Question 1

Kirk is establishing a business in 2011 which could have potential environmental liability problems. Therefore, he is trying to decide between the C corporation form and the S corporation form. He projects that the business will generate losses of approximately $100,000 each year for the first 3 years and then will generate profits of at least $200,000 each year thereafter. All profits will be reinvested in the growth of the business. Kirk projects he will be in the 35% bracket in 2011 and thereafter. Advise Kirk on which tax form he should select.

Accepted Answer

If the business operates as a C corporation, the $300,000 of projected losses will not benefit Kirk on his individual tax return. Instead, the corporation will carry the losses forward to offset against future profits. Assuming profits of $200,000 in year 4 and thereafter, $200,000 of the net operating loss will be used in year 4 and the remaining $100,000 will be used in year 5. From a cash flow perspective, this will result in tax savings to the corporation in years 4 and 5 of $100,250 ($61,250 + $39,000).
  For year 6 and thereafter, the annual tax liability will be $61,250.
If the S election is made, the $100,000 losses for each of the first 3 years can be passed through to Kirk and deducted on his individual tax return. This will result in tax savings to him of $35,000 ($100,000 ´ 35%) in 2011, $35,000 ($100,000 ´ 35%) in 2012, and $35,000 ($100,000 ´ 35%) in 2013. When the time value of money concept is considered, the benefit of the S election is even greater compared with C corporation status.
At the end of year 3 (2013), Kirk may want to terminate the S corporation election. If the election is maintained, Kirk's annual tax liability will be increased by $70,000 ($200,000 ´ 35%) in 2014, and $70,000 ($200,000 ´ 35%) each year thereafter for the S corporation earnings. If the election is terminated, the annual tax liability of the C corporation will be $61,250 [($50,000 ´ 15%) + ($25,000 ´ 25%) + ($25,000 ´ 34%) + ($100,000 ´ 39%)]. This assumes that the after tax earnings of the C corporation will be reinvested in the growth of the business rather than distributed to the shareholders as dividends.

Question 2

Maria has a 70% ownership interest in a business entity. She is in the 28% tax bracket. The entity incurs $18,000 of meals and lodging expense for Maria, which she believes qualify for exclusion under § 119. Which of the following statements is correct?

Accepted Answer

A)   If the entity is a partnership, the effect of the $18,000 expenditure by the partnership on Maria's tax liability is an increase of $5,040.
B)   If the entity is a sole proprietorship, the effect of the $18,000 expenditure by the sole proprietorship on Maria's tax liability is $0.
C)   If the entity is a C corporation, the effect of the $18,000 expenditure by the corporation on Maria's tax liability is $0.
D)   Only a. and c. are correct.
E)   a., b., and c. are correct. D

Question 3

Samantha's basis for her partnership interest is $85,000. If she receives a cash distribution of $95,000, her recognized gain is $10,000 and her basis for her partnership interest is reduced to $0. Samantha is still a partner after the distribution.

Accepted Answer

A) True 
 B)False  True

Question 4

An S corporation is not subject to the AMT, but its shareholders are in that the S corporation's AMT adjustments and preferences are passed through to them.

Accepted Answer

A) True 
 B)False

Question 5

Why does stock redemption treatment for an individual shareholder produce more favorable tax consequences than a dividend?

Accepted Answer

The answer of Why does stock redemption treatment for an...

Question 6

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a C corporation remains the same and the gross income of the shareholder increases.

Accepted Answer

A) True 
 B)False

Question 7

An S corporation election for Federal income tax purposes also is effective for all states' income tax purposes.

Accepted Answer

A) True 
 B)False

Question 8

The AMT statutory rate for C corporations and for S corporation shareholders on the AMT base is 20%.

Accepted Answer

A) True 
 B)False

Question 9

Depending on the election made under the check-the-box provisions, a limited liability company (LLC) with two or more owners might have to file a Form 1065 or a Form 1120.

Accepted Answer

A) True 
 B)False

Question 10

Peter is going to purchase the assets of Kirsten's sole proprietorship. The assets of Kirsten's sole proprietorship have appreciated in value. From Peter's perspective, does it matter whether the purchase is structured as (1) the purchase of the individual assets or (2) the purchase of the sole proprietorship?

Accepted Answer

The answer of Peter is going to purchase the assets...

Question 11

Alice contributes equipment (fair market value of $50,000; adjusted basis of $15,000), subject to a $10,000 liability, to form Orange Partnership, a general partnership. Mary contributes $40,000 cash. Alice and Mary share equally in partnership profits and losses. What is Alice's and Mary's basis for their partnership interests?

Accepted Answer

A)   $10,000 to Alice, $45,000 to Mary.
B)   $25,000 to Alice, $25,000 to Mary.
C)   $15,000 to Alice, $40,000 to Mary.
D)   $5,000 to Alice, $40,000 to Mary.
E)   $20,000 to Alice, $45,000 to Mary.

Question 12

In the sale of a partnership, does the way the sale is structured (i.e., sale of the partnership interests versus the sale of the assets) produce different tax consequences?

Accepted Answer

The answer of In the sale of a partnership, does...

Question 13

C corporations and their shareholders are subject to double taxation. S corporations and their shareholders typically are subject to single taxation. Therefore, for any given amount of corporate taxable income, the combined tax liability of a C corporation and its shareholders will exceed that of an S corporation and its shareholders.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is correct?

Accepted Answer

A)   The purchase of an unincorporated sole proprietorship is always treated as the purchase of the individual business assets.
B)   A taxpayer purchasing a corporation in which the assets are appreciated would prefer to purchase the stock of the corporation.
C)   The purchase of a corporation is always treated as the purchase of the corporate stock.
D)   Only a. and b. are correct.
E)   a., b., and c. are correct.

Question 15

Alice has a 70% interest in a business entity. Her basis for her ownership interest is $260,000. The net income of the business for the tax year is $100,000 and the entity liabilities have increased by $50,000. Determine the effect of the earnings and the liabilities on Alice's basis for her ownership interest if the business is:

Accepted Answer

The answer of Alice has a 70% interest in a...

Question 16

Austin is the sole shareholder of Purple, Inc. Purple's accumulated E & P at the beginning of the year is $700,000. Purple's taxable income after paying a salary and bonus to Austin of $100,000 is $500,000. Assume the salary and bonus payment are reasonable. Purple's maximum exposure in calculating accumulated taxable income for purposes of the accumulated earnings tax for the current tax year is:

Accepted Answer

A)   $330,000.
B)   $500,000.
C)   $600,000.
D)   $1,300,000.
E)   None of the above.

Question 17

Which of the following statements is correct?

Accepted Answer

A)   The number of owners of an LLC is not limited.
B)   If the LLC has three or more corporate characteristics, it will be taxed as a C corporation.
C)   An LLC can elect to be taxed as a C corporation or as a partnership.
D)   Only a. and c.
E)   a., b., and c. are correct.

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following business entity forms are subject to single taxation on the profits and which are subject to double taxation?

Accepted Answer

The answer of Which of the following business entity forms...

Question 20

Under what circumstances, if any, do the § 469 passive activity loss rules apply to C corporations?

Accepted Answer

The answer of Under what circumstances, if any, do the...

Exam 13: Comparative Forms of Doing Business

Maria has a 70% ownership interest in a business entity. She is in the 28% tax bracket. The entity incurs $18,000 of meals and lodging expense for Maria, which she believes qualify for exclusion under § 119. Which of the following statements is correct?

Samantha's basis for her partnership interest is $85,000. If she receives a cash distribution of $95,000, her recognized gain is $10,000 and her basis for her partnership interest is reduced to $0. Samantha is still a partner after the distribution.

An S corporation is not subject to the AMT, but its shareholders are in that the S corporation's AMT adjustments and preferences are passed through to them.

Why does stock redemption treatment for an individual shareholder produce more favorable tax consequences than a dividend?

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a C corporation remains the same and the gross income of the shareholder increases.

An S corporation election for Federal income tax purposes also is effective for all states' income tax purposes.

The AMT statutory rate for C corporations and for S corporation shareholders on the AMT base is 20%.

Depending on the election made under the check-the-box provisions, a limited liability company (LLC) with two or more owners might have to file a Form 1065 or a Form 1120.

In the sale of a partnership, does the way the sale is structured (i.e., sale of the partnership interests versus the sale of the assets) produce different tax consequences?

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following business entity forms are subject to single taxation on the profits and which are subject to double taxation?

Under what circumstances, if any, do the § 469 passive activity loss rules apply to C corporations?