Tax Exam 2 True/False

An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes.

False

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

False

S corporation shareholders are subject to self employment tax on business income allocations from the S corporation if they are actively involved in the S corporation's business

False

S corporations have considerable flexibility in making special profit and loss allocations of operating income.

False

Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

False

The C Corporation tax rate is significantly higher than the top individual marginal tax rate

False

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within 3½ months after the beginning of the year.

False

Unlike partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

False

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes

False Federal income tax expense generates a permanent book-tax difference for Schedule M-3 purposes

General Partnerships are legally formed by filing a partnership agreement with the state in which the partnership is formed

False General partnerships may be formed by written agreement among the partners, called a partnership agreement, or formed informally without a written agreement when two or more owners join together in an activity to generate profits

S corporations are separate tax paying entities that pay tax on their own income

False S corporations are flow-through entities whose income "flows through" to their owners who are responsible for paying tax on the income

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent

False Schedule M-1 is less detailed than Schedule M-3 and does not require the taxpayer to distinguish between temporary and permanent differences

A single-member LLC is taxed as a partnership

False Single-member LLCs are taxed as sole proprietorships

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

False this is partnerships that can do special allocations

A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years

False A corporation carries a net capital loss back 3 years and forward 5 years

The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes

False ASC 810 governs consolidated financial reporting while IRC sections 1501-1504 and the accompanying regulations govern income tax consolidation

Corporations may carry a net operating loss sustained in 2019 back two years and forward 20 years

False An NOL sustained in 2019 can be carried forward indefinitely with no carryback permitted

A partnership with a C corporation partner must always use the accrual method as its accounting method.

False An exception applies to partnerships with annual gross receipts for the three prior tax years of $25M or less

Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners.

False Built in gains and losses on contributed property can only be allocated to the partner contributing the property

Volos Company (a calendar-year corporation) began operations in March of 2017 and was not profitable through December of 2018. Volos has been profitable for the first quarter of 2019 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2019 because it had no tax liability for the 2018 tax year and has been in business for at least 12 months.

False Estimated taxes are due if the corporation expects to incur a tax liability of $500 or more for the year. A corporation can base its estimated payments on the prior year's tax liability only if it is positive, which is not the case here

An affiliated group must file a consolidated tax return

False Filing a consolidated tax return must be elected in the first year, after which it is mandatory on a going forward basis

Income earned by flow-through entities is usually taxed only once at the entity level

False Income is taxed only once at the owner level

Large corporations (corporations with more than $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

False Large corporations can use the prior year liability to determine the first quarter estimated tax payment only

A partner's tax basis or at-risk amount can be increased by making capital contributions, by paying off partnership debt, or by increasing the profitability of the partnership.

False Partners are deemed to have received a cash distribution from the partnership when they are relieved of partnership debt

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

False Partners must treat the value of capital interests they receive in exchange for services as ordinary income. Because there is no immediate liquidation value associated with a profits interest, the partner providing the services will not recognize income

The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount.

False Qualified nonrecourse financing is considered "at-risk"

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc. will continue to use a June 30 year-end as an S corporation.

False S Corporations are generally required to adopt a calendar year end

Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation's stock

False The DRD percentages are 505, 65%, and 100% depending on the stock ownership level

Bingo Corporation incurred $10 million net operating loss in 2019. Bingo reported taxable income of $12M in 2020. Bingo can offset the entire $10M NOL carryover against taxable income in 2020

False The NOL can only offset 80% of taxable income in the carryover year (9.6M). The remainder is carried over to 2021

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

False The amount is 25% of gross receipts for 3 consecutive years

Built-in gains recognized fifteen years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

False The built-in gains recognition period is 5 years

After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.

False The corporation must wait until the beginning of the 5th year to elect S corporation status again

S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the fifteenth day of the fourth month after the S corporation's year end.

False The due date is the 15th day of the third month after the S corporation's year end

The dividends received deduction cannot create a net operating loss. the deduction can reduce income to zero but not below zero

False a DRD is limited to 50% or 65% of taxable income unless it creates or increase a net operating loss deduction, in which case the full amount is allowed

Any losses that exceed the tax basis of a partner in their partnership interest are suspended and carried forward for 20 years.

False excess losses are carried forward indefinitely until there is sufficient basis to utilize the losses

Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.

False non-deductible expenses decrease basis tax-exempt income increases basis

The term "outside basis" refers to the partnership's basis in its assets; whereas, the term "inside basis" refers an individual partner's basis in her partnership interest.

False outside basis: refers to a partner's basis in their partnership interest inside basis: refers to the partnership's basis in its assets

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.

False partner's outside basis must first be increased by any positive basis adjustments and then decreased by any negative basis adjustments

the character of each separately stated item is determined at the partner level

False the partnership reports the amount and character of items of income and loss flowing through the partnership

Sole Proprietorships are treated as legal entities separate from their individual owners

False treated as same entity

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income

False Any book-tax difference that requires an add-back to book income to compute taxable income is an unfavorable book-tax difference because it requires an adjustment that increases taxable income

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

False Corporations file article of incorporation

A C corporation reports its taxable income or loss on Form 1065

False A C corporation reports its taxable income or loss on Form 1120

A partner can generally apply passive activity losses against passive activity income for the year.

True

Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both the book and tax purposes

True

An unincorporated entity with more than one owner is taxed as a partnership

True

Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. but Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent

True

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

True

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 activity

True

Calendar year corporations that request an extension for filing their 2019 tax returns will have a tax return due date of October 15

True

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions)

True

Corporations may carry excess charitable contributions forward five years, but they may not carry them back

True

Corporations taxed as S corporations offer the same legal protection to owners as corporations taxed as C corporations.

True

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

True

For partnership tax years ending after December 31, 2015, partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

True

GenerUs Inc's BoD approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in Nov. 2019. GenerUs made the payment to FoodBank on Feb 2, 2020. GenerUs (a calendar year corporation) may claim a deduction for the contribution on its 2019 tax return

True

Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss) and are also treated as separately stated items.

True

If a C Corporation incurs a net operating loss in 2017, it may carry the loss back two years and forward 20 years to offset income in those years

True

If a C corporation incurs a net operating loss in 2018 and carries the loss forward to 2019, the NOL carryover may offset only 80% of the taxable income before the NOL deduction in those years

True

If a partner participates in partnership activities on a regular, continuous, and substantial basis, then the partnership's activities with respect to this individual partner are not considered passive.

True

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election

True

In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

True

Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference

True

LLC members have more flexibility than corporate shareholders to alter their legal arrangements with respect to one another, the entity, and with outsiders

True

Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level

True

Like partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

True

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

True

Losses form C Corporations are never available to offset a shareholder's personal income

True

Most corporations use the annualized income method to determine their required annual payment for purposed of making quarterly estimated payments

True

Publicly traded corporations cannot be treated as S corporations

True

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

True

S corporation allocated losses to a shareholder not deductible due to the tax basis limitation rules are carried over by the shareholder to future years for potential utilization.

True

S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

True

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

True

Sole Proprietors are subject to self-employment taxes on net income from their sole proprietorships

True

Taxable income of the all C corporations is subject to a flat 21% tax rate

True

The built-in gains tax does not apply to S corporations that never operated as C corporations.

True

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

True

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation

True

When an S corporation distributes appreciated property to its shareholders the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

True

for incentive stock options, the value fo the options that accrue in a given years always creates a permanent unfavorable book-tax difference

True

In certain circumstance, C Corporation shareholders can elect to change the entity to a flow-through entity for tax purposes

True An S-Corporation election achieves this purpose

Bobby T (95% owner) would like to elect S corporation status for DJ, Inc. but Dallas (5% owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc. without Dallas' consent.

True All shareholders on the date of the election must consent to the election

Maria resides in San Antonio, Texas. She formed MZE Corporation under the state laws of Texas. Maria anticipates that she will conduct her business activities in both Mexico and the United States. MZE is eligible to elect S corporation status.

True MZE is eligible to elect S corporation status because MZE was formed under the laws of a US state and its shareholder is a US resident.

tax elections are rarely made at the partnership level

false most tax elections for a partnership are made at the partnership level

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

true

unincorporated entities with only one individual owners are taxed as sole proprietorships

true