Survey of Income Chapter 15

Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated. Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light Incorporated generated a $127,100 profit companywide made up of a $75,600 profit from the Sacramento store, a ($26,500) loss from the San Francisco store, and a combined $78,000 profit from the remaining stores. If Bright Light Incorporated is an S corporation, how much income will be allocated to Roberto? A) $31,775.00. B) $63,550.00. C) $75,600.00. D) $127,100.00.

A) $31,775

Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated. Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light Incorporated 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 Incorporated is an S corporation, how much income will be allocated to Roberto? A) $31,250 B) $62,500 C) $75,000 D) $125,000

A) 31,250 (125000x.25)

Jorge is a 60-percent owner of JJ LLC (taxed as a partnership). He is a passive investor in JJ (he doesn't perform any work 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? A) Business income allocations are not subject to self-employment tax. B) Business income allocations are not subject to the net investment income tax. C) Business income allocations are subject to the additional Medicare tax. D) Business income allocations are taxed at a maximum 23.8 percent tax rate.

A) Business income allocations are not subject to self-employment tax.

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? A) C corporation. B) Limited partnership C) General partnership. D) S corporation.

A) C corporation.

f 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.

A) C corporation.

79) The excess loss limitations apply to owners of all of the following entities except which of the following (answer for tax years other than 2020)? Assume CARES Act applies. A) C corporations B) S corporations C) Entities taxed as partnerships D) Single-member LLCs (owned by an individual taxpayer)

A) C corporations

The excess loss limitations apply to owners of all of the following entities except which of the following? A) C corporations B) S corporations C) Entities taxed as partnerships D) Single-member LLCs (owned by an individual taxpayer)

A) C corporations

Which legal entity provides the least flexible legal arrangement for owners? A) Corporation B) LLC C) Partnership D) Sole proprietorship

A) Corporation

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 the choices are correct.

A) Form 1120 used by C corporations to report their income.

Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year beginning before 2018? A) If it carries back the NOL and/or carries it forward, it may offset up to 80 percent of the taxable income (before the NOL deduction) in those years. B) It may carry the NOL forward for up to 20 years and offset up to 100 percent of the taxable income (before the NOL deduction) in those years. C) It may carry the NOL back two years and offset up to 100 percent of the taxable income (before the NOL deduction) in those years. D) None of these (selecting this option means you believe all of the other responses are true).

A) If it carries back the NOL and/or carries it forward, it may offset up to 80 percent of the taxable income (before the NOL deduction) in those years.

Which of the following legal entities must file documents with the state to be formally recognized by the state? A) Limited Liability B) General Partnership. C) Sole Proprietorship (non LLC) D) None of the choices is correct.

A) Limited liability company

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets? A) Partnership B) S corporation C) C corporation D) Both S corporation and C corporation

A) Partnership

If C corporations retain their after-tax earnings, when will their individual shareholders be taxed on the retained earnings? A) Shareholders will be taxed when they sell their shares at a gain. B) Shareholders will be taxed in the year they elect to be taxed on undistributed retained earnings C) Shareholders will be taxed on undistributed retained earnings in the year the corporation files its tax return. D) None of the choices is correct.

A) Shareholders will be taxed when they sell their shares at a gain.

39) Which legal entity is generally best suited for going public? A) Corporation B) LLC C) Limited liability partnership D) General partnership E) All of these entities are equally suited for going public.

A)Corporations

What kind of deduction is the deduction for qualified business income? A) A for AGI deduction. B) A from AGI deduction that is not an itemized deduction. C) A from AGI deduction that is an itemized deduction. D) None of the choices is correct.

B) A from AGI deduction that is not an itemized deduction.

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? A) Business income allocations are subject to self-employment tax. B) Business income allocations are not subject to the net investment income tax. C) Business income allocations are subject to the additional Medicare tax. D) Business income allocations are taxed at a maximum 23.8 percent tax rate.

B) Business income allocations are not subject to the net investment income tax.

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value? A) General partnership. B) S corporation. C) Limited partnership D) All of the above receive the same tax treatment on liquidating distributions.

B) S corporation.

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.

B) The entity must adopt the same year-end as its owner.

Logan, a 50-percent shareholder in Military Gear Incorporated (MG), is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $100,000 tax loss for the year, Logan's tax basis in his MG 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 tax rate is 24 percent, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation? A) $0 B) $6,000 C) $12,000 D) $18,000

C) $12,000

Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated. Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light generated a $130,950 profit companywide made up of a $76,700 profit from the Sacramento store, a ($29,250) loss from the San Francisco store, and a combined $83,500 profit from the remaining stores. If Bright Light is taxed as a partnership and it is decided that both 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 total? A) ($25,297.50). B) ($20,475.00). C) $3,958.75. D) $21,338.75.

C) $3,958.75.

Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated. Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. 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 it is decided that both 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 total? A) ($25,000) B) ($17,500) C) $5,000 D) $20,000

C) $5,000

40) What document must an LLC file with the state to organize its business? A) Articles of incorporation B) Certificate of LLC C) Articles (or a certificate) of organization D) Partnership agreement E) None of the choices is correct. An LLC does not have to file with the state to organize its business.

C) Articles (or a certificate) of organization.

On which tax form do LLCs with more than one owner generally report their income and losses? A) Form 1120 B) Form 1120S C) Form 1065 D) Form 1040, Schedule C.

C) Form 1065

Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax? A) Both the self-employment tax and the additional Medicare tax are deductible for AGI in full. B) Half of the self-employment tax and half of the additional Medicare tax are deductible for AGI. C) Half of the self-employment tax and none of the additional Medicare tax are deductible for AGI. D) None of the self-employment tax and none of the additional Medicare tax are deductible for AGI.

C) Half of the self-employment tax and none of the additional Medicare tax are deductible for AGI.

Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2020? A) It may carry the NOL back two years and forward 20 years. B) It may not carry the NOL back to prior years but it may carry it forward 20 years. C) It may not carry the NOL back to prior years but it can carry the loss forward indefinitely. D) It may carry the loss back two years and carry the loss forward indefinitely. E) None of the choices is correct.

C) It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.

Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2020? Assume CARES Act applies. A) It may carry the NOL back two years and forward 20 years. B) It may not carry the NOL back to prior years but it may carry it forward 20 years. C) It may not carry the NOL back to prior years but it can carry the loss forward indefinitely. D) It may carry the loss back five years and carry the loss forward indefinitely. E) None of the choices is correct.

C) It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.

What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property distribution to a shareholder? A) Recognizes either gain or loss. B) Does not recognize gain or loss. C) Recognizes gain but not loss. D) Recognizes loss only.

C) Recognizes gain but not loss.

If individual taxpayers are the shareholders of PST Corporation and PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pretax income potentially exposed to? A) One B) Two C) Three D) None.

C) Three

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, respectively? A) 100; no limit; no limit B) no limit; 100; 2 C) no limit; 100; no limit D) 100; 100; no limit

C) no limit; 100; no limit

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 pretax income? A) 18.8% B) 23.8% C) 21% D) 39.8% E) 44.8%

D) 39.8%

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $561,000. 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 pretax income? A) 18.8%. B) 23.8%. C) 21%. D) 39.8% .E) 44.8%.

D) 39.8%

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? A) The compensation is deductible by the entity. B) The compensation is self-employment income to the owner-worker. C) The entity is not required to withhold FICA tax on the compensation it pays to the owner. D) All of these choices are correct.

D) All of these choices are correct.

Owners of which of the following entity types receive deductible compensation from the entity for working for the entity? A) Sole proprietorship B) Entity taxed as a partnership C) S corporation D) Both Entity taxes as a partner and S corporation

D) Both Entity taxes as a partner and S corporation

The deduction for qualified business income applies to income from all but which of the following tax entity types? A) Sole proprietorship. B) Entity taxed as a partnership. C) S corporation. D) C corporation.

D) C corporation.

On which tax form does a single-member LLC with one individual owner report its income and losses? A) Form 1120 B) Form 1120S C) Form 1065 D) Form 1040, Schedule C.

D) Form 1040, Schedule C.

When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation? A) FICA tax only. B) Self-employment tax only. C) FICA and self-employment tax. D) Income tax. E) None of the choices are correct.

D) Income tax.

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities? A) LLC - LLC members. B)Corporation - Shareholders.. C) General partnership - Partnership. D) Limited partnership - General partner.

D) Limited partnership - General partner.

For which type of entity does the entity not pay compensation to an owner who is working for the entity? A) S corporation. B) C corporation. C) Entity taxed as a partnership. D) None of the choices is correct.

D) None of the choices is correct.

Generally, which of the following flow-through entities can elect to be treated as a C corporation? A) Limited partnership B) Limited liability company C) General partnership D) All of these choices are correct.

D)All of these choices are correct

if an individual forms a sole proprietorship, which non-tax factor will be of the greatest benefit to the sole proprietor? A) Liability protection B) Legal flexibility in defining the rights and responsibilities of owners. C) Facilitation of initial public offerings. D)Minimal time and cost to organize.

D)Minimal time and cost to organize.

Which tax classifications can potentially apply to LLCs? A) Partnership B) Partnership and sole proprietorship C) S corporation D) C corporation E) All of these choices are correct.

E) All of these choices are correct.

Which of the following entity characteristics are generally key factors for small business owners in deciding which entity to choose? A) Rate at which income from entity will be taxed B) Required accounting period C) Liability protection D) Both the rate at which income from entity will be taxed and the required accounting period E) Both the rate at which income from entity will be taxed and liability protection.

E) Both the rate at which income from entity will be taxed and liability protection.

Robert is seeking additional capital to expand ABC Incorporated. In order to qualify ABC as an S corporation, which type of investor group could Robert obtain capital from? A) 30 different partnerships. B) 10 different C corporations. C) 90 nonresident individuals. D) 120 unrelated resident individuals. E) None of the choices is correct.

E) None of the choices is correct.

Which of the following legal entities are generally classified as C corporations for tax purposes? A) Limited liability companies B) S corporations C) Limited partnerships D) Sole proprietorships E) None of the choices is correct.

E) None of the choices is correct.