Exam 18: Comparative Forms of Doing Business

Match the following statements. a.For the corporate taxpayer, taxed using the regular tax rates. b.Must be capitalized, but can be amortized over 180 months. c.For the corporate taxpayer, the rate is 21%. d.For the corporate taxpayer, cannot be deducted at all in the current tax year. e.For the corporate taxpayer, limited to 10% of taxable income before certain deductions. -Charitable contributions

If the IRS reclassifies debt as equity, the repayment of the debt by the corporation to the shareholder automatically is treated as a dividend.

The passive activity loss rules apply to S corporations but not to C corporations.

Match the following. a.Contribution of appreciated property to the business entity by an owner is never subject to taxation. b.Realized gains on the contribution of appreciated property to the entity are not recognized by the contributor when an 80% control requirement is satisfied. c.Realized losses on the contribution of loss property to the entity are never recognized by the contributor. d.Realized losses on the contribution of loss property to the entity are recognized by the contributor unless an 80% control requirement is satisfied. e.Basis of ownership interest to the owner is dependent on whether gain or loss is recognized to the owner on the contribution of assets to the business entity. -S corporation

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form. a.Ability of all owners to have limited liability. b.Ability to pass tax attributes through to the owners. c.Right of all owners to participate in the management of the business. d.Number of owners is limited. e.Ability to have multiple owners. -Limited partnership

Kirby, the sole shareholder of Falcon, Inc., leases a building to the corporation.The taxable income of the corporation for the tax year before deducting the lease payments is projected to be $500,000. a.What are the tax consequences to Kirby and to Falcon if Kirby leases a building to the corporation for $400,000? b.Is there a potential pitfall? How would it change the tax consequences to Kirby and to Falcon?

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?

Daniel, who is single, estimates that the profits of his business for the current tax year will be $200,000; he has no other sources of gross income.Since the 21% corporate rate is less than Daniel's marginal rate of 32%, he would save taxes operating the business as a C corporation.

An S corporation election for Federal income tax purposes also is effective for all states' income tax purposes.

Sam and Trang are going to establish a business.Sam will contribute cash of $100,000 for a 50% interest, and Trang will contribute land and a building worth $135,000 (adjusted basis of $65,000) for a 50% interest.The land and building are encumbered by a $35,000 mortgage, which the entity assumes.Determine the tax consequences of the contribution to Sam, Trang, and the entity if the business is: a.An S corporation. b.A partnership. c.A C corporation.

Match the following. a.Contribution of appreciated property to the business entity by an owner is never subject to taxation. b.Realized gains on the contribution of appreciated property to the entity are not recognized by the contributor when an 80% control requirement is satisfied. c.Realized losses on the contribution of loss property to the entity are never recognized by the contributor. d.Realized losses on the contribution of loss property to the entity are recognized by the contributor unless an 80% control requirement is satisfied. e.Basis of ownership interest to the owner is dependent on whether gain or loss is recognized to the owner on the contribution of assets to the business entity. -Limited partnership

Match the following statements. a.Transaction in this form enables double taxation to be avoided. b.Gain or loss is calculated separately for each asset and is subject to single taxation. c.This is subject to double taxation. d.The sale is treated as the sale of a capital asset under § 741 but subject to ordinary income potential under § 751. e.This is not subject to double taxation on the sale of corporate stock. -Sale of the individual assets of an unincorporated sole proprietorship by the owner.

Swallow, Inc., is going to make a distribution of $700,000 to shareholder Marjean who is in the 35% tax bracket. a.Determine the tax liability to Marjean if the form of the distribution is a dividend. b.Determine the tax liability to Marjean if the form of the distribution is a stock redemption. Assume Marjean's adjusted basis for the stock redeemed is $200,000 and that she has owned the stock for five years.

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

Arnold purchases a building for $750,000 that is going to be used by his wholly owned corporation.Which of the following statements are correct?

A benefit of an S corporation when compared with a C corporation is that it is subject to Federal income tax only in limited circumstances.

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form. a.Ability of all owners to have limited liability. b.Ability to pass tax attributes through to the owners. c.Right of all owners to participate in the management of the business. d.Number of owners is limited. e.Ability to have multiple owners. -Sole proprietorship

A limited liability company (LLC) is a hybrid business form that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership.

Match the following attributes with the different forms.A particular attribute may apply to more than one entity form. a.Ability of all owners to have limited liability. b.Ability to pass tax attributes through to the owners. c.Right of all owners to participate in the management of the business. d.Number of owners is limited. e.Ability to have multiple owners. -General partnership

If a C corporation has earnings and profits at least equal to the amount of a distribution, the tax consequences to the shareholders are the same regardless of whether the distribution is classified as a dividend or as a stock redemption.