax, $3,000 
B)  Corporate tax, $48,000; individual tax, $6,400 
C)  Corporate tax, $31,500; individual tax, $6,400 
D)  Corporate tax, $0; Individual tax, $48,000 
A)  Corporate tax, $31,500; individual tax, $3,000 
B)  Corporate tax, $48,000; individual tax, $6,400 
C)  Corporate tax, $31,500; individual tax, $6,400 
D)  Corporate tax, $0; Individual tax, $48,000

Question 15

A personal holding company is a corporation owned by a large number of individual shareholders that has taxable income arising primarily from nonbusiness sources.

Accepted Answer

A) True 
 B)False

Question 16

Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true?

Accepted Answer

A)  If the business is a C corporation, it will not owe regular tax liability during the first two years. 
B)  If the business is a general partnership, it will owe income tax in Year 2. 
C)  If the business is an S corporation, the Year 1 loss can be allocated entirely to Sandy. 
D)  If the business is a C corporation, it will owe income tax in Year 2. 
A)  If the business is a C corporation, it will not owe regular tax liability during the first two years. 
B)  If the business is a general partnership, it will owe income tax in Year 2. 
C)  If the business is an S corporation, the Year 1 loss can be allocated entirely to Sandy. 
D)  If the business is a C corporation, it will owe income tax in Year 2.

Question 17

Mr Allen, whose marginal tax rate is 37%, owns an office building that generates $100,000 annual taxable income. He plans to create a family partnership by giving each of his three children a 15% interest in the building. Mr Allen will retain a 55% interest. Mr Allen will manage the building, and receive a guaranteed payment of $20,000. If Mr Allen's children are in the 12% tax bracket, compute the annual tax savings from this income-shifting arrangement.

Accepted Answer

A)  $11,250 
B)  $9,000 
C)  $5,000 
D)  $0 
A)  $11,250 
B)  $9,000 
C)  $5,000 
D)  $0

Question 18

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?

Accepted Answer

A)  Travis can carry his share of LLC loss back two years as a net operating loss, and request an immediate tax refund of $1,200. 
B)  Travis can carry his share of LLC loss forward, and will get tax savings only when he generates future income. 
C)  Travis can only use his share of the LLC loss in the current year, and will receive no tax savings. 
D)  The LLC will reallocate Travis share of the loss to Gwen, who can claim $1,750 of additional tax savings. 
A)  Travis can carry his share of LLC loss back two years as a net operating loss, and request an immediate tax refund of $1,200. 
B)  Travis can carry his share of LLC loss forward, and will get tax savings only when he generates future income. 
C)  Travis can only use his share of the LLC loss in the current year, and will receive no tax savings. 
D)  The LLC will reallocate Travis share of the loss to Gwen, who can claim $1,750 of additional tax savings.

Question 19

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

Accepted Answer

A)  The S corporation form offers greater flexibility in allocating the income or loss among the owners. 
B)  The owners of an S corporation have unlimited personal liability for the debts of the business. 
C)  The owners of a general partnership have unlimited personal liability for the debts of the business. 
D)  All of the above are true statements. 
A)  The S corporation form offers greater flexibility in allocating the income or loss among the owners. 
B)  The owners of an S corporation have unlimited personal liability for the debts of the business. 
C)  The owners of a general partnership have unlimited personal liability for the debts of the business. 
D)  All of the above are true statements.

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

Bryan Houlberg expects his C corporation to generate a profit of $200,000. -What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

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

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

When a closely held business is formed as a regular corporation, earnings that are distributed to a shareholder-employee as dividends are taxed only once.

Which of the following statements regarding the use of a corporation as a tax shelter is false?

Bryan Houlberg expects his C corporation to generate a profit of $200,000. -What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

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

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.

When a corporation is thinly capitalized, the IRS is more likely to reclassify a portion of the corporation's debt as equity.

Kyrsten Haas expects her S corporation to generate a profit of $200,000. -What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%.

Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900,000 salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable income will:

A business generates profits of $150,000. The owner currently has a 32% marginal tax rate. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

A personal holding company is a corporation owned by a large number of individual shareholders that has taxable income arising primarily from nonbusiness sources.

Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true?

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

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

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

Bryan Houlberg expects his C corporation to generate a profit of $200,000. -What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

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

The personal holding company tax is a penalty tax imposed in addition to the regular income tax.

When a closely held business is formed as a regular corporation, earnings that are distributed to a shareholder-employee as dividends are taxed only once.

Which of the following statements regarding the use of a corporation as a tax shelter is false?

Bryan Houlberg expects his C corporation to generate a profit of $200,000. -What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

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

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.

When a corporation is thinly capitalized, the IRS is more likely to reclassify a portion of the corporation's debt as equity.

Kyrsten Haas expects her S corporation to generate a profit of $200,000. -What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%.

Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900,000 salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable income will:

A business generates profits of $150,000. The owner currently has a 32% marginal tax rate. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sold individual shareholder?

A personal holding company is a corporation owned by a large number of individual shareholders that has taxable income arising primarily from nonbusiness sources.

Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true?

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

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