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Chapter 15 Entities Overview

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Question;Chapter 15;Entities Overview;True / False Questions;1. Corporations;are legally formed by filing articles of organization with the state in which;the corporation will be created.;True False;2. General;partnerships are legally formed by filing a partnership agreement with the;state in which the partnership will be formed.;True False;3. Limited;partnerships are legally formed by filing a certificate of limited partnership;with the state in which the partnership will be organized.;True False;4. Sole;proprietorships are not treated as legal entities separate from their;individual owners.;True False;5. 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.;True False;6. LLC;members have more flexibility than corporate shareholders to alter their legal;arrangements with respect to one another, the entity, and with outsiders.;True False;7. Corporations;are legally better suited for taking a business public compared with LLCs and;general partnerships.;True False;8. Both tax;and nontax objectives should be considered when choosing an appropriate business;entity.;True False;9. Tax rules;require that entities be classified the same way for tax purposes as they are;classified for legal purposes.;True False;10. C;corporations and S corporations are separate taxpaying entities that pay tax on;their own income.;True False;11. All;unincorporated entities are generally treated as flow-through entities for tax;purposes.;True False;12. In certain;circumstances, C corporations can elect to be treated as flow-through entities.;True False;13. An;unincorporated entity with more than one owner is, by default, taxed as a;partnership.;True False;14. A;single-member LLC is taxed as a partnership.;True False;15. For tax;purposes, only unincorporated entities can be considered to be disregarded;entities.;True False;16. Unincorporated;entities with only one individual owner are taxed as sole proprietorships.;True False;17. S;corporations have more restrictive ownership requirements than other entities.;True False;18. Entities;taxed as partnerships can use special allocations to reward owners based on;their responsibilities, contributions, and individual needs.;True False;19. Sole;proprietors are subject to self-employment taxes on net income from their sole;proprietorships.;True False;20. Shareholders;of C corporations receiving property distributions must recognize dividend;income equal to the fair market value of the distributed property if the;distributing corporation has sufficient earnings and profits.;True False;21. Losses;from C corporations are never available to offset a shareholder's personal;income.;True False;Multiple Choice Questions;22. Which of;the following legal entities file documents with the state to be formally;recognized by the state?;A. Limited;Liability Company;B. General;Partnership;C. Sole;Proprietorship;D. None of;these;23. If an;individual forms a sole proprietorship, which nontax factor will be of greatest;benefit to the sole proprietor?;A. Liability;protection;B. Legal;flexibility in defining rights and responsibilities of owners;C. Facilitates;initial public offerings;D. Minimal;time and cost to organize;24. Which;legal entity is correctly paired with the party that bears the ultimate;responsibility for paying the legal entity's liabilities?;A. LLC - LLC;members;B. Corporation;- Corporation;C. General;Partnership - Partnership;D. Limited;Partnership - General partner;E. Both;Corporation - Corporation and Limited Partnership - General partner.;25. Which;legal entity provides the least flexible legal arrangement for owners?;A. Corporation;B. LLC;C. Partnership;D. Sole;Proprietorship;26. Which;legal entity is generally best suited for going public?;A. Corporation;B. LLC;C. Limited;Liability Partnership;D. General;Partnership;E. All of;these entities are equally suited for going public.;27. What;document must LLCs file with the state to organize their business?;A. Articles;of incorporation;B. Certificate;of LLC;C. Articles;of organization;D. Partnership;agreement;E. None of;these. LLCs do not have to file with the state to organize their business.;28. Which of;the following entity characteristics are generally key drivers for small;business owners in deciding which entity to choose?;A. Double;taxation;B. Required;accounting period;C. Liability;protection;D. Double;taxation and required accounting period;E. Double;taxation and liability protection;29. On which;form is income from a single member LLC with one corporate (C corporation);owner reported?;A. Form 1120;used by C corporations to report their income;B. Form;1120S used by S corporations to report their income;C. Form 1065;used by partnerships to report their income;D. Form;1040, Schedule C used by sole proprietorships to report their income;E. None of;these.;30. On which;tax form does a single member LLCs with one individual owner report its income;and losses?;A. Form 1120;B. Form;1120S;C. Form 1065;D. Form;1040, Schedule C;31. On which;tax form do LLCs with more than one owner report their income and losses?;A. Form 1120;B. Form;1120S;C. Form 1065;D. Form;1040, Schedule C;32. Which tax;classifications can potentially apply to LLCs?;A. S;corporation;B. Partnership;C. Sole;proprietorship;D. S;corporation and Partnership;E. S;corporation and Sole proprietorship;F. Partnership;and Sole proprietorship;G. All of;these;33. Generally;which of the following flow-through entities can elect to be treated as a C;corporation?;A. Limited;partnership;B. Limited;Liability Company;C. General;partnership;D. All of;these.;34. Which of;the following legal entities are classified as C corporations for tax purposes?;A. Limited;Liability Company;B. S;corporations;C. Limited;partnerships;D. Sole;proprietorship;E. None of;these;35. If PST;Corporation is a shareholder of MNO Corporation, how many levels of tax is;MNO's pre-tax income potentially exposed to?;A. No;taxation;B. Single;taxation;C. Double;taxation;D. Triple;taxation;36. Crocker;and Company, Inc. had taxable income of $550,000. At the end of the year, it;distributes all its after-tax earnings to Jimmy, the company's sole;shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal;tax rate on dividends is 15 percent. What is the overall tax rate on Crocker;and Company's pre-tax income?;A. 9.9%;B. 15.0%;C. 35.0%;D. 43.9%;E. 66.7%;37. If C;corporations retain their after-tax earnings, when will their shareholders be;taxed on the retained earnings?;A. Shareholders;will be taxed when they sell their shares at a gain;B. Shareholders;will be taxed in the year they elect to be taxed on undistributed retained;earnings;C. Shareholders;will be taxed on undistributed retained earnings in the year the corporation;files its tax return;D. None of;these;38. Which of;the following is most effective in mitigating the double tax?;A. Shift;income from high tax rate shareholders to low tax rate corporations;B. Shift;income from low tax rate shareholders to high tax rate corporations;C. Shift;income from high tax rate corporations to low tax rate shareholders;D. Shift;income from low tax rate corporations to high tax rate shareholders;39. 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?;A. Carried;back two years, carried forward indefinitely;B. Carried;back indefinitely, carried forward two years;C. Carried;back two years, carried forward five years;D. Carried;back two years, carried forward twenty years;E. None of;these.;40. Logan, a;50 percent shareholder in Military Gear Inc., is comparing the tax consequences;of losses from C corporations with losses from S corporations. Assume Military;Gear Inc has a $100,000 loss for the year, Logan's tax basis in his Military;Gear Inc. stock was $150,000 at the beginning of the year, and he received;$75,000 ordinary income from other sources during the year. Assuming Logan's;marginal income tax rate is 15%, how much more tax will Logan pay currently if;Military Gear Inc. is a C corporation compared to the tax he would pay if it;were an S corporation?;A. $0;B. $3,750;C. $7,500;D. $11,250;41. Which of;the following is not an effective strategy for mitigating double taxation in a;C corporation?;A. C;corporations can shift income to shareholders via deductible payments;B. C;corporations can make an S election;C. C;corporations can pay dividends to their shareholders;D. None of;these. All of these statements are effective strategies to mitigate or avoid;double taxation.;42. Robert is;seeking additional capital to expand ABC Inc. In order to qualify ABC as an S;corporation, which type of investor group should Robert obtain capital from?;A. 30;different partnerships;B. 10;different C corporations;C. 90;nonresident individuals;D. 120;unrelated resident individuals;E. None of;these.;43. What tax;year-end must unincorporated entities with only one owner adopt?;A. The;entity is free to adopt any tax year-end;B. The;entity must adopt the same year-end as its owner;C. The;entity must adopt a calendar year-end;D. The;entity may adopt any year-end except for a calendar year-end;44. Roberto;and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto;runs the retail store in Sacramento, CA, and Reagan runs the retail store in;San Francisco, CA. Bright Light Inc. generated a $125,000 profit companywide;made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from;the San Francisco store, and a combined $75,000 profit from the remaining;stores. If Bright Light Inc. is an S corporation, how much income will be;allocated to Roberto?;A. $31,250;B. $62,500;C. $75,000;D. $125,000;45. Roberto;and Reagan are both 25 percent owner/managers for Bright Light Enterprises.;Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail;store in San Francisco, CA. Bright Light generated a $125,000 profit;companywide made up of a $75,000 profit from the Sacramento store, a ($25,000);loss from the San Francisco store, and a combined $75,000 profit from the;remaining stores. If Bright Light is taxed as a partnership and decides that;Roberto and Reagan will be allocated 70 percent of his own store's profit with;the remaining profits allocated pro rata among all the owners, how much income;will be allocated to Reagan?;A. ($25,000);B. ($17,500);C. $5,000;D. $20,000;46. When an;employee/shareholder receives an income allocation from an S corporation, what;taxes apply to the income allocation?;A. FICA tax;only.;B. Self-employment;tax only.;C. FICA and;self-employment tax.;D. None of;these. This income will never be taxed.;E. None of;these. This income will be taxed, but another type of tax will apply.;47. What is;the tax impact to a C corporation or an S corporation when it makes a property;distribution to a shareholder?;A. Recognizes;either gain or loss;B. Does not;recognize gain or loss;C. Recognizes;gain but not loss;D. Recognizes;loss only;48. Assume you;plan to start a new enterprise, you know the probability of having losses for;the first three years of operations is almost 90 percent, and you know you will;report a substantial amount of income from other sources during those same;three years. From a tax perspective, which of the following entity choices;would be least favorable?;A. C;corporation;B. LLC;C. General;partnership;D. S;corporation;49. From a tax;perspective, which entity choice is preferred when a liquidating distribution;occurs and the entity has assets that have declined in value?;A. Partnership;B. S;corporation;C. LLC;D. Partnership;and S corporation;E. S;corporation and LLC;50. From a tax;perspective, which entity choice is preferred when a liquidating distribution;occurs and the entity has appreciated assets?;A. Partnership;B. S;corporation;C. LLC;D. Partnership;and LLC;E. S;corporation and LLC;51. If you;were seeking an entity with the most favorable tax treatment regarding (1) the;number of owners allowed, (2) the flexibility to select your accounting period;and (3) the availability of preferential capital gains rates when selling your;ownership interest, which entity should you decide to use?;A. C;corporation;B. S;corporation;C. Partnership;D. Sole;proprietorship;52. Which of;the following is not an effective strategy for mitigating the double tax;associated with C corporations?;A. Paying a;salary to a shareholder-employee;B. Leasing;property from a shareholder;C. Borrowing;money from a shareholder;D. Paying;fringe benefits to a shareholder-employee;E. All of;these are effective strategies for mitigating double taxation;53. What is;the maximum number of unrelated shareholders a C corporation can have, the;maximum number of unrelated shareholders an S corporation can have, and the;maximum number of partners a partnership may have?;A. 100, no;limit, no limit;B. no limit;100, 2;C. no limit;100, no limit;D. 100, 100;no limit;Essay Questions;54. David;would like to organize HOS as either an LLC or as a corporation generating a 12;percent annual before-tax return on a $300,000 investment. Individual and;corporate tax rates are both 30 percent and individual capital gains and;dividend tax rates are 15 percent. HOS will pay out its after-tax earnings;every year to either its members or its shareholders.;a. Ignoring self-employment taxes, how much would David keep;after taxes if HOS is organized as either an LLC or a corporation?;b. Ignoring self-employment taxes, what are the overall tax;rates (combined owner and entity level) if HOS is organized as either an LLC or;a corporation?;55. Jaron;would like to organize TMZ as either an LLC or as a C corporation generating a;6 percent annual before-tax rate of return on a $200,000 investment. Individual;and corporate tax rates are both 40 percent and individual capital gains and;dividends tax rates are 10 percent. TMZ will distribute its earnings annually;to either its members or shareholders.;a. Ignoring self-employment taxes (and the additional;Medicare Tax), how much would Jaron keep after taxes if TMZ is organized as;either an LLC or a C corporation?;b. Ignoring self-employment taxes (and the additional;Medicare Tax), what are the overall tax rates (combined overall and entity;level) if TMZ is organized as either an LLC or as a C corporation?;56. Emmy would;like to organize PRK as either an LLC or as a C corporation generating a 15;percent annual before-tax rate of return on a $100,000 investment. Individual;ordinary rates are 25 percent, corporate rates are 15 percent, and individual;capital gains and dividends tax rates are 5 percent. PRK will distribute its;earnings annually to either its members or shareholders.;a. Ignoring self-employment taxes, how much would Emmy keep;after taxes if PRK is organized as either an LLC or as a C corporation?;b. Ignoring self-employment taxes, what are the overall tax;rates (combined entity and owner level) if PRK is organized as either an LLC or;a corporation?;57. Jerry;would like to organize FBC as either an LLC or as a C corporation generating an;8 percent annual before-tax rate of return on a $400,000 investment. Individual;and corporate tax rates are both 35 percent and individual capital gains and;dividends tax rates are 15 percent. FBC will pay out its after-tax earnings;every year to either its members or its shareholders.;a. How much would Jerry keep after taxes if FBC is organized;as either an LLC or as a C corporation (ignore self-employment taxes)?;b. Ignoring self-employment taxes, what are the overall tax;rates (combined owner and entity level) tax rates if FBC is organized as either;an LLC or as a C corporation?;58. Taylor;would like to organize DRK as either an LLC or as a C corporation generating a;13 percent annual before-tax rate of return on a $250,000 investment.;Individual and corporate tax rates are both 30 percent and individual capital;gains and dividends tax rates are 5 percent. DRK will distribute its earnings;annually to either its members or shareholders.;a. Ignoring self-employment taxes, how much would Taylor;keep after taxes if DRK is organized as either an LLC or as a C corporation?;b. Ignoring self-employment taxes, what are the overall;(combined owner and entity level) tax rates if DRK is organized as either an;LLC or as a C corporation?;59. Becca;would like to organize BMI as either an LLC or as a C corporation generating a;4 percent annual before-tax rate of return on a $450,000 investment. Individual;ordinary rates are 28 percent, corporate rates are 15 percent, and individual;capital gains and dividends tax rates are 15 percent. BMI will distribute its;earnings annually to either its members or shareholders.;a. Ignoring self-employment taxes, how much would Becca keep;after taxes if BMI is organized as either a LLC or as a C corporation?;b. Ignoring self-employment taxes, what are the overall;(combined owner and entity level) tax rates if BMI is organized as either an;LLC or as a C corporation?;60. 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 20 percent on dividend income.;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?;61. In the;current year, DNS (a C corporation) had taxable income of $600,000 and;distributed all of its after-tax earnings to Daniel, its sole shareholder.;DNS's tax rate is 38 percent. Assuming Daniels's marginal tax rate on ordinary income;is 28 percent and his dividend rate is 15 percent, what is the overall tax rate;(combined corporate level and shareholder level) on DNS's $600,000 of taxable;income?;62. In its;first year of existence, BYC Corporation (a C corporation) reported a loss for;tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports;taxable income from operations of $35,000 in year 2 before any loss carryovers?;63. In its;first year of existence Aspen Corp. (a C corporation) reported a loss for tax;purposes of $50,000. In year 2, it reports a $30,000 loss. For year 3, it;reports taxable income from operations of $120,000. How much tax will Aspen;Corp. pay for year 3? Consult the corporate tax rate table provided to;calculate your answer.;64. For the;current year, Creative Designs Inc., a C corporation, reports taxable income of;$300,000 before paying salary to Ben the sole shareholder of Creative Designs;Inc. (CD). Ben's marginal tax rate on ordinary income is 28 percent and 15;percent on dividend income. Assume CD's tax rate is 39 percent.;a. How much total income tax will Creative Designs and Ben;pay on the $300,000 taxable income for the year if CD doesn't pay any salary to;Ben and instead distributes all of its after-tax income to Ben as a dividend?;b. How much total income tax will Creative Designs and Ben;pay on the $300,000 of income if CD pays Ben a salary of $100,000 and;distributes its remaining after-tax earnings to Ben as a dividend?;c. Compare your answer in part a with your answer to part b.;Explain why these numbers are different.;65. 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.;66. 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.;67. Jamal;Corporation, a C corporation, projects that it will have taxable income of;$500,000 before incurring any lease expenses. Jamal's tax rate is 34 percent.;Ali, Jamal's sole shareholder, has a marginal tax rate of 33 percent on;ordinary income and 15 percent on dividend income. Jamal always distributes all;of its after-tax earnings to Ali.;a. What is the amount of the combined corporate and;shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if;Jamal Corp. distributes all of its after-tax earnings to its sole shareholder;Ali?;b. What is the amount of the combined corporate and;shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if;Jamal leases equipment from Ali at a cost of $120,000 for the year?;c. What is the amount of the combined corporate and;shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if;Jamal Corp. leases equipment from Ali at a cost of $120,000 for the year but;the IRS determines that the fair market value of the lease payments is $80,000?;68. 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?;69. 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?;70. Rodger;owns 100% of the shares in Trevor Inc., a C corporation. Assume the following;for the current year;Given these assumptions, how much cash does Rodger have from;the dividend after all taxes have been paid?;71. Corporation;A owns 10% of Corporation C. The marginal tax rate on non-dividend income for;both A and C is 34%. Corporation C earns a total of $200 million before taxes;in the current year, pays corporate tax on this income and distributes the;remainder proportionately to its shareholders as a dividend. In addition;Corporation A owns 20% of partnership P that earns $500 million in the current;year. Given this fact pattern, answer the following questions;a. How much cash from the Corporation C dividend remains;after Corporation A pays the tax on the dividend assuming Corporation A is;eligible for the 70 percent dividends received deduction?;b. If partnership P distributes all of its current year;earnings in proportion to the partner's ownership percentages, how much cash;from Partnership P does Corporation A have after paying taxes on its share of;income from the partnership?;c. If you were to replace corporation A with individual A;(her marginal tax rate on ordinary income is 28% and on qualified dividends is;15%) in the original fact pattern above, how much cash does individual A have;from the Corporation C dividend after all taxes assuming the dividends are;qualified dividends? Consistent with the original facts, assume that;Corporation C distributes all of its after-tax income to its shareholders.

 

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