Exam 12: The Choice of Business Entity

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.

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

A personal holding company is a corporation owned by a large number of individual shareholders that has taxable income arising primarily from nonbusiness sources.

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?

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

Mr. Allen, whose marginal tax rate is 39.6%, 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.

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 does not make an S corporation election.

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:

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

Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.

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

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

After-tax cash flow is minimized when a business operates as a passthrough entity rather than a taxable corporation.

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

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

Mr. Eddy loaned his solely-owned corporation $3,000,000. The corporation paid a market rate of interest annually. Upon audit, the IRS reclassified some of the debt as equity. Which of the following statements is true?

For the current tax year, Cuddle Corporation's $500,000 of taxable income is all considered to be personal holding company income. The corporation did not pay dividends. Which of the following statements is true?

Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.

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?

Which of the following is not a good reason to form a family partnership?