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Exam 15: Entities Overview

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Question 21

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Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year: Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

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Question 22

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Stacy would like to have SST (a business entity) organized as either an LLC (taxed as a partnership) or as a corporation (taxed as a C corporation) generating a 10 percent annual before-tax return on a $600,000 investment. Stacy's marginal tax rate on ordinary income is 37 percent. Stacy's marginal tax rate on individual capital gains and dividends is 23.8 percent, including the net investment income tax. SST will pay out its after-tax earnings every year to either its members or its shareholders. If SST is taxed as a partnership, Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax. Assume that SST's income is not qualified business income for purposes of the qualified business income deduction. How much would Stacy have after taxes if SST is organized as either an LLC or a C corporation?

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Question 23

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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?

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%, 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?

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

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

Losses from C corporations are never available to offset a shareholder's personal income.

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

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

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

An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.

In certain circumstances, C corporation shareholders can elect to change the entity to a flow-through entity for tax purposes.

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

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

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.

Which of the following statements is true for a C corporation incurring a net operating loss (NOL) for a tax year that begins in 2018?

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 pre-tax income potentially exposed to?

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?

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

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?