Exam 13: Comparative Forms of Doing Business

Aubrey has been operating his business as a C corporation for the past 5 years.The corporation pays him a reasonable salary.The profits of the corporation,after paying Federal income tax,are distributed to him each year as a dividend.He is considering electing S status for his corporation in order to avoid double taxation.What factors should he consider assuming after-tax earnings will continue to be distributed to him?

While the S corporation generally is a tax reporter rather than a taxpayer,it may be subject to tax on built-in gains and on certain passive investment income.

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. -AMT.

Eagle,Inc.recognizes that it may have an accumulated earnings tax problem.According to its calculation,Eagle anticipates it has accumulated taxable income,before reduction for dividends paid,of $600,000 in 2008.Assume that its shareholders are in the 35% marginal tax bracket. a.Calculate the maximum amount of tax that Eagle and its shareholders might pay if the accumulated earnings tax is assessed. b.Calculate the maximum amount of tax that Eagle and its shareholders might pay if it distributes dividends to prevent an accumulated earnings tax assessment from occurring.

The § 465 at-risk provision and the § 469 passive activity loss provision have decreased the tax attractiveness of investments in real estate for partnerships and for limited liability companies.

An individual conducting a sole proprietorship files Schedule C of Form 1040,a partnership files Form 1065,a C corporation files Form 1120,and an S corporation files Form 1120S.

Lime,Inc.,has taxable income of $320,000.If Lime is a C corporation,its tax liability must be $108,050 [($50,000 * 15%)+ ($25,000 * 25%)+ ($25,000 * 34%)+ ($220,000 * 39%)].

The AMT rate for a C corporation is greater than the AMT rate for an individual.

From the perspective of the buyer of an unincorporated sole proprietorship whose assets have increased in value,the buyer is indifferent as to whether the transaction is the purchase of the business or a purchase of the individual assets.

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. -Limited partnership.

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. -C corporation.

Trolette 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:

Bart contributes $100,000 to the Tuna Partnership for a 40% interest.During the first year of operations,Tuna has a profit of $20,000.At the end of the first year,Tuna has outstanding loans from the following banks. What is Bart's at-risk basis in Tuna at the end of the first year?

If a business entity has a majority of corporate characteristics,then it is taxed as a corporation.

Wren,Inc.is owned by Alfred (30%)and Mabel (70%).Alfred's marginal tax rate is 25% and Mabel's marginal tax rate is 33%.Wren's taxable income for 2008 is $400,000. a.Determine the amount of the distribution that Wren would make to enable Alfred and Mabel to pay their tax liabilities associated with Wren's $400,000 taxable income if Wren is an S corporation. b.If Wren is a C corporation.

Factors that should be considered in making the S corporation election for the current tax year include the following:

The shareholders of an S corporation all have limited liability with respect to their ownership interests in the corporation,whereas only limited partners in a limited partnership have limited liability with respect to their ownership interests in a partnership.

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

The tax treatment of S corporation shareholders with respect to fringe benefits is not the same as the tax treatment for C corporation shareholders.

Marcus 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 an S corporation and the transaction qualifies under § 351,the S corporation's basis for the property and the shareholder's basis for the stock are: