Exam 12: 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.

Losses from C corporations are never available to offset a shareholder's personal income.

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

While a C corporation's losses cannot be used by their shareholders to offset personal income, a C corporation may carry back and carry forward losses to help offset the taxable income a corporation had or will have. How are these net operating losses carried back and carried forward?

Which of the following legal entities are generally classified as C corporations for tax purposes?

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

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.

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

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.

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

When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation?

If PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pre-tax income potentially exposed to?

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

A single-member LLC is taxed as a partnership.

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

Tuttle Corporation (a C corporation) projects that it will have taxable income for the year of $300,000 before incurring any interest expense. Assume Tuttle's tax rate is 35 percent. a. What is the amount of the combined corporate and shareholder level tax on the $300,000 of pre-interest expense earnings if Ruth, Tuttle's sole shareholder, lends Tuttle Corporation $100,000 at the beginning of the year, Tuttle pays Ruth $10,000 of interest on the loan (interest is considered to be reasonable), and Tuttle distributes all of its after-tax earnings to Ruth? Assume her ordinary marginal rate is 33 percent and dividend tax rate is 15 percent. b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $8,000. What is the amount of the combined corporate and shareholder level tax on Tuttle Corporation's pre-interest expense earnings?

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

For the current year, Birch Corporation, a C corporation, reports taxable income of $400,000 before paying salary to its sole shareholder Elaine. Elaine's marginal tax rate on ordinary income is 33 percent and 15 percent on dividend income. If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation, what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35 percent and it always distributes all after-tax earnings to Elaine.

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?

Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an S corporation, which type of investor group could Robert obtain capital from?