Exam 12: The Choice of Business Entity

Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 39.6%.

The progressive corporate tax rate schedule is applied once to the aggregate taxable income of a controlled group.

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.

Mrs. Ford, who has a 39.6% marginal tax rate, is the sole shareholder and CEO of Fast Inc. She also holds a $1 million interest-bearing note issued by Fast. The corporation's Compute Fast's taxable income.

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?

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

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

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

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.

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. 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?

Kyrsten Haas expects her S corporation to generate a profit of $200,000. Kyrsten's marginal tax rate on ordinary income is 39.6%. What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?

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

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

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

The IRS agent who audited the Form 1120 filed by Alano Inc. concluded that $300,000 of the salary that Alano paid to its CEO and sole shareholder was a constructive dividend. As a result:

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

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 Mrs. Jansen's income tax liability.

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

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