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Exam 12: Entities Overview

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Question 1

True/False

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Unincorporated entities are typically treated as flow-through entities for tax purposes.

A) True
B) False

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Question 2

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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.

F) A) and B)
G) B) and C)

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Question 3

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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 not allow you to offset the entity losses against your income from other sources?

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

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.

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

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

S corporation shareholders are legally responsible for paying the S corporation's debts because S corporations are treated as flow-through entities for tax purposes.

What document must an LLC file with the state to organize its business?

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

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed.

Jorge is a 100-percent owner of JJ LLC (taxed as an S corporation) .He works full time 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?

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

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

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?

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: 12-03 Identify fundamental differences in tax characteristics across entity types. Bloom's: Remember Accessibility: Keyboard Navigation; Screen Reader Compatible AICPA/AACSB: BB Critical Thinking / Reflective 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?

In its first year of existence (2018), Aspen Corp.(a C corporation)reported a loss for tax purposes of $60,000.In 2019, it reports a $40,000 loss.For 2020, it reports taxable income from operations of $120,000.How much tax will Aspen Corp.pay for year 3?

S corporations have more restrictive ownership requirements than other entities.