Exam 4: Entities Overview

Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.

Nancy purchased a building and then leased the building to ZML.Nancy is the sole shareholder of ZML.She leased the building to ZML for $2,500 per month.However,the IRS determined that the fair market value of the lease payment should only be $1,500 per month.How would the lease payment be treated with respect to both Nancy and ZML?

General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed.

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

Which of the following is most effective in mitigating the double tax?

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

Cali Corp.(a C corporation)projects that it will have taxable income of $250,000 for the year before paying any fringe benefits.Stacey,Cali's sole shareholder,has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income.Assume Cali's tax rate is 34 percent. a.What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 of pre-benefit income if Cali Corp.does not pay out any fringe benefits and distributes all of its after-tax earnings to Stacey? b.What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 of pre-benefit income if Cali Corp.pays Stacey's adoption expenses of $50,000 and the payment is considered to be a qualified fringe benefit? Cali Corp.distributes all of its after-tax earnings to Stacey. c.What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 of pre-benefit income if Cali Corp.pays Stacey's adoption expenses of $50,000 and the payment is considered to be a nonqualified fringe benefit? Cali Corp.distributes all of its after-tax earnings to Stacey.

Both tax and nontax objectives should be considered when choosing an appropriate business entity.

Sole proprietorships are not treated as legal entities separate from their individual owners.

Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities,contributions,and individual needs.