TAX 2 CH 4

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? A. C corporation B. LLC C. General partnership D. S corporation

a

If C corporations retain their after-tax earnings, when will their 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 these

a

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

a

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

a

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? A. $31,250 B. $62,500 C. $75,000 D. $125,000

a

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

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

a

Which of the following legal entities file documents with the state to be formally recognized by the state? A. Limited Liability Company B. General Partnership C. Sole Proprietorship D. None of these

a

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. Partnership B. S corporation C. LLC D. Partnership and S corporation E. S corporation and LLC

b

What tax year-end must unincorporated entities 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

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 regular 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? A. $0 B. $3,750 C. $7,500 D. $11,250

c

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

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? A. ($25,000) B. ($17,500) C. $5,000 D. $20,000

c

What document must LLCs file with the state to organize their business? A. Articles of incorporation B. Certificate of LLC C. Articles of organization D. Partnership agreement E. None of these. LLCs do not have to file with the state to organize their business

c

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? A. 100; no limit; no limit B. no limit; 100; 2 C. no limit; 100; no limit D. 100; 100; no limit

c

What is the tax impact to a C corporation or an S corporation when it makes a 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

Which of the following is most effective in mitigating the double tax? A. Shift income from high tax rate shareholders to low tax rate corporations B. Shift income from low tax rate shareholders to high tax rate corporations C. Shift income from high tax rate corporations to low tax rate shareholders D. Shift income from low tax rate corporations to high tax rate shareholders

c

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.

c

Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income? A. 9.9% B. 15.0% C. 35.0% D. 43.9% E. 66.7%

d

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. LLC D. Partnership and LLC E. S corporation and LLC

d

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

d

If PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pre-tax income potentially exposed to? A. No taxation B. Single taxation C. Double taxation D. Triple taxation

d

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

d

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

d

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? A. Carried back two years, carried forward indefinitely B. Carried back indefinitely, carried forward two years C. Carried back two years, carried forward five years D. Carried back two years, carried forward twenty years E. None of these.

d

Robert is seeking additional capital to expand ABC Inc. 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 these.

e

When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation? A. FICA tax only. B. Self-employment tax only. C. FICA and self-employment tax. D. None of these. This income will never be taxed. E. None of these. This income will be taxed, but another type of tax will apply.

e

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 - Corporation C. General Partnership - Partnership D. Limited Partnership - General partner E. Both B and D

e

Which of the following entity characteristics are generally key drivers for small business owners in deciding which entity to choose? A. Double taxation B. Required accounting period C. Liability protection D. Double taxation and required accounting period E. Double taxation and liability protection

e

Which of the following is not an effective strategy for mitigating the double tax associated with C corporations? A. Paying a salary to a shareholder-employee B. Leasing property from a shareholder C. Borrowing money from a shareholder D. Paying fringe benefits to a shareholder-employee E. All of these are effective strategies for mitigating double taxation

e

Which of the following legal entities are generally classified as C corporations for tax purposes? A. Limited Liability Company B. S corporations C. Limited partnerships D. Sole proprietorship E. None of these

e

Which tax classifications can potentially apply to LLCs? A. S corporation B. Partnership C. Sole proprietorship D. S corporation and Partnership E. S corporation and Sole proprietorship F. Partnership and Sole proprietorship G. All of these

g