Question 1

What kind of deduction is the deduction for qualified business income?

Accepted Answer

A) A for AGI deduction. 
B) A from AGI deduction that is not an itemized deduction. 
C) A from AGI deduction that is an itemized deduction. 
D) None of the choices are correct. 
A) A for AGI deduction. 
B) A from AGI deduction that is not an itemized deduction. 
C) A from AGI deduction that is an itemized deduction. 
D) None of the choices are correct. B

Question 2

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?

Accepted Answer

A) C corporation. 
B) S corporation. 
C) Partnership. 
D) Sole proprietorship. 
A) C corporation. 
B) S corporation. 
C) Partnership. 
D) Sole proprietorship. A

Question 3

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

Accepted Answer

A) True 
 B)False  False

Question 4

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: 15-03 Identify fundamental differences in tax characteristics across entity types.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical 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?

Accepted Answer

A) $31,250 
B) $62,500 
C) $75,000 
D) $125,000 
A) $31,250 
B) $62,500 
C) $75,000 
D) $125,000

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) $0 
B) $6,000 
C) $12,000 
D) $18,000 
A) $0 
B) $6,000 
C) $12,000 
D) $18,000

Question 8

From a tax perspective,which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

Accepted Answer

A) Partnership. 
B) S corporation. 
C) C corporation. 
D) S corporation and C corporation. 
A) Partnership. 
B) S corporation. 
C) C corporation. 
D) S corporation and C corporation.

Question 9

On which form is income from a single-member LLC with one corporate (C corporation)owner reported?

Accepted Answer

A) Form 1120 used by C corporations to report their income. 
B) Form 1120S used by S corporations to report their income. 
C) Form 1065 used by partnerships to report their income. 
D) Form 1040,Schedule C used by sole proprietorships to report their income. 
E) None of the choices are correct. 
A) Form 1120 used by C corporations to report their income. 
B) Form 1120S used by S corporations to report their income. 
C) Form 1065 used by partnerships to report their income. 
D) Form 1040,Schedule C used by sole proprietorships to report their income. 
E) None of the choices are correct.

Question 10

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

Accepted Answer

A) S corporation. 
B) C corporation. 
C) Entity taxed as a partnership. 
D) None of the choices are correct. 
A) S corporation. 
B) C corporation. 
C) Entity taxed as a partnership. 
D) None of the choices are correct.

Question 11

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?

Accepted Answer

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 these choices are correct. 
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 these choices are correct.

Question 12

Both tax and nontax objectives should be considered when choosing the entity type for a new business.

Accepted Answer

A) True 
 B)False

Question 13

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?

Accepted Answer

7.35 perce

Question 14

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?

Accepted Answer

A) 18.8% 
B) 23.8% 
C) 21% 
D) 39.8% 
E) 44.8% 
A) 18.8% 
B) 23.8% 
C) 21% 
D) 39.8% 
E) 44.8%

Question 15

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

Accepted Answer

A) Partnership. 
B) S corporation. 
C) LLC. 
D) Partnership and S corporation. 
E) S corporation and LLC. 
A) Partnership. 
B) S corporation. 
C) LLC. 
D) Partnership and S corporation. 
E) S corporation and LLC.

Question 16

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

Accepted Answer

A) Sole proprietorship 
B) Entity taxed as a partnership 
C) S corporation 
D) Two of the above 
A) Sole proprietorship 
B) Entity taxed as a partnership 
C) S corporation 
D) Two of the above

Question 17

Robert is seeking additional capital to expand ABC Inc.In order to qualify ABC as an S corporation,which type of investor group could Robert obtain capital from?

Accepted Answer

A) 30 different partnerships. 
B) 10 different C corporations. 
C) 90 nonresident individuals. 
D) 120 unrelated resident individuals. 
E) None of the choices are correct. 
A) 30 different partnerships. 
B) 10 different C corporations. 
C) 90 nonresident individuals. 
D) 120 unrelated resident individuals. 
E) None of the choices are correct.

Question 18

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

Accepted Answer

A) Rate at which income from entity will be taxed. 
B) Required accounting period. 
C) Liability protection. 
D) Rate at which income from entity will be taxed and required accounting period. 
E) Rate at which income from entity will be taxed and liability protection. 
A) Rate at which income from entity will be taxed. 
B) Required accounting period. 
C) Liability protection. 
D) Rate at which income from entity will be taxed and required accounting period. 
E) Rate at which income from entity will be taxed and liability protection.

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) Limited liability companies. 
B) S corporations. 
C) Limited partnerships. 
D) Sole proprietorships. 
E) None of the choices are correct. 
A) Limited liability companies. 
B) S corporations. 
C) Limited partnerships. 
D) Sole proprietorships. 
E) None of the choices are correct.

Exam 15: Entities Overview

What kind of deduction is the deduction for qualified business income?

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?

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

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

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

From a tax perspective,which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

On which form is income from a single-member LLC with one corporate (C corporation)owner reported?

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

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?

Both tax and nontax objectives should be considered when choosing the entity type for a new business.

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?

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

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

Robert is seeking additional capital to expand ABC Inc.In order to qualify ABC as an S corporation,which type of investor group could Robert obtain capital from?

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

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.

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

An Introduction to Tax

Tax Compliance,the Irs,and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview,dependents,and Filing Status

Gross Income and Exclusions

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Business Income,deductions,and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Corporate Operations

Accounting for Income Taxes

Corporate Taxation: Nonliquidating Distributions

Corporate Formation,reorganization,and Liquidation

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

State and Local Taxes

The Ustaxation of Multinational Transactions

Transfer Taxes and Wealth Planning

Filters