Exam 12: The Choice of Business Entity

Zenon Corporation generates taxable income of $100,000 per year.Yellow Corporation generates taxable income of $50,000 per year. a.Calculate regular income tax liability for Zenon and Yellow. b.How would your answers to part (a)change if Mary Jones is the sole shareholder of both Zenon and Yellow? c.How would the ownership of the two corporations impact their tax liability if Zenon and Yellow each generated taxable income of $500,000? Provide calculations to support your conclusion.

Kyrsten Haas expects her S corporation to generate a profit of $200,000.Kyrsten's marginal tax rate on ordinary income is 39.6%.What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?

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 34% and Gerry's was 39.6%.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?

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

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

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?

Which of the following is not exclusively a benefit of a passthrough entity?

Andrews Corporation owns all of the outstanding stock of Zeta Inc.The two corporations do not file a consolidated income tax return.This year,each corporation recorded $200,000 of taxable income.What is the regular tax liability of each corporation?

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

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

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.

The IRS may conclude that a CEO/shareholder of a closely held corporation has been paid a nondeductible constructive dividend rather than a deductible salary.

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

A business generates profit of $100,000.The owner has a 39.6% 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?

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

Mrs.Fuente,who has a 39.6% 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: Compute Mrs.Fuente's tax on her income from Furey.(Ignore payroll taxes in your calculations.)

Mr.Longwood and Mrs.Kennett are the equal shareholders in LK Corporation.Both shareholders have a 39.6 percent marginal tax rate on ordinary income.LK's financial records show the following: Corporate tax rate schedule. 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?

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

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