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Exam 4: Business Entities Overview

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Question 31

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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.

E) A) and D)
F) C) and D)

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Question 32

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

A) True
B) False

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Question 33

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Which legal entity provides the least flexible legal arrangement for owners?

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

An unincorporated entity with more than one owner is, by default, taxed as a partnership.

In 2020, Aspen Corporation reported $120,000 of taxable income before the net operating loss (NOL) deduction. It had an NOL carryover of $60,000 from 2018 and an NOL carryover from 2019 of $40,000. How much tax will Aspen Corporation pay on its 2020 tax return?

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

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 $132,000 profit companywide made up of a $77,000 profit from the Sacramento store, a ($30,000) loss from the San Francisco store, and a combined $85,000 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?

Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year beginning before 2018?

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

When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?

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

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $566,500. 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?

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

Rodger owns 100 percent of the shares in Trevor Incorporated a C corporation. Assume the following for the current year: Given these assumptions, how much cash does Rodger have from the dividend after paying taxes on the distribution?

If a C corporation incurred a net operating loss in 2017, it could carry the loss back two years and forward 20 years to offset income in those years. However, it may offset only 80 percent of the taxable income before the NOL deduction in those years.

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?

Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?

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

In 2020, BYC Corporation (a C corporation) had an NOL carryover from 2017 in the amount of $40,000. How much tax will BYC pay in 2020 if it reports taxable income from operations of $35,000 in 2020 before the NOL deduction?