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Exam 15: 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

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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 Incorporated generated a $127,800 profit companywide made up of a $75,800 profit from the Sacramento store, a ($27,000) loss from the San Francisco store, and a combined $79,000 profit from the remaining stores. If Bright Light Incorporated is an S corporation, how much income will be allocated to Roberto?

A) $31,950.00.
B) $63,900.00.
C) $75,800.00.
D) $127,800.00.

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

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Question 3

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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.

Which legal entity is generally best suited for going public?

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

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

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

Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2020?

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

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.

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.

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?

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

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?

The excess loss limitations apply to owners of all of the following entities except which of the following?

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

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.

A Corporation owns 10percent of D Corporation. D Corporation earns a total of $202 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 $502 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.

Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.