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Exam 15: Entities Overview

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Question 21

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David would like to organize HOS (a business entity)as either an S corporation or as a corporation (taxed as a C corporation)generating a 12 percent annual before-tax return on a $300,000 investment.David's marginal tax rate is 24 percent and the corporate tax rate is 21 percent.David's marginal tax rate on individual capital gains and dividends is 15 percent.HOS will pay out its after-tax earnings every year to either its members or its shareholders.If HOS is taxed as an S corporation,David's business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business),and the business income allocation would qualify for the deduction for qualified business income. a.How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation? b.What are the overall tax rates (combined owner and entity level)if HOS is organized as either an S corporation or a C corporation?

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Question 22

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If a C corporation incurs a net operating loss in 2019 and carries the loss forward to 2020,the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

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B) False

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Question 23

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LLC members have more flexibility than corporate shareholders to alter their legal arrangements with respect to one another,the entity,and with outsiders.

Corporation A owns 10 percent of Corporation C.The marginal tax rate on nondividend income for both A and C is 21 percent.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 40 percent of Partnership P,which 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 50 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 37 percent and on qualified dividends is 23.8 percent (including the net investment income tax)] 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.

What tax year-end must an unincorporated entity with only one owner adopt?

Unincorporated entities are typically treated as flow-through entities for tax purposes.

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

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

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

The deduction for qualified business income applies to income of all but which of the following tax entity types?

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

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.

Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year ending in 2017?

Which tax classifications can potentially apply to LLCs?

Corporations are legally better suited for taking a business public compared with LLCs and general partnerships.

If a C corporation incurred a net operating loss in 2017,it could carry the loss back two years and forward 20 years to offset income in those years.However,it may offset only 80 percent of the taxable income before the NOL deduction in those years.

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

If a C corporation incurs a net operating loss in 2019,it may carry the loss back two years and forward 20 years to offset income in those years.

Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.

The C corporation tax rate is significantly lower than the top individual marginal tax rate.