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Exam 15: Entities Overview

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Question 1

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Explanation: Owners of unincorporated entities can be either individuals or corporations.In either case,the tax year-end of the entity must match the tax year-end of the owner. Difficulty: 2 Medium Topic: Entity Tax Characteristics Learning Objective: 15-03 Identify fundamental differences in tax characteristics across entity types. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking -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

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

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Question 2

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

A) True
B) False

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Question 3

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Owners of which of the following entity types receive deductible compensation from the entity for working for the entity?

Owners who work for entities taxed as a partnership receive guaranteed payments as compensation.The guaranteed payments are not self-employment income.

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?

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

P corporation owns 60 percent of the stock of S corporation.If S corporation distributes a dividend to P corporation,what is the tax rate on the dividend after the dividends received deduction (DRD)if P is entitled to a 65 percent DRD?

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

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

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?

Tax rules require that entities be classified the same way for tax purposes as they are classified for legal purposes.

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

Logan,a 50-percent shareholder in Military Gear Inc.(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?

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

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 activities.

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?

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?

What kind of deduction is the deduction for qualified business income?

Which of the following legal entities are generally classified as C corporations for tax purposes?

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