Exam 4: Entities Overview

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

All unincorporated entities are generally treated as flow-through entities for tax purposes.

Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.

Corporation A owns 10% of Corporation C.The marginal tax rate on non-dividend income for both A and C is 34%.Corporation C earns a total of $200 million before taxes in the current year,pays corporate tax on this income and distributes the remainder proportionately to its shareholders as a dividend.In addition,Corporation A owns 20% of partnership P that earns $500 million in the current year.Given this fact pattern,answer the following questions: a.How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend assuming Corporation A is eligible for the 70 percent dividends received deduction? b.If partnership P distributes all of its current year earnings in proportion to the partner's ownership percentages,how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership? c.If you were to replace corporation A with individual A [her marginal tax rate on ordinary income is 28% and on qualified dividends is 15% (the net investment income tax does not apply)] in the original fact pattern above,how much cash does individual A have from the Corporation C dividend after all taxes assuming the dividends are qualified dividends? Consistent with the original facts,assume that Corporation C distributes all of its after-tax income to its shareholders.

Crocker and Company,Inc.had taxable income of $550,000.At the end of the year,it distributes all its after-tax earnings to Jimmy,the company's sole shareholder.Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent.What is the overall tax rate on Crocker and Company's pre-tax income?

Which of the following legal entities file documents with the state to be formally recognized by the state?

SNL corporation,a C corporation,reports $400,000 of taxable income in the current year.SNL's tax rate is 35 percent.Answer the following questions,assuming Keegan,SNL's sole shareholder,has a marginal tax rate of 39.6 percent on ordinary income and 23.8 percent on dividend income (including the net investment income tax). a.Compute the first level of tax on SNL's taxable income for the year. b.Compute the second level of tax on SNL's income assuming that SNL currently distributes all of its after-tax earnings to Keegan.What is the overall (combined owner and entity level)tax rate on SNL's taxable income for the year?

For tax purposes,only unincorporated entities can be considered to be disregarded entities.

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

Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises.Roberto runs the retail store in Sacramento,CA,and Reagan runs the retail store in San Francisco,CA.Bright Light 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 is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners,how much income will be allocated to Reagan?

S corporation shareholders are legally responsible for paying the S corporation's debts because S corporations are treated as flow-through entities for tax purposes.

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

Jamal Corporation,a C corporation,projects that it will have taxable income of $500,000 before incurring any lease expenses.Jamal's tax rate is 34 percent.Ali,Jamal's sole shareholder,has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income.Jamal always distributes all of its after-tax earnings to Ali. a.What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp.distributes all of its after-tax earnings to its sole shareholder Ali (ignore the 3.8% net investment income tax)? b.What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal leases equipment from Ali at a cost of $120,000 for the year (ignore the 3.8% net investment income tax)? c.What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp.leases equipment from Ali at a cost of $120,000 for the year but the IRS determines that the fair market value of the lease payments is $80,000 (ignore the 3.8% net investment income tax)?

Which legal entity is generally best suited for going public?

For the current year,Creative Designs Inc.,a C corporation,reports taxable income of $300,000 before paying salary to Ben,the sole shareholder of Creative Designs Inc.(CD).Ben's marginal tax rate on ordinary income is 28 percent and 15 percent on dividend income.Assume CD's tax rate is 39 percent. a.How much total income tax will Creative Designs and Ben pay on the $300,000 taxable income for the year if CD doesn't pay any salary to Ben and instead distributes all of its after-tax income to Ben as a dividend? b.How much total income tax will Creative Designs and Ben pay on the $300,000 of income if CD pays Ben a salary of $100,000 and distributes its remaining after-tax earnings to Ben as a dividend? c.Compare your answer in part a.with your answer to part b.Explain why these numbers are different.

Jerry would like to organize FBC as either an LLC or as a corporation (taxed as a C corporation)generating an 8 percent annual before-tax rate of return on a $400,000 investment.Individual and corporate tax rates are both 35 percent and individual capital gains and dividends tax rates are 15 percent.FBC will pay out its after-tax earnings every year to either its members or its shareholders. a.Ignoring self-employment taxes,how much would Jerry keep after taxes if FBC is organized as either an LLC or as a corporation (taxed as a C corporation)? b.Ignoring self-employment taxes,what are the overall tax rates (combined owner and entity level)tax rates if FBC is organized as either an LLC or as a corporation (taxed as a C corporation)?

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

Logan,a 50 percent shareholder in Military Gear Inc.,is comparing the tax consequences of losses from C corporations with losses from S corporations.Assume Military Gear Inc has a $100,000 loss for the year,Logan's tax basis in his Military Gear Inc.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 regular income tax rate is 15%,how much more tax will Logan pay currently if Military Gear Inc.is a C corporation compared to the tax he would pay if it were an S corporation?

In certain circumstances,C corporations can elect to be treated as flow-through entities.

An unincorporated entity with more than one owner is,by default,taxed as a partnership.