Ch19 – Characteristics Of Business Entities

Question 1

How does the tax treatment of an S-corporation parallel the tax treatment of partners and partnerships?

Answer 1

They are pass-thru entities and all income is distributed equally to the shareholders.

Question 2

Service partners often receive fixed payments like salaries called guaranteed payments. But, the partners are not treated as…

Answer 2

statutory employees for federal tax purposes.

Question 3

What are the THREE requirements to form an S-corporation?

Answer 3

Must be a domestic corporation and no nonresident aliens (the US only!)

Must have no ineligible shareholders

Must have no more than 100 equal shareholders

Question 4

The thresholds for the additional Medicare contribution tax burdens are imposed on lesser of the taxpayer’s ________ or ________.

Answer 4

net investment income (NII)

OR

modified adjusted gross income (MAGI)

over $200K for individuals and $250K for married filing jointly.

Question 5

What is a major problem associated with the lack of continuation of a closely held business?

Answer 5

That the business assets will often face diminished value when the business terminates.

Question 6

Additional tax burdens were enacted to help fund the Affordable Care Act of 2010. How much additional Medicare tax was imposed on higher wage earners and how much is imposed on net investment income (NII)?

Answer 6

Medicare Contribution Tax = 0.9%

net investment income (NII) = 3.8%

Question 7

Partners forming a partnership receive cost basis in their partnership interests equal to ______ and the ______ contributed by that partner.

Answer 7

the amount of cash and the adjusted cost basis (due to depreciation) of any property contributed by that partner.

Question 8

What type of business entities have “continuity of operations”?

Answer 8

ALL corporations (including S-Corps) have continuity of life beyond the life of the owners.

Question 9

Which business entities are taxed directly to the business owners and are considered pass-through entities?

Answer 9

proprietorships

partnerships

s-corps

LLCs

Question 10

A general partnership and sole proprietorship are automaticallyterminated by operation of law at…

Answer 10

the death or disability of one of the partners.

Question 11

Pass-through business entities may deduct up to ___% of Qualified Business Income (QBI) based on income and many other things.

Answer 11

20%

Question 12

There are many reasons for a business to terminate, the most obvious of which is financial failure. What are the common business continuity concerns?

Answer 12

The death, disability, or retirement of an owner or key employee.

Question 13

What are the TWO requirements when forming an unincorporated business (e.g. - proprietorships and partnerships)?

Answer 13

ALL entities require appropriate licenses/certificates and name registration with the state.

Question 14

A ______ MUST have at least one general partner and a ______ require NO general partner(s), but are heavily restricted.

Answer 14

(a) Limited Partnership (LP)
(b) Limited Liability Partnership (LLP)

Question 15

The formation of a corporation is MORE expensive, time consuming, and complex than other business entities. What are the TWO requirements to begin operations as a corporation?

Answer 15

a) filed with the state
b) by-laws are the internal governing document

Question 16

Which partners retain personal responsibility for business operations and which partners are at risk only to the extent of their investment in the business?

Answer 16

The general partners all retain responsibility and limited partners risk their investment.

Question 17

Issuing new shares of a corporation can dilute ownership and control. What are some defenses against shares being diluted?

Answer 17

Having multi-share classes of stock can be issued without diluting control, such as preferred stock and non-voting common stock.

Question 18

Qualified Business Income (QBI) deductions are based on _______, _______, and _______.

Answer 18

business type (qualified trade vs specified service)

ownership interest

phase-out ranges

Question 19

The amount of income a partner is entitled to withdraw under a partnership agreement, even if actually withdrawn.

Answer 19

distributive share

Question 20

Explain deductions allowed only for “reasonable compensation”.

Answer 20

Many corporations pay shareholder-employees through tax deductible reasonable compensation rather than through dividends (eg - net investment income (NII)).

Question 21

Members of an LLC choose ________ and use operating losses of the LLC to offset personal income.

Answer 21

partnership taxation

Question 22

What ever happen to the congress enacted the corporate alternative minimum tax *(AMT)*?

Answer 22

It was permanently repealed by the TCJA

Question 23

What are the TWO ways owners compensated?

Answer 23

labor (compensation for services)

capital (compensation for ownership)

Question 24

What are the tax advantages for fringe benefits, such as group term life or health insurance?

Answer 24

These types of benefits are deductible from corporate income while providing no taxable to the shareholder-employee.

Question 25

The form of compensation to the owners of the closely held corporation may consist of _______, _______, or _______.

Answer 25

cash (salary or bonuses)

fringe benefits

or

dividends.

Question 26

In many cases, how can corporations minimize the amount of taxes paid at the corporate level?

Answer 26

By minimizing the amount of actual corporate taxable income.

Question 27

What happens in a business where capital is NOT a significant income-producing factor (e.g. - personal service businesses)?

Answer 27

Most or ALL of the business’s income could be paid out to shareholder-employees and deducted as reasonable compensation.

Question 28

How much of the business interest is paid to the deceased partner’s estate?

Answer 28

The fair value for the decedent’s interest.

Question 29

Identifying the key employee might be _______ than it seems.

Answer 29

more difficult

Question 30

Key employee life insurance needs ________.

Answer 30

employee consent

Question 31

Name the TWO types of partnerships.

Answer 31

General (GP)

Limited (LP, LLP)

Question 32

What is the income tax rate for an individual versus a corporation?

Answer 32

individual = 37%

corporation = 21%

Question 33

Generally, ALL owners are personally responsible for their own actions regardless of the type of business entity. What is the risk exposure for the following business entities?

sole proprietorship - _______\_

general partnership - _______\_

limited partnership (LP) – _______\_

limited liability Partnership (LLP) – _______\_

limited liability Company (LLC) – _______\_

corporation - _______\_

Answer 33

sole proprietorship - unlimited liability

general partnership - joint and several unlimited liability

limited partnership (LP) – limited liability for LPs and unlimited liability for GPs

limited liability Partnership (LLP) – limited liability

limited liability Company (LLC) – limited liability

corporation - limited liability

Question 34

When does the deductions for Qualified Business Income sunsets?

Answer 34

2025

Question 35

How much can be held for reasonable business purposes by corporations and not be subject to the accumulated earnings tax?

Answer 35

$250K