Exam 13: Comparative Forms of Doing Business

Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000.For the current tax year,the entity has profits of $50,000.If the entity is a C corporation,the corporate profits have no effect on Carol's basis in her stock.However,if the entity is an S corporation,Carol's basis increases to $90,000 [$60,000 + (60% * $50,000)].

Actual dividends paid to shareholders result in double taxation.Likewise,deemed dividends (e.g.,free use of corporate assets by a shareholder)result in double taxation.

In its first year of operations (2008),Auburn,Inc.(a C corporation)has gross receipts of $22 million and net income of $6 million.Auburn is not subject to the AMT for 2008.

Abby is a limited partner in a limited partnership.Her basis in the partnership interest is $92,000 with an at-risk basis of $80,000.Abby's share of the partnership loss for the tax year is $100,000.She has other income of $300,000. a.How much of the $100,000 can Abby offset against her other income of $300,000? What happens to any balance that cannot be deducted in the current tax year? b.Assume instead that Abby is the owner of an interest in an LLC. How much of the $100,000 can Abby offset against her other income of $300,000? What happens to any balance that cannot be deducted in the current year?

Daisy,Inc.,has taxable income of $850,000 during 2008,its first year of operations. Daisy distributes dividends of $200,000 to its 10 shareholders (i.e.,$20,000 each). Daisy earmarks $361,000 of its earnings for potential future expansion into other cities. a.Calculate Daisy's total tax liability associated with the current tax year if the $361,000 is treated as representing reasonable needs of the business. b.Calculate Daisy's total potential tax liability associated with the current tax year if none of the $361,000 qualifies as reasonable needs of the business.

Normally a C corporation shareholder would prefer to receive a return of capital distribution (e.g.,stock redemption)rather than a dividend distribution.Provide an example of where the opposite is true.

Match the following statements: a.For the corporate taxpayer, are 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 20%. 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.

Amos contributes land with an adjusted basis of $70,000 and a fair market value of $100,000 to White,Inc.,an S corporation,in exchange for 50% of the stock of White,Inc.Carol contributes cash of $100,000 for the other 50% of the stock.If White later sells the land for $110,000,$35,000 [$30,000 + 50%($10,000)] is allocated to Amos and $5,000 ($10,000 * 50%)is allocated to Carol.

The tax forms available for conducting a business entity include the:

The corporate tax rate for a business entity is always less than the tax rate that would apply if the business entity were not incorporated.

Which of the following entities has the most potential for raising capital?

Blue,Inc.,has taxable income before salary payments to its president of $700,000 in 2008.Blue is in the 34% tax bracket,and the president is in the 35% tax bracket. 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 larger salary to the president? c.What negative tax result may occur associated with the payment of the higher salary?

Rose,an S corporation,distributes land to Walter,its only shareholder.Rose's adjusted basis for the land is $100,000,and the fair market value is $175,000.Rose has a recognized gain of $75,000 ($175,000 - $100,000)on the distribution.Walter's adjusted basis for the land is the fair market value of $175,000.

Match the following tax 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. -C corporation.

A corporation may alternate between S corporation and C corporation status each year,depending on which results in more tax savings.

The corporation has a greater potential for raising capital than does the partnership.

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.

Samantha's basis for her partnership interest is $112,000.If she receives a cash distribution of $95,000,her recognized gain is $0 and her basis for her partnership interest is reduced to $17,000.Samantha is still a partner after the distribution.

Rocky and Sandra (shareholders)each loan Eagle Corporation $10,000 at the market rate of 10% interest.Which of the following statements are false?

Match the following statements: a.Status applies only if elected by the taxpayer. b.Not making distributions to shareholders. c.Rate for a corporate taxpayer is 20%. d.Subject to double taxation. e.Eligible for special allocations. -Partnerships.