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Exam 4: Entities Overview

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Question 41

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

A) The entity is free to adopt any tax year-end.
B) The entity must adopt the same year-end as its owner.
C) The entity must adopt a calendar year-end.
D) The entity may adopt any year-end except for a calendar year-end.

E) A) and D)
F) None of the above

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Question 42

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If you were seeking an entity with the most favorable tax treatment regarding (1) the number of owners allowed, (2) the flexibility to select your accounting period, and (3) the availability of preferential capital gains rates when selling your ownership interest, which entity should you decide to use?

A) C corporation.
B) S corporation.
C) Partnership.
D) Sole proprietorship.

E) None of the above
F) B) and C)

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Question 43

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For which type of entity does the entity not pay compensation to an owner who is working for the entity?

When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?

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

S corporations have more restrictive ownership requirements than other entities.

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

Which tax classifications can potentially apply to LLCs?

An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.

If a C corporation incurs a net operating loss in 2019, it may carry the loss back two years and forward 20 years to offset income in those years.

The excess loss limitations apply to owners of all of the following entities except which of the following?

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

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

Both tax and nontax objectives should be considered when choosing the entity type for a new business.

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

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

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

Corporations are legally better suited for taking a business public compared with LLCs and general partnerships.

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

Corporation A owns 10 percent of Corporation C. The marginal tax rate on nondividend income for both A and C is 21 percent. 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 percent of Partnership P, which 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 percent 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.