Chapter 15 Test Bank

1. Award: 10.
00 points
Corporations are legally formed by filing articles of organization with the state in which the corporation will be created.
 True
 False
Corporations file articles of incorporation.
References
True / False Difficulty: 2 Medium Learning Objective: 15-01 Discuss the legal and other nontax
characteristics of different types of legal business entities.
2. Award: 10.00 points
General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed.
 True
 False
General partnerships may be formed by written agreement among the partners, called a partnership agreement, or may be formed informally without a written
agreement when two or more owners join together in an activity to generate profits.
References
Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 15-01 Discuss the legal and other nontax
Sole proprietorships that are not organized as LLCs are not treated as legal entities separate from their individual owners.
 True
 False
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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
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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.
 True
 False
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Corporations are legally better suited for taking a business public compared with LLCs and general partnerships.
 True
 False
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Both tax and nontax objectives should be considered when choosing the entity type for a new business.
 True
 False
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Tax rules require that entities be classified the same way for tax purposes as they are classified for legal purposes.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 15-02 Describe the different types of business
entities for tax purposes.
C corporations and S corporations are separate taxpaying entities that pay tax on their own income.
 True
 False
S corporations are flow-through entities whose income "flows through" to their owners, who are responsible for paying tax on the income.
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True / False Difficulty: 2 Medium Learning Objective: 15-02 Describe the different types of business
Unincorporated entities are typically treated as flow-through entities for tax purposes.
 True
 False
References
In certain circumstances, C corporation shareholders can elect to change the C corporation to a flow-through entity for tax purposes.
 True
 False
An S corporation election achieves this purpose.
References
An unincorporated entity with more than one owner is, by default, taxed as a partnership.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 15-02 Describe the different types of business
A single-member LLC is taxed as a partnership.
 True
 False
Single-member LLCs are taxed as sole proprietorships.
References
For tax purposes, only unincorporated entities can be considered to be disregarded entities.
 True
 False
If an entity is incorporated, it is a corporate entity for tax purposes and cannot be a disregarded entity.
References
Unincorporated entities with only one individual owner are taxed as sole proprietorships.
 True
 False
References
S corporations have more restrictive ownership requirements than other entities.
 True
 False
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True / False Difficulty: 2 Medium Learning Objective: 15-03 Identify fundamental differences in tax
characteristics across business entity types.
Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.
 True
 False
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Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.
 True
 False
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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
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Losses from C corporations are never available to offset a shareholder's personal income.
 True
 False
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True / False Difficulty: 1 Easy Learning Objective: 15-03 Identify fundamental differences in tax
The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.
 True
 False
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S corporation shareholders are subject to self-employment tax on business income allocations from the S corporation if they are actively involved in the S
corporation's business.
 True
 False
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Business income allocations to owners from an LLC that is taxed as a partnership are subject to self-employment tax if the owners are significantly involved in
the entity's business activities.
 True
 False
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Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders
are passive investors in the S corporation.
 True
 False
References
Due to recent tax law changes, C corporations are no longer subject to double taxation.
 True
 False
References
The C corporation tax rate is lower than the top individual marginal tax rate.
 True
 False
References
S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments.
 True
 False
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Owners who work for entities taxed as a partnership receive guaranteed payments as compensation. The guaranteed payments are not self-employment
income.
 True
 False
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For tax purposes, sole proprietorships pay sole proprietors guaranteed payments as compensation for their services.
 True
 False
References
If a C corporation incurs a net operating loss in 2020, it may carry the loss back two years and forward 20 years to offset income in those years.
 True
 False
References
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.
 True
 False
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If a C corporation incurs a net operating loss in 2020 and carries the loss forward to 2021, the NOL carryover is not allowed to offset 100 percent of the
corporation's taxable income (before the net operating loss deduction).
 True
 False
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An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the
shareholder's basis in the stock no matter how large the loss.
 True
 False
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True / False Difficulty: 3 Hard Learning Objective: 15-03 Identify fundamental differences in tax
Which of the following legal entities must file documents with the state to be formally recognized by the state?
 Limited liability company.
 General partnership.
 Sole proprietorship (non LLC).
 None of the choices is correct.
LLCs file articles of organization with the state to receive formal recognition from the state, but general partnerships typically don't file their partnership
agreements. Because sole proprietorships are not treated as legal entities separate from their owners, sole proprietors don't need to do anything to receive
legal recognition from the state.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 15-01 Discuss the legal and other nontax
If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?
 Liability protection.
 Legal flexibility in defining rights and responsibilities of owners.
 Facilitation of initial public offerings.
 Minimal time and cost to organize.
While a sole proprietorship can be organized with minimal time and cost, sole proprietorships don't provide a shield for the individual owner. Legal flexibility to
define the rights and responsibilities of owners and the ability to go public are irrelevant because they are not characteristics that pertain to sole
proprietorships.
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Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?
 LLC - LLC members.
 Corporation - Shareholders..
 General partnership - Partnership.
 Limited partnership - General partner.
Corporations and LLCs, rather than their owners, are responsible for their debts. General partners are responsible for debts of general and limited partnerships.
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Which legal entity provides the least flexible legal arrangement for owners?
 Corporation.
 LLC.
 Partnership.
 Sole proprietorship.
State partnership and LLC statutes provide members and partners with a great deal of flexibility. In contrast, corporate governance rules limit the flexibility of
shareholders.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 15-01 Discuss the legal and other nontax
Which legal entity is generally best suited for going public?
 Corporation.
 LLC.
 Limited liability partnership.
 All of these entities are equally suited for going public.
Corporations have the governance structure to successfully achieve an initial public offering. The other entities would have to restructure to make this
possible.
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Multiple Choice Difficulty: 1 Easy Learning Objective: 15-01 Discuss the legal and other nontax
What document must an LLC file with the state to organize its business?
 Articles of incorporation.
 Certificate of LLC.
 Articles (or a certificate) of organization.
 Partnership agreement.
 None of the choices is correct. An LLC does not have to file with the state to organize its business.
LLCs must file either articles of organization or a certificate of organization with the state the LLC desires to organize its business in (depending on the state).
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Which of the following entity characteristics are generally key factors for small business owners in deciding which entity to choose?
 Rate at which income from entity will be taxed.
 Required accounting period.
 Liability protection.
 Both the rate at which income from entity will be taxed and the required accounting period.
 Both the rate at which income from entity will be taxed and liability protection.
While each circumstance is different, small business owners typically seek liability protection while having income taxed at the lowest rate.
References
Multiple Choice Learning Objective: 15-01 Discuss

the legal and other nontax
characteristics of different types
of legal business entities.
Difficulty: 1 Easy Learning Objective: 15-03 Identify

fundamental differences in tax
characteristics across business
entity types.
On which form is income from a single-member LLC with one corporate (C corporation) owner reported?
 Form 1120 used by C corporations to report their income.
 Form 1120S used by S corporations to report their income.
 Form 1065 used by partnerships to report their income.
 Form 1040, Schedule C used by sole proprietorships to report their income.
 None of the choices are correct.
A single-member LLC with one corporate owner is considered to be a disregarded entity. In essence, the entity is treated like a division of its parent company.
Thus, its income will be reported on the Form 1120 of its parent corporation.
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Multiple Choice Difficulty: 3 Hard Learning Objective: 15-02 Describe the different types of business
On which tax form does a single-member LLC with one individual owner report its income and losses?
 Form 1120.
 Form 1120S.
 Form 1065.
 Form 1040, Schedule C.
Single-member LLCs with one individual owner follow the same filing guidelines as sole proprietorships. Thus, their income is reported on Form 1040, Schedule
C.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 15-02 Describe the different types of business
On which tax form do LLCs with more than one owner generally report their income and losses?
 Form 1120.
 Form 1120S.
 Form 1065.
 Form 1040, Schedule C.
LLCs with more than one owner are taxed as partnerships and report their income on Form 1065.
References
Which tax classifications can potentially apply to LLCs?
 Partnership.
 Partnership and sole proprietorship.
 S corporation.
 C corporation.
 All of these choices are correct.
LLCs can elect to be taxed as corporations, and then they can make an S election if they satisfy the requirements for number and type of shareholder. The
default tax status for LLCs with more than one member is partnership, and the default tax status for single-member LLCs with an individual owner is sole
proprietorship.
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Generally, which of the following flow-through entities can elect to be treated as a C corporation?
 Limited partnership.
 Limited liability company.
Owners of unincorporated entities may elect to have them treated as C corporations for tax purposes.
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Which of the following legal entities are generally classified as C corporations for tax purposes?
 Limited liability companies.
 S corporations.
 Limited partnerships.
 Sole proprietorships.
 None of the choices is correct.
Limited liability companies and limited partnerships are generally taxed as partnerships. S corporations are taxed under a separate set of rules applicable to S
corporations (an S corporation is not a legal entity). Sole proprietorships are not taxed separately from their owners.
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If individual taxpayers are the shareholders of PST Corporation and PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's
pretax income potentially exposed to?
 One.
 Two.
 Three.
 None.
MNO will have to pay taxes on the amount of pretax income it earns. Then, if MNO pays a dividend to PST, the income will be taxed a second time. If PST pays
a dividend to its individual shareholders, the income will be taxed a third time.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 15-03 Identify fundamental differences in tax
Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $550,000. At the end of the year, CC distributed all its after-tax
earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent,
including the net investment income tax. What is the overall tax rate on Crocker and Company's pretax income?
 18.8%
 23.8%
 21%
 39.8%
 44.8%
Crocker and Company pays taxes of $115,500 ($550,000 × 0.21). Therefore $434,500 ($550,000 − $115,500) will be distributed to the shareholder as a
dividend. The shareholder pays taxes of $103,411 ($434,500 × 0.238). The total taxes paid on Crocker and Company's pretax income are $218,911 ($115,500 +
$103,411), and the overall tax rate will be 39.8 percent ($218,911/$550,000).
References
Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $562,500. At the end of the year, CC distributed all its after-tax
earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent,
including the net investment income tax. What is the overall tax rate on Crocker and Company's pretax income?
 18.8%.
 23.8%.
 21%.
 39.8%.
 44.8%.
Crocker and Company pays taxes of $118,125 ($562,500 × 0.21). Therefore $444,375 ($562,500 − $118,125) will be distributed to the shareholder as a dividend.
The shareholder pays taxes of $105,761 ($444,375 × 0.238). The total taxes paid on Crocker and Company's pretax income are $223,886 ($118,125 + $105,761),
and the overall tax rate will be 39.8 percent ($223,886/$562,500).
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If C corporations retain their after-tax earnings, when will their individual shareholders be taxed on the retained earnings?
 Shareholders will be taxed when they sell their shares at a gain.
 Shareholders will be taxed in the year they elect to be taxed on undistributed retained earnings.
 Shareholders will be taxed on undistributed retained earnings in the year the corporation files its tax return.
Corporate shareholders generally pay taxes on corporate earnings when they sell their shares or when they receive dividends.
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The deduction for qualified business income applies to income from all but which of the following tax entity types?
 Entity taxed as a partnership.
 S corporation.
 C corporation.
The deduction for qualified business income applies to business income allocated to an owner from all of the above entities except for a C corporation.
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Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2020?
 It may carry the NOL back two years and forward 20 years.
 It may not carry the NOL back to prior years but it may carry it forward 20 years.
 It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.
 It may carry the loss back two years and carry the loss forward indefinitely.
For tax years beginning after 2017, C corporations may not carry NOLs back, but they may carry them forward indefinitely.
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Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2020?
 It may carry the NOL back two years and forward 20 years.
 It may not carry the NOL back to prior years but it may carry it forward 20 years.
 It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.
 It may carry the loss back five years and carry the loss forward indefinitely.
Under the CARES Act, NOLs in tax years beginning after 2017 and before 2021 can be carried back five years. Consistent with pre CARES Act law, NOLs
incurred in a tax year beginning in 2020 can be carried forward indefinitely
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Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year beginning before 2018?
 If it carries back the NOL and/or carries it forward, it may offset up to 80 percent of the taxable income (before the NOL deduction) in those years.
 It may carry the NOL forward for up to 20 years and offset up to 100 percent of the taxable income (before the NOL deduction) in those years.
 It may carry the NOL back two years and offset up to 100 percent of the taxable income (before the NOL deduction) in those years.
 None of these (selecting this option means you believe all of the other responses are true).
For NOLs originating in tax years beginning before 2018, C corporations can offset up to 100 percent of taxable income before the NOL deduction.
References
Logan, a 50-percent shareholder in Military Gear Incorporated (MG), is comparing the tax consequences of losses from C corporations with losses from S
corporations. Assume MG has a $100,000 tax loss for the year, Logan's tax basis in his MG 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 tax rate is 24 percent, how much more tax will Logan pay currently if
MG is a C corporation compared to the tax he would pay if it were an S corporation?
 $0
 $6,000
 $12,000
 $18,000
Logan would pay $18,000 in taxes if Military Gear Incorporated is a C corporation ($75,000 × 24%) because none of the MG loss would be available to offset
his personal income. If it were an S corporation, he would have to pay $6,000 in taxes [($75,000 − $50,000) × 24%]. Thus, he has to pay $12,000 more in taxes
($18,000 − $6,000) currently if Military Gear Incorporated is a C corporation.
References
Logan, a 50-percent shareholder in Military Gear Incorporated (MG), is comparing the tax consequences of losses from C corporations with losses from S
corporations. Assume MG has a $106,000 tax loss for the year, Logan's tax basis in his MG stock was $153,000 at the beginning of the year, and he received
$78,000 ordinary income from other sources during the year. Assuming Logan's marginal tax rate is 24 percent, how much more tax will Logan pay currently if
MG is a C corporation compared to the tax he would pay if it were an S corporation?
 $0
 6,000
 12,720
 18,720
Logan would pay $18,720 in taxes if Military Gear Incorporated is a C corporation ($78,000 × 24%) because none of the MG loss would be available to offset his
personal income. If it were an S corporation, he would have to pay $6,000 in taxes [($78,000 − $53,000) × 24%]. Thus, he has to pay $12,720 more in taxes
($18,720 − $6,000) currently if Military Gear Incorporated is a C corporation.
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What kind of deduction is the deduction for qualified business income?
 A for AGI deduction.
 A from AGI deduction that is not an itemized deduction.
 A from AGI deduction that is an itemized deduction.
The qualified business income deduction is a from AGI deduction but is not an itemized deduction.
References
Robert is seeking additional capital to expand ABC Incorporated. In order to qualify ABC as an S corporation, which type of investor group could Robert obtain
capital from?
 30 different partnerships.
 10 different C corporations.
 90 nonresident individuals.
 120 unrelated resident individuals.
S corporations have strict rules regarding the number and type of owners they may have. An S corporation cannot have more than 100 unrelated shareholders.
Furthermore, shareholders may not be corporations, partnerships, nonresident aliens, or certain types of trusts.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 15-03 Identify fundamental differences in tax
What tax year-end must an unincorporated entity with only one owner adopt?
 The entity is free to adopt any tax year-end.
 The entity must adopt the same year-end as its owner.
 The entity must adopt a calendar year-end.
 The entity may adopt any year-end except for a calendar year-end.
Owners of unincorporated entities can be either individuals or corporations. In either case, the tax year-end of the entity must match the tax year-end of the
owner.
References
Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated. Roberto runs the retail store in Sacramento, California, and Reagan
runs the retail store in San Francisco, California. Bright Light Incorporated 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 Incorporated is an S
corporation, how much income will be allocated to Roberto?
 $31,250
 $62,500
 $75,000
 $125,000
S corporations may not specially allocate income to shareholders; thus, the $125,000 companywide profit must be allocated to Roberto based on his
ownership percentage in Bright Light Incorporated Roberto would receive 25 percent of the total profits, or $31,250 ($125,000 × 0.25).
References
runs the retail store in San Francisco, California. Bright Light Incorporated generated a $127,100 profit companywide made up of a $75,600 profit from the
Sacramento store, a ($26,500) loss from the San Francisco store, and a combined $78,000 profit from the remaining stores. If Bright Light Incorporated is an S
corporation, how much income will be allocated to Roberto?
 $31,775.00.
 $63,550.00.
 $75,600.00.
 $127,100.00.
S corporations may not specially allocate income to shareholders; thus, the $127,100 companywide profit must be allocated to Roberto based on his ownership
percentage in Bright Light Incorporated Roberto would receive 25 percent of the total profits, or $31,775.00 ($127,100 × 0.25).
References
runs the retail store in San Francisco, California. 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 it is
decided that both 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 in total?
 ($25,000)
 ($17,500)
 $5,000
 $20,000
Because Bright Lights Incorporated is a partnership, the special allocation described is permissible. Reagan would receive 70 percent of the loss from his store,
or ($17,500) ($25,000 × 0.70). Additionally, Reagan will receive 25 percent of the remaining profits not specially allocated, or $22,500 [0.25 × (125,000 + 17,500
− ($75,000 × 0.70))]. Thus, Reagan will be allocated a total of $5,000 of income.
References
Multiple Choice Difficulty: 3 Hard Learning Objective: 15-03 Identify fundamental differences in tax
runs the retail store in San Francisco, California. Bright Light generated a $130,950 profit companywide made up of a $76,700 profit from the Sacramento store,
a ($29,250) loss from the San Francisco store, and a combined $83,500 profit from the remaining stores. If Bright Light is taxed as a partnership and it is
decided that both 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 in total?
 ($25,297.50).
 ($20,475.00).
 $3,958.75.
 $21,338.75.
Because Bright Lights Incorporated is a partnership, the special allocation described is permissible. Reagan would receive 70 percent of the loss from his store,
or ($20,475) ($29,250 × 0.70). Additionally, Reagan will receive 25 percent of the remaining profits not specially allocated, or $24,433.75 [0.25 × ($130,950 +
$20,475 − ($76,700 × 0.70))] Thus, Reagan will be allocated a total of $3,958.75 of income.
References
Multiple Choice Difficulty: 3 Hard Learning Objective: 15-03 Identify fundamental differences in tax
When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?
 FICA tax only.
 Self-employment tax only.
 FICA and self-employment tax.
 Income tax.
 None of the choices are correct.
An S corporation employee/shareholder must pay FICA tax on any salary received from an S corporation; however, any S corporation ordinary business income
allocated to them is not subject to either FICA or self-employment tax. Rather, it will only be subject to the income tax at the shareholder’s marginal ordinary
income tax rate.
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What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property distribution to a shareholder?
 Recognizes either gain or loss.
 Does not recognize gain or loss.
 Recognizes gain but not loss.
 Recognizes loss only.
Gains must be recognized on distributed appreciated property for both taxable corporations and S corporations. However, losses are not allowed if the
distributed property has depreciated in value.
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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 not allow you to offset the entity losses against your income from other sources?
 Limited partnership
 S corporation.
A C corporation's losses must be used at the entity level. That is, the losses don't flow through to owners to offset their income from other sources.
References
From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?
 S corporation.
 Limited partnership
 All of the above receive the same tax treatment on liquidating distributions.
When assets that have declined in value are distributed in liquidation, S corporations may immediately deduct losses from the assets (and pass them through
to shareholders) whereas these losses are typically deferred if the distributing entity is taxed as a partnership.
References
From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?
 Partnership
 S corporation
 C corporation
 Both S corporation and C corporation
Partnerships and their owners generally don't recognize any gain during a liquidating distribution. Conversely, both S corporations and C corporations must
recognize gain when appreciated assets are distributed in a liquidating distribution.
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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?
 S corporation.
 Partnership.
These three tax considerations are most favorable for a company that chooses to be taxed as a C corporation. There is no limit to the number of owners
allowed, no restrictions on what accounting period to use, and all of the gains from selling shares in a C corporation are capital gains.
References
Jorge is a 60-percent owner of JJ LLC (taxed as a partnership). He is a passive investor in JJ (he doesn't perform any work for JJ) and his marginal ordinary tax
rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?
 Business income allocations are not subject to self-employment tax.
 Business income allocations are not subject to the net investment income tax.
 Business income allocations are subject to the additional Medicare tax.
 Business income allocations are taxed at a maximum 23.8 percent tax rate.
Because Jorge is a passive investor in JJ, the business income allocated to him from JJ are not subject to self-employment tax.
References
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, respectively?
 100; no limit; no limit
 no limit; 100; 2
 no limit; 100; no limit
 100; 100; no limit
An S corporation is the only type of entity that has a limit on the maximum number of owners it may have. S corporations may have up to 100 unrelated
shareholders.
References
Jorge is a 100-percent owner of JJ LLC (taxed as an S corporation). He works full time for JJ and his marginal ordinary tax rate is 37 percent. Which of the
following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?
 Business income allocations are subject to self-employment tax.
 Business income allocations are not subject to the net investment income tax.
 Business income allocations are subject to the additional Medicare tax.
 Business income allocations are taxed at a maximum 23.8 percent tax rate.
Because Jorge is not a passive investor, the business income allocations from JJ are not subject to the net investment income tax.
References
Which of the following statements is true regarding compensation paid to an owner of an entity taxed as a partnership who works for the entity?
 The compensation is deductible by the entity.
 The compensation is self-employment income to the owner-worker.
 The entity is not required to withhold FICA tax on the compensation it pays to the owner.
The entity can deduct the compensation payments, called guaranteed payments, and is not required to withhold any taxes on the payments because it is self-
employment income to the owner-worker.
References
For which type of entity does the entity not pay compensation to an owner who is working for the entity?
 S corporation.
 C corporation.
 Entity taxed as a partnership.
Only sole proprietorships don't pay compensation to owners because the entity and the owner are the same taxpayer.
References
Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?
 Both the self-employment tax and the additional Medicare tax are deductible for AGI in full.
 Half of the self-employment tax and half of the additional Medicare tax are deductible for AGI.
 Half of the self-employment tax and none of the additional Medicare tax are deductible for AGI.
 None of the self-employment tax and none of the additional Medicare tax are deductible for AGI.
Fifty percent of the self-employment tax is deductible for AGI. The additional Medicare tax is not deductible.
References
Owners of which of the following entity types receive deductible compensation from the entity for working for the entity?
 Sole proprietorship
 Entity taxed as a partnership
 S corporation
 Both Entity taxes as a partner and S corporation
This applies to owners of entities taxed as partnerships and S corporations but not sole proprietorships, because sole proprietorships don't pay compensation
to owners.
References
The excess loss limitations apply to owners of all of the following entities except which of the following?
 C corporations
 S corporations
 Entities taxed as partnerships
 Single-member LLCs (owned by an individual taxpayer)
The excess loss limitation does not apply to C corporation shareholders because those losses stay at the entity level.
References
The excess loss limitations apply to owners of all of the following entities except which of the following (answer for tax years other than 2020)?
 C corporations
 S corporations
 Entities taxed as partnerships
 Single-member LLCs (owned by an individual taxpayer)
The excess loss limitation does not apply to C corporation shareholders because those losses stay at the entity level. The excess loss limitations are waived in
2020 under the CARES Act.
References
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?
S corporation Description C corporation

a.
(1) Pretax earnings $ 36,000 12% × $300,000 $ 36,000
(2) Entity-level tax rate 0% 21%
(3) Entity-level tax $0 $ 7,560
(4) Earnings after entity-level tax $ 36,000 (1) − (3) $ 28,440
(5) QBI deduction 7,200 (4) × 20% Not Applicable
(6) Net income taxable to owner 28,800 (4) − (5) 28,440
(7) Owner-level marginal tax rate 27.8% 24% + 3.8% net investment income tax 15%
(8) Owner-level tax $ 8,006 (6) × (7) $ 4,266
After-tax cash flow $ 27,994 (1) − (8) $ 24,174
b. S corporation C corporation
Overall tax rate 22.24% (8)/(1) 32.85%
References
Essay Difficulty: 2 Medium Learning Objective: 15-03 Identify fundamental differences in tax
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 $420,000 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. (Round your intermediate calculations and final answer to
whole number dollar amount.)
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?
S corporation Description C corporation

a.
(1) Pretax earnings $ 50,400 12% × $ 420,000 $ 50,400
(2) Entity-level tax rate 0% 21%
(3) Entity-level tax $0 $ 10,584
(4) Earnings after entity-level tax $ 50,400 (1) − (3) $ 39,816
(5) QBI deduction 10,080 (4) × 20% Not Applicable
(6) Net income taxable to owner 40,320 (4) − (5) 39,816
(7) Owner-level marginal tax rate 27.8% 24% + 3.8% net investment income tax 15%
(8) Owner-level tax $ 11,209 (6) × (7) $ 5,972
After-tax cash flow 39,191 (1) − (8) 33,844
b. S corporation C corporation
Overall tax rate 22.24% (8)/(1) 32.85%
References
Stacy would like to organize SST (a business entity) as either an LLC (taxed as a partnership) or as a corporation (taxed as a C corporation) generating a 10
percent annual before-tax return on a $600,000 investment. Stacy's marginal tax rate on ordinary income is 37 percent. Stacy's marginal tax rate on individual
capital gains and dividends is 23.8 percent, including the net investment income tax. SST will pay out its after-tax earnings every year to either its members or
its shareholders. If SST is taxed as a partnership, Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax.
Assume that SST's income is not qualified business income for purposes of the qualified business income deduction. How much would Stacy have after taxes if
SST is organized as either an LLC or a C corporation?
LLC Description
(1) Pretax earnings $ 60,000 10% × $600,000
(2) Entity-level tax rate 0%
(3) Entity-level tax 0
(4) Earnings after entity-level tax $ 60,000 (1) − (3)
(5) QBI deduction 0 Does not qualify N
(6) Deduction for 50 percent of SE tax (803) (1) × 0.9235 × 0.029 × 0.5 N
(7) Net income taxable to owner 59,197 (4) + (5) + (6)
(8) Income tax paid by owner 21,903 (7) × 0.37
(9) Self-employment tax 1,607 (1) × 0.9235 × 0.029 N
(10) Additional Medicare tax/Net investment income tax 499 (1) × 0.9235 × 0.009 additional Medicare tax
(11) Owner-level tax $ 24,009 (8) + (9) + (10)
After-tax cash flow $ 35,991 (1) − (11)
References
Essay Difficulty: 1 Easy Learning Objective: 15-03 Identify fundamental differences in tax
P corporation owns 60 percent of the stock of S corporation. If S corporation distributes a dividend to P corporation, what is the tax rate on the dividend after
the dividends received deduction (DRD) if P is entitled to a 65 percent DRD?
7.35 percent (1 − 0.65) × 0.21.
References
In 2020, BYC Corporation (a C corporation) had an NOL carryover from 2017 in the amount of $40,000. How much tax will BYC pay in 2020 if it reports taxable
income from operations of $35,000 in 2020 before the NOL deduction?
None. BYC's NOL of ($40,000) is available to offset income generated by BYC in 2020. Since BYC earned $35,000 of taxable income in 2020 before the NOL
deduction, it can use ($35,000) of the loss carryover from 2017 to offset its entire taxable income. BYC will have a ($5,000) loss carryover available for 2021
and beyond.
References
In 2020, Aspen Corporation reported $120,000 of taxable income before the net operating loss (NOL) deduction. It had an NOL carryover of $60,000 from
2018 and an NOL carryover from 2019 of $40,000. How much tax will Aspen Corporation pay on its 2020 tax return?
$5,040
Description Amount Explanation

(1) 2020 taxable income $ 120,000
(2) 2018 NOL carryforward $ 60,000
(4) Total NOL carryforward to 2020 100,000 (2) + (3)
(5) NOL deduction limit 96,000 (1) × 80%. 80% of taxable income before NOL deductio
(6) NOL deduction 96,000 Lesser of (4) or (5)
(7) Taxable income after NOL deduction $ 24,000 (1) − (6)
(8) Tax Rate 21%
Taxes Paid $ 5,040 (7) × (8)
References
In 2020, Aspen Corporation reported $120,000 of taxable income before the net operating loss (NOL) deduction. It had an NOL carryover of $60,000 from
2018 and an NOL carryover from 2019 of $40,000. How much tax will Aspen Corporation pay on its 2020 tax return?
$4,200

(1) 2020 taxable income $ 120,000
(4) Total NOL carryforward to 2020 100,000 (2) + (3)
(5) NOL deduction 100,000 Lesser of (1) or (4)
(6) Taxable income after NOL deduction $ 20,000 (1) − (5)
(7) Tax Rate 21%
Taxes Paid $ 4,200 (6) × (7)
References
Rodger owns 100 percent of the shares in Trevor Incorporated a C corporation. Assume the following for the current year:
Trevor Incorporated's pretax income = $16,000

Percentage of after-tax earnings retained by Trevor Incorporated = 0% (i.e., all after-tax earnings distributed)
Rodger's dividend tax rate = 15%
Given these assumptions, how much cash does Rodger have from the dividend after paying taxes on the distribution?
$10,744

(1) Trevor Incorporated pretax income $ 16,000
(2) Dividend to Rodger $ 12,640 (1) × (1 − 0.21)
(3) Rodger's tax on dividend $ 1,896 (2) × 0.15
Cash remaining after tax on dividend $ 10,744 (2) − (3)
References
Rodger owns 100 percent of the shares in Trevor Incorporated a C corporation. Assume the following for the current year:
Trevor Incorporated’s pretax income = $24,000

Percentage of after-tax earnings retained by Trevor Incorporated = 0% (i.e., all after-tax earnings distributed)
Rodger’s dividend tax rate = 15%
Given these assumptions, how much cash does Rodger have from the dividend after paying taxes on the distribution? (Round your intermediate calculations
and final answer to whole number dollar amount.)
$16,116

(1) Trevor Incorporated pretax income $ 24,000
(2) Dividend to Rodger $ 18,960 (1) × (1 − 0.21)
(3) Rodger's tax on dividend $ 2,844 (2) × 0.15
Cash remaining after tax on dividend $ 16,116 (2) − (3)
References
A Corporation owns 10 percent of D Corporation. D Corporation 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, A Corporation owns 40 percent of Partnership P.
Partnership P earns $500 million in the current year. Given this fact pattern, answer the following questions:
a. How much cash from the D Corporation dividend remains for A Corporation after A pays the tax on the dividend, assuming A Corporation 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 A
Corporation have after paying taxes on its share of income from the partnership?
c. If you were to replace A Corporation with Individual A [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 D Corporation dividend after all
taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that D Corporation distributes all of its after-tax income to its
shareholders.
a.

(1) Dividend from D Corporation $ 15,800,000 $200,000,000 × (1 − 0.21) × 10%
(2) Tax on dividend from D Corporation $ 1,659,000 (1) × (1 − 0.5) × 21%
(3) Cash remaining after tax on dividend $ 14,141,000 (1) − (2)
b.

(1) Cash received from Partnership P $ 200,000,000 $500,000,000 × 40%
(2) Tax on share of income from Partnership P $ 42,000,000 (1) × 21%
(3) Cash remaining from distribution after taxes $ 158,000,000 (1) − (2)
c.

(1) Dividend from Corporation D $ 15,800,000 $200,000,000 × (1 − 0.21) × 10%
(2) Tax on dividend from Corporation D $ 3,760,400 (1) × 23.8%
References
A Corporation owns 10 percent of D Corporation. D Corporation 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, A Corporation owns 40 percent of Partnership P.
Partnership P earns $500 million in the current year. Given this fact pattern, answer the following questions:
a. How much cash from the D Corporation dividend remains for A Corporation after A pays the tax on the dividend, assuming A Corporation 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 A
Corporation have after paying taxes on its share of income from the partnership?
c. If you were to replace A Corporation with Individual A [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 D Corporation dividend after all
taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that D Corporation distributes all of its after-tax income to its
shareholders.
a.

(1) Dividend from D Corporation $ 15,815,800 $200.20 × (1 − 0.21) × 10%
(2) Tax on dividend from D Corporation $ 1,660,659 (1) × (1 − 0.5) × 21%
b.

(1) Cash received from Partnership P $ 200,080,000 $500.20 × 40%
(2) Tax on share of income from Partnership P $ 42,016,800 (1) × 21%
(3) Cash remaining from distribution after taxes $ 158,063,200 (1) − (2)
c.

(1) Dividend from Corporation D $ 15,815,800 $200.20 × (1 − 0.21) × 10%
(2) Tax on dividend from Corporation D $ 3,764,160 (1) × 23.8%
References

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1. Award: 10.

Corporations ﬁle articles of incorporation.

2. Award: 10.00 points

3. Award: 10.00 points

5. Award: 10.00 points

6. Award: 10.00 points

7. Award: 10.00 points

9. Award: 10.00 points

10. Award: 10.00 points

11. Award: 10.00 points

An S corporation election achieves this purpose.

13. Award: 10.00 points

14. Award: 10.00 points

A single-member LLC is taxed as a partnership.

Single-member LLCs are taxed as sole proprietorships.

16. Award: 10.00 points

17. Award: 10.00 points

S corporations have more restrictive ownership requirements than other entities.

18. Award: 10.00 points

20. Award: 10.00 points

21. Award: 10.00 points

22. Award: 10.00 points

24. Award: 10.00 points

25. Award: 10.00 points

26. Award: 10.00 points

28. Award: 10.00 points

29. Award: 10.00 points

30. Award: 10.00 points

32. Award: 10.00 points

33. Award: 10.00 points

34. Award: 10.00 points

 Limited liability company.

 Sole proprietorship (non LLC).

 None of the choices is correct.

36. Award: 10.00 points

 Legal ﬂexibility in deﬁning rights and responsibilities of owners.

 Facilitation of initial public offerings.

 Minimal time and cost to organize.

37. Award: 10.00 points

 LLC - LLC members.

 General partnership - Partnership.

 Limited partnership - General partner.

39. Award: 10.00 points

Which legal entity is generally best suited for going public?

 Limited liability partnership.

 All of these entities are equally suited for going public.

40. Award: 10.00 points

 Articles (or a certiﬁcate) of organization.

 Rate at which income from entity will be taxed.

 Required accounting period.

Multiple Choice Learning Objective: 15-01 Discuss

Diﬃculty: 1 Easy Learning Objective: 15-03 Identify

42. Award: 10.00 points

 Form 1120 used by C corporations to report their income.

 Form 1120S used by S corporations to report their income.

 Form 1065 used by partnerships to report their income.

 Form 1040, Schedule C used by sole proprietorships to report their income.

 None of the choices are correct.

 Form 1040, Schedule C.

44. Award: 10.00 points

 Form 1040, Schedule C.

45. Award: 10.00 points

Which tax classiﬁcations can potentially apply to LLCs?