Exam 12: The Choice of Business Entity

Which of the following is not a controlled corporate group?

Mr. Allen, whose marginal tax rate is 35%, owns an office building that generates $100,000 annual taxable income. He plans to create a family partnership by giving each of his three children a 15% interest in the building. Mr. Allen will retain a 55% interest. Mr. Allen will manage the building, and receive a guaranteed payment of $20,000. If Mr. Allen's children are in the 15% tax bracket, compute the annual tax savings from this income-shifting arrangement.

Betsy Williams is the sole shareholder of Kurt Corporation. She also owns the office building that serves as corporate headquarters for Kurt. Last year, Kurt paid $200,000 annual rent to Betsy for use of the building. Kurt's marginal tax rate was 34 percent and Betsy's marginal tax rate was 35 percent. The revenue agent who audited Kurt's return concluded that the fair rental value of the office building was $140,000. a. What effect does this conclusion have on Betsy's personal income tax liability? b. What effect does this conclusion have on Kurt's corporate income tax liability?

A business generates profit of $100,000. The owner has a 35% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?

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

If a new business organized as a C corporation incurs start-up losses, the tax benefits of those losses will be recognized immediately.

Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.

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

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.

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.

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 a permissible reason for a regular corporation to accumulate earnings at the entity level and avoid the imposition of the accumulated earnings tax?

Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's marginal tax rate is 25%, and Ben's marginal tax rate is 28%.

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

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.

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

Platte River Corporation is a calendar year S corporation. At the beginning of the year, Mr. Reeves owned 100% of Platte River's outstanding stock. On June 30 of the current year, he gave 25% of the stock to his son Mark and 10% of the stock to his daughter Megan. Platte River's ordinary income for the year was $220,000. What portion of this income must each shareholder report?

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. If Gwen's marginal tax rate is 35%, her tax savings from the first-year LLC loss is:

Cathy is the President and sole shareholder of Boxer, Inc., a regular corporation. The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary. If the IRS disallowed $550,000 of the salary as unreasonable compensation, the corporation's regular income tax will change by a:

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 35%. 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 does not make an S corporation election.