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Exam 4: Business Entities Overview

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Question 1

True/False

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

A) True
B) False

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Question 2

Multiple Choice

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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?

A) Business income allocations are not subject to self-employment tax.
B) Business income allocations are not subject to the net investment income tax.
C) Business income allocations are subject to the additional Medicare tax.
D) Business income allocations are taxed at a maximum 23.8 percent tax rate.

E) A) and B)
F) A) and C)

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A

Question 3

Multiple Choice

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On which tax form do LLCs with more than one owner generally report their income and losses?

Which legal entity is generally best suited for going public?

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

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 $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 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?

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

The deduction for qualified business income applies to income from all but which of the following tax entity types?

Due to recent tax law changes, C corporations are no longer subject to double taxation.

For tax purposes, sole proprietorships pay sole proprietors guaranteed payments as compensation for their services.

Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.

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?

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.

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.

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?

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

A Corporation owns 10percent of D Corporation. D Corporation 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, A Corporation owns 40percent of Partnership P. Partnership P earns $500 million in the current year. Given this fact pattern, answer the following questions: a. How much cash from the D Corporation dividend remains for A Corporation after A pays the tax on the dividend, assuming A Corporation is eligible for the 50 percent dividends received deduction? b. If Partnership P distributes all of its current-year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does A Corporation have after paying taxes on its share of income from the partnership? c. If you were to replace A Corporation with Individual A [marginal tax rate on ordinary income is 37 percent and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does Individual A have from the D Corporation dividend after all taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that D Corporation distributes all of its after-tax income to its shareholders.

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?

Logan, a 50-percent shareholder in Military Gear Incorporated (MG) , is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $103,000 tax loss for the year, Logan's tax basis in his MG stock was $151,500 at the beginning of the year, and he received $76,500 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?

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?