Exam 15: Entities Overview

For tax purposes, only unincorporated entities can be considered to be disregarded entities.

Nancy purchased a building and then leased the building to ZML. Nancy is the sole shareholder of ZML. She leased the building to ZML for $2,500 per month. However, the IRS determined that the fair market value of the lease payment should only be $1,500 per month. How would the lease payment be treated with respect to both Nancy and ZML?

What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have?

For the current year, Birch Corporation, a C corporation, reports taxable income of $400,000 before paying salary to its sole shareholder Elaine. Elaine's marginal tax rate on ordinary income is 33 percent and 15 percent on dividend income. If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation, what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35 percent and it always distributes all after-tax earnings to Elaine.

Which of the following is most effective in mitigating the double tax?

Jaron would like to organize TMZ as either an LLC or as a C corporation generating a 6 percent annual before-tax rate of return on a $200,000 investment. Individual and corporate tax rates are both 40 percent and individual capital gains and dividends tax rates are 10 percent. TMZ will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes (and the additional Medicare Tax), how much would Jaron keep after taxes if TMZ is organized as either an LLC or a C corporation? b. Ignoring self-employment taxes (and the additional Medicare Tax), what are the overall tax rates (combined overall and entity level) if TMZ is organized as either an LLC or as a C corporation?

What tax year-end must unincorporated entities with only one owner adopt?

Unincorporated entities with only one individual owner are taxed as sole proprietorships.

While a C corporation's losses cannot be used by their shareholders to offset personal income, a C corporation may carry back and carry forward losses to help offset the taxable income a corporation had or will have. How are these net operating losses carried back and carried forward?

Becca would like to organize BMI as either an LLC or as a C corporation generating a 4 percent annual before-tax rate of return on a $450,000 investment. Individual ordinary rates are 28 percent, corporate rates are 15 percent, and individual capital gains and dividends tax rates are 15 percent. BMI will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes, how much would Becca keep after taxes if BMI is organized as either a LLC or as a C corporation? b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if BMI is organized as either an LLC or as a C corporation?

In its first year of existence Aspen Corp. (a C corporation) reported a loss for tax purposes of $50,000. In year 2, it reports a $30,000 loss. For year 3, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3? Consult the corporate tax rate table provided to calculate your answer.

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

LLC members have more flexibility than corporate shareholders to alter their legal arrangements with respect to one another, the entity, and with outsiders.

Losses from C corporations are never available to offset a shareholder's personal income.

On which tax form does a single member LLCs with one individual owner report its income and losses?

If C corporations retain their after-tax earnings, when will their shareholders be taxed on the retained earnings?

What is the tax impact to a C corporation or an S corporation when it makes a property distribution to a shareholder?

Jerry would like to organize FBC as either an LLC or as a C corporation generating an 8 percent annual before-tax rate of return on a $400,000 investment. Individual and corporate tax rates are both 35 percent and individual capital gains and dividends tax rates are 15 percent. FBC will pay out its after-tax earnings every year to either its members or its shareholders. a. How much would Jerry keep after taxes if FBC is organized as either an LLC or as a C corporation? (ignore self-employment taxes) b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) tax rates if FBC is organized as either an LLC or as a C corporation?

Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an S corporation, how much income will be allocated to Roberto?

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?