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Exam 4: Entities Overview

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Question 31

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

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Question 32

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

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Question 33

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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.

Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year ending in 2017?

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

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $550,000. 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?

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.

If a C corporation incurs a net operating loss in 2019 and carries the loss forward to 2020, the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

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?

Owners of which of the following entity types receive deductible compensation from the entity for working for the entity?

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

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?

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

If C corporations retain their after-tax earnings, when will their shareholders who are individuals be taxed on the retained earnings?

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

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

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

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

Which legal entity is generally best suited for going public?

David would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $300,000 investment. David's marginal tax rate is 24 percent and the corporate tax rate is 21 percent. David's marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, David's business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business), and the business income allocation would qualify for the deduction for qualified business income. a. How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation? b. What are the overall tax rates (combined owner and entity level) if HOS is organized as either an S corporation or a C corporation?