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Exam 11: Entities Overview

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Question 1

Multiple Choice

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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?

A) The compensation is deductible by the entity.
B) The compensation is self-employment income to the owner-worker.
C) The entity is not required to withhold FICA tax on the compensation it pays to the owner.
D) All of the choices are correct.

E) All of the above
F) A) and D)

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Question 2

Multiple Choice

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

A) Both the self-employment tax and the additional Medicare tax are deductible for AGI in full.
B) Half of the self-employment tax and all of the additional Medicare tax are deductible for AGI.
C) Half of the self-employment tax and none of the additional Medicare tax are deductible for AGI.
D) None of the self-employment tax and none of the additional Medicare tax are deductible for AGI.

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

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C

Question 3

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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.

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

Which legal entity is generally best suited for going public?

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

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?

Unincorporated entities with only one individual owner are taxed as sole proprietorships.

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

Rodger owns 100% of the shares in Trevor Inc.,a C corporation.Assume the following for the current year: Trevor Inc.'s pre-tax income $=\$ 16,000$ Percentage of after-tax earnings retained by Trevor Inc. $=0 \%$ (i.e. all after-tax earnings distributed) Rodger's dividend tax rate $=15 \%$ Given these assumptions,how much cash does Rodger have from the dividend after all taxes have been paid?

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?

Owners of which of the following entity types could potentially increase their after-tax cash flow from the entity by reducing the compensation they receive in order to increase the amount of business income that flows-through to them from the entity?

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.

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?

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

S corporations have more restrictive ownership requirements than other entities.

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

Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation.

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

Corporations are legally better suited for taking a business public compared with LLCs and general partnerships.