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Exam 4: Business Entities Overview

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Question 1

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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.

A) True
B) False

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Question 2

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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?

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Question 3

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Which tax classifications can potentially apply to LLCs?

A single-member LLC is taxed as a partnership.

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

An unincorporated entity with more than one owner is, by default, taxed as a partnership.

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?

What kind of deduction is the deduction for qualified business income?

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.

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?

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

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 $129,900 profit companywide made up of a $76,400 profit from the Sacramento store, a ($28,500) loss from the San Francisco store, and a combined $82,000 profit from the remaining stores. If Bright Light Incorporated is an S corporation, how much income will be allocated to Roberto?

Generally, which of the following flow-through entities can elect to be treated as a C corporation?

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) ? A. C corporations B. S corporations C. Entities taxed as partnerships D. Single-member LLCs (owned by an individual taxpayer) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 80) 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.

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?

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

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.

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

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 generated a $132,000 profit companywide made up of a $77,000 profit from the Sacramento store, a ($30,000) loss from the San Francisco store, and a combined $85,000 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?