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Exam 15: Entities Overview

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Question 21

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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.

F) B) and E)
G) B) and D)

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Question 22

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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) All of the above

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Question 23

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Which of the following legal entities file documents with the state to be formally recognized by the state?

What document must LLCs file with the state to organize their business?

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

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?

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

On which tax form does a single member LLCs with one individual owner report its income and losses?

Corporation A owns 10% of CorporationC. The marginal tax rate on non-dividend income for both A and C is 34%. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income and distributes the remainder proportionately to its shareholders as a dividend. In addition, Corporation A owns 20% of partnership P that earns $500 million in the current year. Given this fact pattern, answer the following questions: a. How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend assuming Corporation A is eligible for the 70 percent dividends received deduction? $\begin{array}{|l|c|l|}\hline{\text { Description }} & \text { Amount } & {\text { Explanation }} \\\hline \begin{array}{l}\text { (1) Dividend from } \\\text { Corporation C }\end{array} & \$ 13,200,000 & \begin{array}{l}\$ 200,000,000 \times(1-.34) \times \\10 \%\end{array} \\\hline \begin{array}{l}\text { (2) Tax on dividend from } \\\text { Corporation C }\end{array} & \$ 1,346,400 & (1) \times 34 \% \times 30 \% \\\hline \begin{array}{l}\text { (3) Cash remaining after } \\\text { tax on dividend }\end{array} & \$ 11,853,600 & (1)-(2) \\\hline\end{array}$ $\begin{array} { | l | c | c | } \hline { \text { Description } } & \text { Amount } & \text { Explanation } \\\hline \begin{array} { l } \text { (1) Cash received from } \\\text { Partnership P }\end{array} & \mathbf { \$ 1 0 0 , 0 0 0 , 0 0 0 } & \mathbf { \$ 5 0 0 , 0 0 0 , 0 0 0 } \times \mathbf { 2 0 } \% \\\hline \begin{array} { l } \text { (2) Tax on share of income } \\\text { from Partnership P }\end{array} & \mathbf { \$ 3 4 , 0 0 0 , 0 0 0 } & ( 1 ) \times \mathbf { 3 4 \% } \\\hline \begin{array} { l } \text { (3) Cash remaining from } \\\text { distribution after taxes }\end{array} & \mathbf { \$ 6 6 , 0 0 0 , 0 0 0 } & ( 1 ) - ( 2 ) \\\hline\end{array}$ $\begin{array} { | l | c | c | } \hline { \text { Description } } & \text { Amount } & \text { Explanation } \\\hline \begin{array} { l } \text { (1) Dividend from } \\\text { Corporation C }\end{array} & \mathbf { \$ 13,200,000 } & \mathbf { \$ 2 0 0 , 0 0 0 , 0 0 0 } \times (1-34)\times \mathbf { 1 0 } \% \\\hline \begin{array} { l } \text { (2) Tax on dividend from } \\\text { Corporation C }\end{array} & \mathbf { \$ 1 , 98 0 , 0 0 0 } & ( 1 ) \times \mathbf { 15 \% } \\\hline \begin{array} { l } \text { (3) Cash remaining after } \\\text { tax on dividend}\end{array} & \mathbf { \$ 11 , 22 0 , 0 0 0 } & ( 1 ) - ( 2 ) \\\hline\end{array}$

What is the tax impact to a C corporation or an S corporation when it makes a property distribution to a shareholder?

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

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?

Which of the following is most effective in mitigating the double tax?

Generally, which of the following flow-through entities can elect to be treated as a C 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?

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

Tuttle Corporation (a C corporation) projects that it will have taxable income for the year of $300,000 before incurring any interest expense. Assume Tuttle's tax rate is 35 percent. a. What is the amount of the combined corporate and shareholder level tax on the $300,000 of pre-interest expense earnings if Ruth, Tuttle's sole shareholder, lends Tuttle Corporation $100,000 at the beginning of the year, Tuttle pays Ruth $10,000 of interest on the loan (interest is considered to be reasonable), and Tuttle distributes all of its after-tax earnings to Ruth? Assume her ordinary marginal rate is 33 percent and dividend tax rate is 15 percent. b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $8,000. What is the amount of the combined corporate and shareholder level tax on Tuttle Corporation's pre-interest expense earnings?

For the current year, Birch Corporation, a C corporation, reports taxable income of $400,000 before paying salary to its sole shareholder Elaine. Elaine's marginal tax rate on ordinary income is 33 percent and 15 percent on dividend income. If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation, what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35 percent and it always distributes all after-tax earnings to Elaine.

Sole proprietorships are not treated as legal entities separate from their individual owners.

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?