7.1 - Definition & Accounting

Question 1

How is an entity with two or more members classified if no election is made for a newly formed domestic entity?

Answer 1

As a partnership

Question 2

How is an entity with a single member classified if no election is made for a newly formed domestic entity?

Answer 2

Disregarded as an entity separate from the owner (sole proprietorship)

Question 3

How is a newly formed foreign entity with limited liability classified?

Answer 3

As an association taxed as a corporation

Question 4

Identify entities treated as corporations

Answer 4

• Ones incorporated under state or federal law;
• associations;
• joint stock companies;
• insurance companies;
• insurance companies;
• certain banks;
• state-owned organizations;
• certain foreign organizations;
• publicly traded partnerships

Question 5

What are C corporations?

Answer 5

Corporations other than S corporations

Question 6

What is an S corporation?

Answer 6

A pass-through entity that is not subject to the regular corporate income tax and treated similarly to partnerships.

Question 7

True or False&raquo_space;> partnerships, trusts and estates are generally treated as corporations.

Answer 7

False – are not treated as corporations

Question 8

How are publicly traded partnerships taxed?

Answer 8

As corporations

Question 9

What is a limited liability company or LLC?

Answer 9

• would normally elect partnership status to avoid being taxed as a corporation;
• partnership election allows for limited liability of the owners while at the same time retaining the single taxation;
• owners are allowed to participate in the operations of the business and there are no restrictions on the type of owners

Question 10

What is a professional association or PA?

Answer 10

An association of professions (e.g. accountants, doctors or lawyers, is treated as a corporation for tax purposes if it is both organized under a state’s Professional Association Act and operated as a corporation

Question 11

Can one individual be considered a professional association?

Answer 11

Yes

Question 12

What is a Personal Service Corporation or PSC?

Answer 12

• Principal activity is performing personal services, substantially by employee-owners;
• taxed at flat rate of 35% & corporate rates do not apply

Question 13

How much stock must an employee-owner own in a Personal Service Corporation?

Answer 13

More than 10%

Question 14

When might the IRS allocate income, deductions, credits, exclusions, and other allowances between a Personal Service Corporation (PSC) and its employee-owners?

Answer 14

If substantially all the PSC’s services are performed for one other corporation, partnership, or entity, and the principal purpose of the PSC is tax avoidance.

Question 15

What is a Personal Holding Company or PHC?

Answer 15

Any nonexempt closely held corporation having a significant portion of its income being passive in nature and are subject to a penalty tax on excess personal holding company income

Question 16

Define “check the box” regulations?

Answer 16

Allows an eligible entity to decide whether it will be taxed as a corporation or a partnership

Question 17

Define an eligible entity for “check the box” status?

Answer 17

A business that is not required to be treated as a corporation under federal tax law.

Question 18

What type of business do “check the box” regulations apply to?

Answer 18

Business entities other than trusts that are separate for federal tax purposes

Question 19

Define the tax year a PSC or Personal Service Corporation is required to use.

Answer 19

Calendar tax year except for a valid business purpose or a PSC that makes “minimum distributions”

Question 20

When are corporate tax returns due?

Answer 20

On or before the 15th day of the 3rd month following the close of the tax year (e.g. 3/15th for a calendar year corporation)

Question 21

What are the requirements for a corporation to get a 6-month extension on tax filings?

Answer 21

• file form 7004 and pay estimated unpaid tax liability

Question 22

Is a formal election required for the accounting method of a newly incorporated C corporation?

Answer 22

No – any method may be “elected” by using that method on the initial return.

Question 23

What type of entities may elect to use the cash method of accounting?

Answer 23

• PSCs;
• S Corporations;
• Certain farming corporations;
• C Corporations that have average annual gross receipts of no more than $5 million in the 3 preceding tax years.

Question 24

Are tax shelters allowed to use the cash method?

Answer 24

No

Question 25

What is the corporate income tax formula?

Answer 25

Income – Exclusions – Deductions * Tax Rate – Credits + AMT + FICA Taxes + Special Taxes = Tax Liability or Refund Receivable