Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 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.

Accepted Answer

A)  $118,800 total tax cost 
B)  $99,169 total tax cost 
C)  $99,772 
D)  $0 
A)  $118,800 total tax cost 
B)  $99,169 total tax cost 
C)  $99,772 
D)  $0

Question 3

A business generates profits of $150,000. The owner currently has a 28% MTR. 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, $41,250; individual tax, $3,000 
B)  Corporate tax, $33,950; individual tax, $5,600 
C)  Corporate tax, $41,750; individual tax, $5,600 
D)  Corporate tax, $0; Individual tax, $42,000 
A)  Corporate tax, $41,250; individual tax, $3,000 
B)  Corporate tax, $33,950; individual tax, $5,600 
C)  Corporate tax, $41,750; individual tax, $5,600 
D)  Corporate tax, $0; Individual tax, $42,000

Question 4

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 have a 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 have a 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 5

Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.

Accepted Answer

A) True 
 B)False

Question 6

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.

Accepted Answer

A) True 
 B)False

Question 7

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?

Accepted Answer

A)  Regardless of whether the business is a partnership or an S corporation, the owners will include the bank debt in the tax basis of their ownership interests. 
B)  From a liability standpoint, the owners should be indifferent as to whether they are a general partnership or an S corporation. 
C)  If the business is an S corporation, the owners can allocate income and losses in any reasonable manner. 
D)  If the business is a partnership the owners can allocate income and losses in any reasonable manner. 
A)  Regardless of whether the business is a partnership or an S corporation, the owners will include the bank debt in the tax basis of their ownership interests. 
B)  From a liability standpoint, the owners should be indifferent as to whether they are a general partnership or an S corporation. 
C)  If the business is an S corporation, the owners can allocate income and losses in any reasonable manner. 
D)  If the business is a partnership the owners can allocate income and losses in any reasonable manner.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)  The tax burden imposed on corporate earnings is always lower if the corporation makes an S election. 
B)  Business owners desiring current cash flow can maximize annual after-tax cash flow by operating as a regular corporation. 
C)  Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary, interest, or rental income. 
D)  All of the above statements are true. 
A)  The tax burden imposed on corporate earnings is always lower if the corporation makes an S election. 
B)  Business owners desiring current cash flow can maximize annual after-tax cash flow by operating as a regular corporation. 
C)  Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary, interest, or rental income. 
D)  All of the above statements are true.

Question 13

Which of the following is NOT one of the characteristics of a constructive dividend?

Accepted Answer

A)  Payment between a corporation and a shareholder 
B)  Original payment treated as deductible by the corporation 
C)  Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation 
D)  All of the above are common characteristics of constructive dividends. 
A)  Payment between a corporation and a shareholder 
B)  Original payment treated as deductible by the corporation 
C)  Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation 
D)  All of the above are common characteristics of constructive dividends.

Question 14

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

Accepted Answer

A)  The personal holding company tax is imposed in addition to the regular corporate income tax. 
B)  The personal holding company tax was originally enacted to discourage individuals from incorporating their investment portfolios. 
C)  The personal holding company tax is calculated by a qualifying corporation and paid on its annual corporate income tax return. 
D)  The personal holding company tax is assessed on a qualifying corporation's undistributed personal holding company income. 
A)  The personal holding company tax is imposed in addition to the regular corporate income tax. 
B)  The personal holding company tax was originally enacted to discourage individuals from incorporating their investment portfolios. 
C)  The personal holding company tax is calculated by a qualifying corporation and paid on its annual corporate income tax return. 
D)  The personal holding company tax is assessed on a qualifying corporation's undistributed personal holding company income.

Question 15

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?

Accepted Answer

A)  Since the children did not pay for the stock, Homer will still be taxed on the full income of the corporation under the assignment of income doctrine. 
B)  Homer must receive a reasonable salary for any time he spends working on behalf of the business. 
C)  Both statements are true. 
D)  Neither statement is true. 
A)  Since the children did not pay for the stock, Homer will still be taxed on the full income of the corporation under the assignment of income doctrine. 
B)  Homer must receive a reasonable salary for any time he spends working on behalf of the business. 
C)  Both statements are true. 
D)  Neither statement is true.

Question 16

Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A)  $0 
B)  $100,000 
C)  $76,000 
D)  $50,000 
A)  $0 
B)  $100,000 
C)  $76,000 
D)  $50,000

Question 18

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 Mimeo's income tax liability.

Accepted Answer

A)  $17,000 increase 
B)  $17,000 decrease 
C)  $17,500 increase 
D)  $17,500 decrease 
A)  $17,000 increase 
B)  $17,000 decrease 
C)  $17,500 increase 
D)  $17,500 decrease

Question 19

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

Accepted Answer

A)  Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
B)  Start-up losses of a business organized as a partnership are deductible by the partners, potentially generating immediate tax savings. 
C)  Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
D)  Start-up losses of a business organized as an S corporation are deductible by the shareholders, potentially generating immediate tax savings. 
A)  Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
B)  Start-up losses of a business organized as a partnership are deductible by the partners, potentially generating immediate tax savings. 
C)  Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit. 
D)  Start-up losses of a business organized as an S corporation are deductible by the shareholders, potentially generating immediate tax savings.

Question 20

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?

Accepted Answer

A)  $3,000 
B)  $3,863 
C)  $5,000 
D)  $6,800 
A)  $3,000 
B)  $3,863 
C)  $5,000 
D)  $6,800

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

A business generates profits of $150,000. The owner currently has a 28% MTR. 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?

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?

Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.

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?

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

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

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.

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

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

Which of the following is NOT one of the characteristics of a constructive dividend?

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

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?

Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.

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

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?

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, Partnerships, Llcs, and S Corporations

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

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

A business generates profits of $150,000. The owner currently has a 28% MTR. 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?

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?

Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.

A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.

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?

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

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

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.

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

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

Which of the following is NOT one of the characteristics of a constructive dividend?

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

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?

Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.

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

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?

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, Partnerships, Llcs, and S Corporations

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