Business Entities Flashcards
True or False: Shareholders of C corporations are not allowed to deduct their share of corporate losses on their individual tax returns.
True. The business alone can deduct C-corporate losses.
True or False: A C corporation wishing to minimize the effect of two layers of tax may well be advised to pay dividends to its shareholder base, especially if the shareholder base is generally US-resident individuals.
False. Dividends are generally not deductible by a C corporation. Thus, paying dividends will not reduce the two levels of tax. Rather, the corporation should consider capitalizing the C corporation with more debt and reducing equity. Interest on debt is generally deductible.
True or False: Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return.
True. LLCs can decide how the IRS will tax it.
True or False: The US tax system treats C corporations as taxpaying entities that will incur corporate level taxes if the entity has sufficient income.
True. C-Corporations pay their own taxes. The income is not “passed through” to the shareholders.
When selecting a business entity, is it possible to meet the dual goals of obtaining (i) legal liability protection, and (ii) flow-through tax treatment? Please circle you answer below and give a brief explanation.
Yes. An LLC, LLP, and an S corporation are common vehicles for accomplishing the dual goals of limiting legal liability and obtaining flow-through treatment for tax purposes. Nevertheless if a business entity is going to become a public company, it may be impossible to use an S corporation because S corporations are limited to 100 shareholders. In addition, it could be difficult to use an LLC or LLP structure because (i) they are not commonly used for public businesses, and (ii) publicly traded partnerships are taxed as corporations.
True or False: Publicly traded businesses are usually C corporations.
True.
True or False: A partnership can be taxed as a C corporation in certain conditions.
True.
True or False: S corporations can have an unlimited number of shareholders.
False. S corporations may not have more than 100 shareholders and they are limited to one class of stock. As a result, S corporations are not a good vehicle for a business entity accessing the public equity markets.
True or False: If corporate tax rates are substantially reduced and individual tax rates are unchanged, businesses may consider incorporating to reduce their tax burden.
True.
Assume a business incorporates as a C corporation and has the following facts for 2013:
- Taxable income is $100 million
- The corporation is subject to corporate tax on 100% of its taxable income at the maximum corporate tax rate
- The corporation’s shareholders are entirely comprised of US individuals subject to a 20% tax rate on dividends (i.e., they are not subject to the 3.8% net investment income tax).
- The corporation distributes 100% of its after-tax 2013 earnings to its shareholders as a dividend.
Given these facts, how much combined tax will be paid by the C corporation and the individual shareholders with respect to the $100 million income earned by the C corporation?
Corporate Tax: $100 million x 35% = $35 million
Individual Tax: $65 million of after-tax earnings x 20% = $13 million
Total: $48 million taxes paid by the corporation and individuals
True or False: If two individuals establish an LLC and elect for federal income tax purposes to disregard the LLC, the LLC will be treated as a sole proprietorship for federal income tax purposes.
False. If a dual-member LLC elects to be disregarded for federal income tax purposes, the LLD will be treated as a partnership. If a single-member LLC elects to be disregarded, it would be treated as a sole proprietorship.
True or False: Using a flow-through entity to avoid double taxation should always be the preferred tax planning approach.
False. When the corporate tax rates and the individual tax rates are the same, it will be advantageous to avoid double tax by using a flow-through entity. However, when the corporate tax rate is less than the individual tax rate, tax planners need to evaluate the net present value of the double taxes paid by a corporation vs. paying 100% of the individual tax immediately. In addition, if the corporate tax rate is reduced to approximately 25% or less and the current individual tax rates are unchanged, it will likely be beneficial for many flow-through entities to convert to a C corporation.
True or False: Corporations can legitimately have only one set of books.
False. Corporations can have multiple sets of books depending upon the purpose (e.g., financial accounting, federal tax, various state and local tax jurisdictions, regulatory purposes, and management accounting).
True or False: For a calendar year C corporation, estimated taxes are due April 15, June 15, September 15, and January 15 of the following year.
False. The 4th corporate estimated tax payment is due December 15, not January 15 of the following year. The sentence provides the rule for individual tax purposes.
True or False: In order to avoid an IRC 6655 penalty for underpaying corporate estimated taxes, a corporation generally must pay 100% of its actual tax for the year through estimated tax payments. However, there are several exceptions to the general rule – some favorable and some unfavorable.
True.
