Exam 15: Entities Overview

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

Owners of which of the following entity types could potentially increase their after-tax cash flow from the entity by reducing the compensation they receive in order to increase the amount of business income that flows-through to them from the entity?

A single-member LLC is taxed as a partnership.

Which of the following statements is true regarding compensation paid to an owner of an entity taxed as a partnership who works for the entity?

An unincorporated entity with more than one owner is, by default, taxed as a partnership.

Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?

Corporation A owns 10% of Corporation C. The marginal tax rate on non-dividend income for both A and C is 21%. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income and distributes the remainder proportionately to its shareholders as a dividend. In addition, Corporation A owns 40% of partnership P that earns $500 million in the current year. Given this fact pattern, answer the following questions: a. How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend assuming Corporation A is eligible for the 50 percent dividends received deduction? b. If Partnership P distributes all of its current year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership? c. If you were to replace Corporation A with individual A [her marginal tax rate on ordinary income is 37% and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does individual A have from the Corporation C dividend after all taxes assuming the dividends are qualified dividends? Consistent with the original facts, assume that Corporation C distributes all of its after-tax income to its shareholders.

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

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 of the following entity characteristics are generally key drivers for small business owners in deciding which entity to choose?

David would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $300,000 investment. David's marginal tax rate is 24 percent and the corporate tax rate is 21 percent. David's marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, David's business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business) and the business income allocation would qualify for the deduction for qualified business income. a. How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation? b. What are the overall tax rates (combined owner and entity level) if HOS is organized as either an S corporation or a C corporation?

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

If a C corporation incurs a net operating loss in 2018 and carries the loss forward to 2019, the NOL carryover is not allowed to offset 100% of the corporation's taxable income (before the net operating loss deduction).

Unincorporated entities are typically treated as flow-through entities for tax purposes.

Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year ending in 2017?

S corporation shareholders are legally responsible for paying the S corporation's debts because S corporations are treated as flow-through entities for tax purposes.

S corporation shareholders who work for the S corporation receive compensation in the form of a guaranteed payment.

P corporation owns 60 percent of the stock of S corporation. If S corporation distributes a dividend to P corporation, what is tax rate on the dividend after the dividends received deduction (DRD) if P is entitled to a 65 percent DRD?

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

Corporations are legally formed by filing articles of organization with the state in which the corporation will be created.