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Exam 4: Business Entities Overview

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Question 21

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Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $566,500. 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?

A) 18.8%.
B) 23.8%.
C) 21%.
D) 39.8%.
E) 44.8%.

F) A) and E)
G) A) and D)

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Question 22

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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).

A) True
B) False

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Question 23

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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?

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

Owners who work for entities taxed as a partnership receive guaranteed payments as compensation. The guaranteed payments are not self-employment income.

S corporations have more restrictive ownership requirements than other entities.

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.

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?

Sole proprietorships that are not organized as LLCs are not treated as legal entities separate from their individual owners.

Which legal entity is generally best suited for going public?

A Corporation owns 10percent 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 40percent 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.

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

For tax purposes, only unincorporated entities can be considered to be disregarded entities.

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?

Which legal entity provides the least flexible legal arrangement for owners?

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

S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments.

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?

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