Exam 15: Entities Overview

Which of the following is not an effective strategy for mitigating the double tax associated with C corporations?

David would like to organize HOS as either an LLC or as a corporation generating a 12 percent annual before-tax return on a $300,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividend tax rates are 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. a. Ignoring self-employment taxes, how much would David keep after taxes if HOS is organized as either an LLC or a corporation? b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) if HOS is organized as either an LLC or a corporation?

Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.

On which tax form do LLCs with more than one owner generally report their income and losses?

General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed.

Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.

Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.

Which legal entity provides the least flexible legal arrangement for owners?

In certain circumstances, C corporations can elect to be treated as flow-through entities.

Jamal Corporation, a C corporation, projects that it will have taxable income of $500,000 before incurring any lease expenses. Jamal's tax rate is 34 percent. Ali, Jamal's sole shareholder, has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income. Jamal always distributes all of its after-tax earnings to Ali. a. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp. distributes all of its after-tax earnings to its sole shareholder Ali? (ignore the 3.8% net investment income tax) b. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal leases equipment from Ali at a cost of $120,000 for the year? (ignore the 3.8% net investment income tax) c. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp. leases equipment from Ali at a cost of $120,000 for the year but the IRS determines that the fair market value of the lease payments is $80,000? (ignore the 3.8% net investment income tax)