Chapter 2

Question 1

Sole Propriortship

Answer 1

Not a separate taxable entity form the individual who owns the propriortship

Question 2

What form does a sole propriertship report all its business income and expenses on?

Answer 2

Schedule C of form 1040

Question 3

Does a proprietor report all profits regardless of what was withdrawn?

Answer 3

YES! - taxable!

Question 4

Partnerships - subject to Federal Income Tax?

Answer 4

No!

Question 5

What form is a partnership required to fill out?

Answer 5

A partnership is required to file Form 1065, which reports the results of the partnership’s business activities

Question 6

Can some partnership items be reported separately?

Answer 6

Yes - Interest Income, Dividend Income and Long term capital gain. Not aggregated in businesses ordinary income or loss.

Question 7

How are the partnerships income and losses and separately reported items allocated?

Answer 7

Allocated based on P&L agreement.

Question 8

What form does each partner separately report its profits and losses earnings on?

Answer 8

Schedule k-1, reports on his or her own tax return

Question 9

What are C corporations governed by?

Answer 9

Subchapter C of the Internal Revenue Code

Question 10

C Corporations

Answer 10

“regular corporations”,

Question 11

S Corporations,

Answer 11

generally do not pay Federal Income Tax, governed by Schedule S

Question 12

S Corporations are similar to partnerships how?

Answer 12

are similar to partnerships in that ordinary business income (loss) flows through to the shareholders to be reported on their separate returns

Question 13

S corporations are also similar to partnerships regarding the flowthrough of certain items how?

Answer 13

Certain items flow through to the shareholders and retain their separate character when reported on the shareholders’ returns

Question 14

Are C Corporations subject to an entity level Federal Income Tax?

Answer 14

Yes!

Question 15

Double Taxation Effect

Answer 15

C Corporations, taxed Federally and then any dividend income is taxed for shareholders as well. “A C corporation reports its income and expenses on Form 1120. The corporation computes tax on the taxable income reported on the Form 1120 using the rate schedule applicable to corporations. When a corporation distributes its income, the corporation’s shareholders report dividend income on their own tax returns. Thus, income that has already been taxed at the corporate level is also taxed at the shareholder level.

Question 16

Are dividend distributions deductible by corporations?

Answer 16

No

Question 17

What are the tax rates for dividend distributions?

Answer 17

current tax rate applicable to qualified dividend income (and long-term capital gains) is 15 percent or, for taxpayers in the 39.6 percent marginal tax bracket, 20 percent (0 percent for taxpayers in the 10 or 15 percent marginal tax bracket)

Question 18

What kind of liability issues do sole proprietorships and partnerships face?

Answer 18

Unlimited Liability - Sole proprietors and general partners in partnerships face the danger of unlimited liability. Creditors of the business may file claims not only against the assets of the business but also against the personal assets of proprietors or general partners. State corporate law protects shareholders from claims against their personal assets for corporate debts.

Question 19

What is the continuity of life advantage?

Answer 19

Shareholders may come and go, but a corporation can continue to exist. Death or withdrawal of a partner, on the other hand, may terminate the existing partnership and cause financial difficulties that result in dissolution of the entity

Question 20

What factors have increased Limited Liability Company’s presence in the more recent years?

Answer 20

1988 when the IRS first ruled that it would treat qualifying LLCs as partnerships for tax purposes

Question 21

What are some advantages of LLC’s?

Answer 21

Owners are do not have unlimited liability exposure, the avoidance of double taxation as LLC’s are treated as partnerships and proprietorships for tax purposes, do not generally pay federal income tax

Question 22

Relevant Characteristics of Corporations

Answer 22

Continuity of life.
Centralized management.
Limited liability.
Free transferability of interests

Question 23

Check the Box Regulations

Answer 23

The Regulations enable taxpayers to choose the tax status of a business entity without regard to its corporate (or noncorporate) characteristics.

Question 24

Check Te Box Regulations Classifications

Answer 24

Under the check-the-box Regulations, an unincorporated entity with more than one owner is, by default, classified as a partnership. An unincorporated entity with only one owner is, by default, classified as a disregarded entity (or DRE). A DRE is treated as a sole proprietorship if it is owned by an individual taxpayer or as a branch or a division of a corporate owner. If the entity wants to use its default status, it simply files the appropriate tax return. If it wants to use a different status or change its status, it does so by “checking a box” on Form 8832. Thus, an LLC (single or multi-member) can choose to be taxed as a C corporation and, if it otherwise qualifies, even elect S corporation status.

Question 25

Are capital assets distinguishable between corporate and individual taxpayers?

Answer 25

There is not distinction made.

Question 26

Which corporations have sever restrictions in regards to fiscal year?

Answer 26

Personal Service Corporations ( calendar year) and S corporations

Question 27

What is a personal service corporation?

Answer 27

A PSC has as its principal activity the performance of personal services, and such services are substantially performed by shareholder-employees. The performance of services must be in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.

Question 28

Under what conditions can a PSC elect a fiscal year other than the calendar year?

Answer 28

A business purpose (e.g., natural business cycle) for the year can be demonstrated.

The PSC year results in a deferral of not more than three months’ income

Question 29

Is the cash basis of accounting allowed for corporations?

Answer 29

No, but exceptions are as follows:

S corporations.
Corporations engaged in the trade or business of farming or timber.
Qualified PSCs.
Corporations with average annual gross receipts of $5 million or less for the most recent three-year period.

Question 30

What determines the classification of short term or long term capital gains?

Answer 30

the holding period of the assets sold or exchanged

Question 31

What is the tax rate for corporations on long tern capital gains?

Answer 31

Taxed at normal corporate tax rates

Question 32

Who can the passive loss be applied to?

Answer 32

individual taxpayers
closely held C corporations
personal service corporations (PSCs)

Question 33

What is a closely held C Corp?

Answer 33

A corporation is closely held if, at any time during the last half of the taxable year, more than 50 percent of the value of the corporation’s outstanding stock is owned, directly or indirectly, by or for not more than five individuals.

Question 34

What requirements must be met for a PSC to be qualified as one?

Answer 34

The principal activity of the corporation is the performance of personal services.

The services are substantially performed by shareholder-employees.

More than 10 percent of the stock (in value) is held by shareholder-employees. Any stock held by an employee on any one day causes the employee to be a shareholder-employee.

Question 35

When can a charitable contribution deduction be made?

Answer 35

For the year in which it is paid.

Question 36

An accrual base corporation may deduct a charitable donation on the grounds of :

Answer 36

n accrual basis corporation may claim the deduction in the year preceding payment if two requirements are met.

First, the contribution must be authorized by the board of directors by the end of that year.

Second, it must be paid on or before the fifteenth day of the third month of the next year.

Question 37

What deductions are specific to corporate taxpayers?

Answer 37

Dividends received and organizational expenditures

Question 38

Rules for a Dividend Deduction

Answer 38

The following steps are useful in applying these rules.

Multiply the dividends received by the deduction percentage.

Multiply the taxable income by the deduction percentage.
The deduction is limited to the lesser of step 1 or step 2, unless deducting the amount derived in step 1 results in an NOL. If so, the amount derived in step 1 is used. This is referred to as the NOL rule.