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Exam 15: Entities Overview

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Question 31

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Which of the following is not an effective strategy for mitigating double taxation in a C corporation?

A) C corporations can shift income to shareholders via deductible payments
B) C corporations can make an S election
C) C corporations can pay dividends to their shareholders
D) None of these. All of these statements are effective strategies to mitigate or avoid double taxation.

E) B) and C)
F) A) and D)

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Question 32

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On which form is income from a single member LLC with one corporate (C corporation) owner reported?

A) Form 1120 used by C corporations to report their income
B) Form 1120S used by S corporations to report their income
C) Form 1065 used by partnerships to report their income
D) Form 1040, Schedule C used by sole proprietorships to report their income
E) None of these.

F) A) and E)
G) A) and D)

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Question 33

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Emmy would like to organize PRK as either an LLC or as a C corporation generating a 15 percent annual before-tax rate of return on a $100,000 investment. Individual ordinary rates are 25 percent, corporate rates are 15 percent, and individual capital gains and dividends tax rates are 5 percent. PRK will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes, how much would Emmy keep after taxes if PRK is organized as either an LLC or as a C corporation? b. Ignoring self-employment taxes, what are the overall tax rates (combined entity and owner level) if PRK is organized as either an LLC or a corporation?

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

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?

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?

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?

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

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?

Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume Military Gear Inc has a $100,000 loss for the year, Logan's tax basis in his Military Gear Inc. stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal income tax rate is 15%, how much more tax will Logan pay currently if Military Gear Inc. is a C corporation compared to the tax he would pay if it were an S corporation?

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?

Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an S corporation, which type of investor group should Robert obtain capital from?

A single-member LLC is taxed as a partnership.

SNL corporation, a C corporation, reports $400,000 of taxable income in the current year. SNL's tax rate is 35 percent. Answer the following questions, assuming Keegan, SNL's sole shareholder, has a marginal tax rate of 39.6 percent on ordinary income and 20 percent on dividend income. a. Compute the first level of tax on SNL's taxable income for the year. b. Compute the second level of tax on SNL's income assuming that SNL currently distributes all of its after-tax earnings to Keegan. What is the overall (combined owner and entity level) tax rate on SNL's taxable income for the year?

All unincorporated entities are generally treated as flow-through entities for tax purposes.

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.

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 be least favorable?

Taylor would like to organize DRK as either an LLC or as a C corporation generating a 13 percent annual before-tax rate of return on a $250,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividends tax rates are 5 percent. DRK will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes, how much would Taylor keep after taxes if DRK is organized as either an LLC or as a C corporation? b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if DRK is organized as either an LLC or as a C corporation?

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