Chapter 17 Questions Flashcards
As separate legal entities, corporations offer liability protection to their shareholders.
True. This is one of the primary benefits of incorporation.
Owners can limit the transferability of stock, particularly in closely held corporations.
True. This is one of the primary benefits of incorporation.
C corporations offer shareholders the option of passing through losses.
False. This is a feature of S corporations.
S corporations are well suited for new small businesses.
True. S corporations are designed to help new small business owners deduct start-up losses.
S corporation status can be revoked if the number of shareholders exceeds 50.
False. S corporation status can be revoked if there are more than 100 shareholders.
If a 5% shareholder transfer an office building to a corporation in exchange for stock, they will qualify for the nonrecognition provision.
False. A shareholder must have 80% or more control to qualify for nonrecognition.
Boot must be recognized even in an otherwise qualified nonrecognition transfer.
True. Nonrecognition only applies to property transfers, not boot.
A downside to debt financing of a new corporation is the need to make regular repayments.
True. Businesses with little cashflow may prefer equity financing.
Charitable deductions are limited to 50% of a corporation’s taxable income.
False. Charitable deductions are limited to 10% of taxable income.
Net operating losses may be carried forward up to 20 years.
False. Net operating losses may be carried forward indefinitely.
A corporation must distribute a dividend if accumulated earnings exceed $150K or $250K (depending on its industry).
False. A corporation that accumulates earnings above these thresholds will be subject to an additional tax.
Personal holding companies can “backfire” by subjecting all corporate income to personal ordinary income tax rates.
False. The PHC is subject to both corporate and dividend taxes that can exceed ordinary income tax rates.
Dividend distributions up to a shareholder’s basis are considered a tax free return of capital.
False. Dividends up to a corporations profits are taxes at the dividend rate. Additional dividends receives, up to a shareholder’s basis, are considered a tax free return of capital.
Which of the following statements about “C” corporation taxation is(are) correct?
I. A Net Operating Loss (NOL) may be carried back 2 years and/or carried forward 20.
II. The only corporation whose income will always be taxed at a flat rate of 21% is a professional service corporation.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
D. Neither I nor II
