Exam 3: Tax Planning Strategies and Related Limitations

Bobby and Whitney are husband and wife,and Whitney operates a sole proprietorship.They expect their joint taxable income next year to be $225,000,of which $175,000 is attributed to the sole proprietorship.Whitney is contemplating incorporating the sole proprietorship.Using the 2019 married filing jointly tax brackets and the corporate tax brackets,how much current tax could this strategy save Bobby and Whitney? How much income should be retained in the corporation? (Use tax rate schedule.)

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Question 1

Correct Answer:

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Assuming Bobby and Whitney's goal is to minimize their current federal income tax exposure,one can compare the married filing jointly and corporate tax rate schedules to achieve this goal.Since Bobby and Whitney have $50,000 of taxable income not related to the sole proprietorship,they are currently in the 12 percent tax bracket.The task is to allocate the $175,000 between Bobby and Whitney and the corporation to minimize their current liability.The corporate tax rate is 21 percent and is higher than Bobby and Whitney's marginal tax rate of 12 percent.To take advantage of the remaining $28,950 of the 12 percent individual tax bracket ($78,950 − $50,000),$28,950 of the profits should be shifted to Bobby and Whitney.Bobby and Whitney's personal marginal tax rate would now be 22 percent,which is higher than the corporation's tax rate of 21 percent.To take advantage of the corporation's 21 percent tax bracket,the remaining $146,050 of corporate income should be retained in the corporation.In sum,$146,050 of the expected profits are retained in the corporation and $28,950 of the profits are shifted to Bobby and Whitney.This strategy will save Bobby and Whitney $2,597.00,calculated as:

In general,tax planners prefer to accelerate deductions.

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(True/False)

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Question 2

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True

A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine?

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Question 3

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If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return,$25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

(Multiple Choice)

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Question 4

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

(True/False)

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Question 5

Which of the following increases the benefits of income deferral?

(Multiple Choice)

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Question 6

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

(True/False)

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Question 7

The business purpose,step-transaction,and substance-over-form doctrines may limit the conversion strategy.

(True/False)

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Question 8

The business purpose,step-transaction,and substance-over-form doctrines may limit the income-shifting strategy.

(True/False)

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Question 9

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine. In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

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Question 10

Which of the following may limit the conversion strategy?

(Multiple Choice)

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Question 11

Susan Brown has decided that she would like to go back to school after her kids leave home in five years.To save for her education,Susan would like to invest $25,000 in an investment that provides a high return.If her marginal tax rate is 35 percent,what is Susan's after-tax rate of return for the following investment options? Qualified dividends are taxed at 15 percent. (1)Corporate bond issued at face value with 10 percent stated interest rate payable annually. (2)Dividend-paying stock with an annual qualifying dividend equal to 10 percent of her investment. (3)Growth stock with an annual growth rate of 8 percent and no dividends paid.(Round your interim calculations to the nearest whole number.)

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Question 12

There are two basic timing-related tax rate strategies.What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflicting recommendations? What information do you need to determine the appropriate action?

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Question 13

Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent.If a city of Atlanta bond pays 7.65 percent interest,what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

(Multiple Choice)

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Question 14

The timing strategy is particularly effective for cash-basis taxpayers.

(True/False)

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Question 15

Antonella works for a company that pays a year-end bonus in December of each year.Assume that Antonella expects to receive a $20,000 bonus in December this year,her tax rate is 30 percent,and her after-tax rate of return is 8 percent.If Antonella's employer paid her bonus on January 1 of next year instead of in December,how much would this action save Antonella in today's tax dollars? If Antonella's tax rate increased to 32 percent next year,would receiving the bonus in January still be advantageous? Use Exhibit 3.1.

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Question 16

Assume that Larry's marginal tax rate is 24 percent.If corporate bonds pay 10 percent interest,what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

(Multiple Choice)

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Question 17

Implicit taxes may reduce the benefits of the conversion strategy.

(True/False)

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Question 18

If tax rates are decreasing:

(Multiple Choice)

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Question 19

Boeing is considering opening a plant in one of two neighboring states.One state has a corporate tax rate of 15 percent.If operated in this state,the plant is expected to generate $1,200,000 pretax profit.The other state has a corporate tax rate of 5 percent.If operated in this state,the plant is expected to generate $1,085,000 of pretax profit.Which state should Boeing choose based upon tax considerations only? Why do you think the plant in the state with a lower tax rate would produce a lower pretax income?

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Question 20

Showing 1 - 20 of 115

In general,tax planners prefer to accelerate deductions.

A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine?

If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return,$25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

Which of the following increases the benefits of income deferral?

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

The business purpose,step-transaction,and substance-over-form doctrines may limit the conversion strategy.

The business purpose,step-transaction,and substance-over-form doctrines may limit the income-shifting strategy.

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine. In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

Which of the following may limit the conversion strategy?

There are two basic timing-related tax rate strategies.What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflicting recommendations? What information do you need to determine the appropriate action?

The timing strategy is particularly effective for cash-basis taxpayers.

Assume that Larry's marginal tax rate is 24 percent.If corporate bonds pay 10 percent interest,what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Implicit taxes may reduce the benefits of the conversion strategy.

If tax rates are decreasing:

An Introduction to Tax

Tax Compliance,the Irs,and Tax Authorities

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

Entities Overview

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

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