Exam 12: The Choice of Business Entity

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?

If a business is formed as a regular corporation, the income may be subject to double taxation.

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?

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

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

The current equalization of the top individual and corporate tax rates has increased the potential use of corporations as tax shelters.

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

Partnerships offer more flexibility in allocating income among owners than S corporations.

In today's tax environment, the opportunity for individuals to exploit the difference between the individual and the corporate rate structure is greater than ever.

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 revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis' (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 35%, and Ms. Lewis' marginal tax rate is 33%. Which of the following is not a consequence of the recharacterization?

Which of the following items might an IRS agent seek to recharacterize as a constructive dividend?

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?

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?

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

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

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

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

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.

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?