Ch. 16 Business Entity Selection and Taxation

Question 1

Articles of Incorporation

Answer 1

The charter document FOR A CORPORATION that must be filed with the Secretary of State in the organization’s state of domicile

Question 2

Articles of Organization

Answer 2

The charter document FOR A LLC that must be filed with the Secretary of State in the organization’s state of domicile

Question 3

Family Limited Partnership

Answer 3

A special type of limited partnership created with the purpose of transferring assets to younger generations using the annual gift exclusion and valuation discounts for minority interest and lack of marketability.

Question 4

General Partnership

Answer 4

A joint business venture among two of more persons/entities to conduct business as co-owners in which all owners have unlimited liability with regard to the debts and obligations of the partnership.

Question 5

Keogh Plan

Answer 5

A qualified plan for a self-employed person.

Question 6

Limited Liability Partnership

Answer 6

A hybrid entity generally comprised of licensed professionals that provides partial liability protection to its members and may be taxed as either a corporation or partnership

Question 7

Limited Partnerships

Answer 7

Associations of two or more people in a business for profit however, one or more of the partners have limited participation in the management and therefore maintain limited risk exposure.

Question 8

Managing Partner

Answer 8

A partner named to have responsibilities for specific tasks or for day-to-day operations.

Question 9

S Corporation

Answer 9

A corporation under state law that elects to be taxed as a pass through entity.

Question 10

Sole Proprietorship

Answer 10

A business owners and operated by a single person

Question 11

Which form of business type is the least complex (in terms of management and governance)?

Answer 11

Sole Proprietorships:

Administrative requirements and formalities dictated under state law are the least burdensome.

Question 12

Which form of business types (2) do not require an initial filing registration with the state?

Answer 12

Sole Proprietorships & General Partnerships

Question 13

Which form of business type is the easiest for transferring ownership interest?

Answer 13

Sole Proprietorship

Question 14

In which form of business type is Limited Liability not available?

Answer 14

1. Sole Proprietorships
2. General Partnerships
3. The General Partner of a Limited Partnership.

Question 15

Which form of business type has the advantage of being able to accumulate profits at the corporate level without the owners having to pay income taxes on those profits until distributed as dividends?

Answer 15

C Corporation

Question 16

Which form of business type compensates owners as W-2 income and dividend income?

Answer 16

C Corporation

Question 17

Which form of business types has a maximum limit of 100 owners?

Answer 17

S Corporation

Question 18

In which forms of business (2) are owners known as Shareholders?

Answer 18

S Corporation
C Corporation

Question 19

In which form of business is tax paid as an entity?

Answer 19

C Corporation

Question 20

In which forms of business types (6) are taxes passed through to owner’s individual tax return?

Answer 20

1. General Partnerships
2. Limited Partnerships
3. Limited Liability Partnerships
4. Family Liability Partnership
5. Limited Liability Corporations
6. S Corporations

Question 21

Which forms of business type (2) may file as either a corporation or a partnership?

Answer 21

Limited Liability Partnership (LLP)
&
Limited Liability Company (LLC)

Question 22

What is the W-2 Wage Limitation to the QBI deduction?

Answer 22

For pass through entities (other than Sole Proprietorships), the QBI deduction cannot exceed the greater of :
1. 50% of the W-2 Wages
or
2. the sum of 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of all “qualified property.”

Question 23

Qualified Property

Answer 23

tangible, depreciable property (including real estate) owned by a qualified business or trade by the close of the tax year and which is used for the purpose of business in the production of income.

Question 24

UBIA

Answer 24

Unadjusted basis, immediately after acquisition of all “qualified property.”

Question 25

What is the calculation for The Self-Employed Contribution RATE
(think Keogh Plan)

Answer 25

The Self-Employed Contribution Rate =
Contribution Rate to other Participants / (1+ Contribution Rate to other Participants)

Question 26

What is the calculation for the Self-Employment Tax?
(think Keogh Plan)

Answer 26

The Self-Employment Tax= Net Self-Employment Income * 92.35% = Net Earnings Subject to Self Employment Tax. * 15.3% up to $147,000 + 2.9% over $147,000

Question 27

What is the calculation for the Self-Employed Individual’s Qualified Plan CONTRIBUTION AMOUNT?
(think Keogh Plan)

Answer 27

Net Self-Employment Income - 1/2 of Self-Employment Income = Adjusted Net Self-Employment Income * Self-Employed Contribution Rate = Self-Employed Individual’s Qualified Plan Contribution

Question 28

What is Adjusted Net-Self Employment Income also known as?

Answer 28

Earned Income

Question 29

QBI Threshold & Phase-Out Amounts

Answer 29

Single - $170,050 - $220,050
MFJ - $340,100 - $440,100

Question 30

Taxpayer’s Marginal Tax Rate after QBI

Answer 30

Pre-QBI Tax Rate * 80%
example: 35% * 80% = 28% Marginal Tax Rate

Question 31

How many classes of stock does a S-Corporation have?

Answer 31

Only One

Question 32

How many classes of stock does a C-Corporation have?

Answer 32

Up to 50

Question 33

What kind of stock holders are allowed in S-Corporation?

Answer 33

Only individuals. Corporations, partners, trust and illegal aliens not allowed to be stock holders of an S-Corp.

Question 34

Which business entity type has the ability (advantage) to make distributions to members which does not directly correlate to their proportionate share of interest in the business?

Answer 34

LLC
Example: business is owned 50%/50%, but the owners are compensated 60%/40%.

Question 35

Which business entity type is allowed to retain earning and reinvest those earnings?

Answer 35

C-Corporations ONLY

Question 36

What are Specified Service Trade or Businesses (SSTBs) also known as?

Answer 36

“out of favor” service businesses

Question 37

Which business entity type cannot have preferred returns for certain investors?

Answer 37

S-Corporations

Question 38

Which business entity types (2) cannot consider loans from third parties to be apart of basis?

Answer 38

S-Corporations
&
C-Corporations

Question 39

How is excess income over compensation treated in a S-Corp?

Answer 39

The excess income distributed is treated as dividend income in S-Corp.

Question 40

How is excess income over compensation treated in a LLC?

Answer 40

The excess income distributed is treated as Self-Employment income in LLC.

Question 41

which partnerships require registration with the state?

Answer 41

limited partnerships (NOT general parnerships)

Question 42

Which business entity types (2) may file as either a partnership or corporation?

Answer 42

LLC and LLP

Question 43

Partnerships are considered what type of Business Entity Type?

Answer 43

General Partnerships

Question 44

What is the Net Income Tax Rate calulcation?

Answer 44

Tax Rate (1-20%)

Question 45

SSTB and W2 Wage limitation for QBI deduction

Answer 45

The limitations apply once…

Single Taxable Income is 170,050 or more

MFJ Taxable Income is 340,100 or more.