Exam 15: Entities Overview

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $550,000. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pre-tax income?

The deduction for qualified business income applies to income of all but which of the following tax entity types?

If a C corporation incurs a net operating loss in 2018, it may carry the loss back two years and forward 20 years to offset income in those years.

Beginning in 2018, C corporations are no longer subject to double taxation.

Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light 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 is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?

In its first year of existence (2018) Aspen Corp. (a C corporation) reported a loss for tax purposes of $60,000. In 2019, it reports a $40,000 loss. For 2020, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3?

Jorge is a 100 percent owner of JJ LLC (taxed as an S Corporation). He works full-time for JJ and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?

Business income allocations to owners from an LLC that is taxed as a partnership are subject to self-employment tax if the owners are significantly involved in the entity's business activities.

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

S corporations have more restrictive ownership requirements than other entities.

Which legal entity is generally best suited for going public?

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

Which tax classifications can potentially apply to LLCs?

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

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

Owners who work for entities taxed as a partnership receive guaranteed payments as compensation. The guaranteed payments are not self-employment income.

Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation.

Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would not allow you to offset the entity losses against your income from other sources?

For tax purposes, sole proprietorships pay sole proprietors guaranteed payments as compensation for their services.

Which of the following legal entities file documents with the state to be formally recognized by the state?