Exam 12: The Choice of Business Entity

If a business is operated as a passthrough entity,the startup losses of the business may be deducted against the current taxable income of the owner.

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.

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

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

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 34% and Mrs.Jansen's marginal tax rate on ordinary income was 39.6%.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.

Leo owns 100% of four different corporations.During their tax years ending December 31,each corporation had taxable income of $20,000.What is the regular tax liability of each corporation?

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 39.6%.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 does not make an S corporation election.

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?

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

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.

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.

The IRS agent who audited the Form 1120 filed by Alano Inc.concluded that $300,000 of the salary that Alano paid to its CEO and sole shareholder was a constructive dividend.As a result:

The use of a corporation as a tax shelter is most effective when the individual tax rate is significantly higher than the corporate tax rate.

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

A family partnership can be used to shift a portion of the income from a capital-intensive manufacturing business to a taxpayer's young children.

Contributions of property to S corporations are tax-free only if the contributing parties have control (80% ownership)immediately after the contribution.

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:

The use of a corporation as a tax shelter is most effective when the corporate tax rate is significantly higher than the individual tax rate.

Recent tax legislation reducing the individual tax on dividends has made C corporations more attractive than they were prior to the legislation.

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 15% marginal tax rate.Their son,Mark,has a 25% marginal tax rate.Calculate the expected annual tax savings to the family from the proposed transfer of partnership interests.