Exam 13: Comparative Forms of Doing Business

Both Albert and Elva own 50% of the stock of Eagle, Inc. a C corporation). To cover what is perceived as temporary working capital needs, each shareholder loans Eagle $200,000 with an annual interest rate of 3% same as the Federal rate) and a maturity date of one year. The loan is made at the beginning of 2019. a. What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as debt? b. What are the tax consequences to Albert, Elva, and Eagle if the loans are classified as equity?

Candace, who is in the 32% tax bracket, is establishing a business that could have potential environmental liability problems. Therefore, she is trying to decide between the C corporation form and the S corporation form. She projects that the business will generate earnings of about $75,000 each year. Advise Candace on the tax consequences of each entity form.

The Net Investment Income Tax NIIT) is owed by both high income individuals and corporations.

Chen contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity. If the entity is a C corporation and the transaction qualifies under § 351, the corporation's basis for the property and the shareholder's basis for the stock are:

Techniques that can be used to minimize the current period tax liability include:

Match the following. -General partnership

List some techniques for reducing and/or avoiding double taxation by transferring funds to the shareholders that are deductible to the corporation.

Match the following statements. -Net capital loss

Alice contributes equipment fair market value of $82,000; adjusted basis of $20,000), subject to a $14,000 liability, to form Orange Partnership, a general partnership. Mary contributes $68,000 cash. Alice and Mary share equally in partnership profits and losses. What is Alice's and Mary's basis for their partnership interests?

Techniques that may permit a C corporation to avoid double taxation are available.

Transferring funds that are deductible by the C corporation to shareholders can reduce or eliminate double taxation.

Kristine owns all of the stock of a C corporation which owns the following assets. Her adjusted basis for her stock is $270,000. Calculate Kristine's recognized gain or loss and classify it as capital or ordinary if she sells her stock for $500,000.

List some techniques that can be used to avoid and/or reduce double taxation for a C corporation.

Blue, Inc., records taxable income before salary payments of $700,000 to its president who has a marginal rate of 32%. a. Calculate the tax liability to Blue if the president's salary is $400,000 and if it is $100,000. b. What tax benefit is there of paying the higher salary to the president? c. What negative tax result may occur associated with the payment of the higher salary?

Ralph wants to purchase either the stock or the assets of Red, Inc., a C corporation. Under what circumstances would Ralph prefer to purchase: a. The stock from the shareholders? b. The assets from the corporation?

Ashley holds a 65% interest in a business entity. Her basis for ownership interest is $300,000. The net income of the business for the tax year is $100,000 and the entity liabilities have increased by $60,000. Determine the effect of the earnings and the liabilities on Ashley's basis for her ownership interest if the business is: a. A C corporation. b. An S corporation. c. A partnership.

Lee owns all the stock of Vireo, Inc., a C corporation for which he has an adjusted basis of $150,000. The assets of Vireo are recorded as follows. Adjusted Basis FMV Cash \ 35,000 \ 35,000 Accounts receivable 20,000 20,000 Inventory 22,000 25,000 Building 28,000 30,000 Land 40,000 90,000 Lee sells his stock to Katrina for $300,000. Determine the tax consequences to: a. Lee. b. Katrina. c. Vireo

Match the following statements. -Sale of corporate stock by the C corporation shareholders.

John wants to buy a business whose assets have appreciated in value. If the business is operated as a C corporation, it does not matter to John whether he purchases the assets or the stock.

Kirk is establishing a business in year 1 that could have potential environmental liability problems. Therefore, he is trying to decide between the C corporation form and the S corporation form. He projects that the business will generate losses of approximately $100,000 each year for the first three years and then will generate profits of at least $200,000 each year thereafter. All profits will be reinvested in the growth of the business. Kirk projects he will be in the 35% bracket for all tax years. Advise Kirk on which tax form he should select.