Exam 12: The Choice of Business 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.

One disadvantage of the creation of a family-owned entity is that there is dilution of control with respect to the original business owners.

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 makes an S corporation election.

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

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

Mr. Longwood and Mrs. Kennett are the equal shareholders in LK Corporation. Both shareholders have a 39.6 percent marginal tax rate on ordinary income. LK's financial records show the following: a. Compute the combined tax cost for LK, Mr. Longwood, and Mrs. Kennett attributable to LK's operations. b. How would your computation change if the interest on the shareholder debt was $175,000 and LK paid no dividends?

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.

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

Mr. and Mrs. Maxwell and their two children (Alicia and Percy) are the four equal partners in MAP Partnership. This year, MAP generated $52,000 ordinary income. Compute the tax cost for the business if Mr. and Mrs. Maxwell's marginal rate is 39.6 percent, Alicia's marginal rate is 28 percent, and Percy's marginal rate is 15 percent. (Ignore SE tax consequences.)

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 39.6 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?

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

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?

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

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

Which of the following is not a controlled corporate group?

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:

A partner in a limited liability partnership (LLP) is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.

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

Typical family-owned businesses are operated as pass-through entities.

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?