Exam 12: The Choice of Business Entity

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 accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.

After-tax cash flow is minimized when a business operates as a passthrough entity rather than a taxable corporation.

Which of the following statements regarding the accumulated earnings tax is true?

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 39.6%?

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.

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

Which of the following statements regarding corporate controlled groups is false?

If a corporation has a high debt-to-equity ratio, the IRS may reclassify deductible interest payments as nondeductible dividends.

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

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.

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.

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 had sufficient taxable income in prior years to pay tax in the 28% tax bracket. Which of the following statements regarding Travis' tax savings from the current LLC loss is true?

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?

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?

Typical family-owned businesses are operated as passthrough entities.

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

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?

Sunny Daze, Inc., a publicly held company, has $9,000,000 of retained earnings and no financial justification for retaining the earnings. Therefore, it must calculate and pay an accumulated earnings tax on its annual corporate tax return.

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