Chapter 2: Other Employer Situations Flashcards
All corporations are taxed on their earnings at the corporate level and not at the shareholder level.
True or False?
False. An S corporation is taxed at the individual shareholder level, not the corporate level.
A sole proprietorship files a separate tax return to report earned income.
True or False?
False. The earned income for a sole proprietorship is reported on the individual’s tax return, not a separate return for the proprietorship.
A QSLOB who meets the different industries’ safe harbor will have met the administrative scrutiny test.
True or False?
True
A sole proprietor’s earnings are reduced by 100 percent of the self-employment tax when determining earned income.
True or False?
False. The earnings are reduced by ½ of the self-employment tax.
An LLP may be a nonprofit organization.
True or False?
False. LLPs must be organized as for-profit entities.
The separate line of business must satisfy a 50-employee requirement, a notice requirement, and an administrative scrutiny requirement to be a QSLOB.
True or False?
True
Each QSLOB must be tested separately for all annual compliance testing.
True or False?
False. The employer may elect to test on a QSLOB basis for coverage testing under IRC §410(b) (and thereby nondiscrimination testing under IRC §401(a)(4), 401(k) and 401(m)). Top-heavy testing, as well as the application of the IRC §415 limits, among other things, are performed on an employer-wide basis.
A plan must satisfy the nondiscriminatory classification test on an employer-wide basis first before testing on a QSLOB basis.
True or False?
True
Compensation that may be used for plan purposes, for employees of a C corporation, is Form W-2 compensation.
True or False?
True
Compensation that may be used for plan purposes, for a partner of a partnership, is Form W-2 compensation.
True or False?
False. The partner’s compensation for plan purposes will be his or her earned income.
Which of the following statements regarding business entity types is NOT TRUE?
A. A sole proprietorship is an unincorporated business owned by only one person.
B. A partnership is an unincorporated business owned by more than one individual.
C. An LLP must be treated as a partnership for federal tax purposes.
D. S corporation income flows to the shareholders and is taxed as if the shareholders were partners.
The answer is C. An LLP may elect to be taxed as a partnership or as a corporation.
Based on the following information, determine the net earned income for Partner A:
* Partner A owns 30% of the partnership.
* The partnership has net income, before the profit-sharing contribution, of $450,000.
* The partnership contributes $50,000 to the plan for non-partner employees.
* Partner A’s self-employment tax is $9,000.
* Partner A receives a profit-sharing allocation equal to 5% of compensation.
A. $105,714
B. $110,000
C. $114,286
D. $115,500
The answer is B.
Partnership income $450,000
Less contribution to employees ($50,000)
Net income to partners $400,000
Partner A’s portion of income (30%) × .30
Partner A’s income $120,000
Less ½ of SE Tax for Partner A ($4,500)
Partner A’s income $115,500
Partner A receives a profit-sharing allocation equal to 5 percent of compensation. The algebraic formula is:
x = .05($115,500 – x)
x = $5,775 – .05x
1.05x = $5,775
x = $5,500
Hence, Partner A’s net earned income = $115,500 - $5,500 = $110,000.
Which of the following statements regarding self-employed individuals is NOT TRUE?
A. A qualified plan may cover a self-employed owner as if that individual were an employee.
B. Compensation for plan purposes is W-2 wages.
C. Pre-tax elective contributions are included in compensation in determining the maximum deductible employer contribution under IRC §404.
D. A limited partner will not necessarily derive any earned income from a partnership.
The answer is B. Plan compensation for a self-employed individual is earned income, not W-2 wages.
Which of the following safe harbor tests may not be used to satisfy the QSLOB administrative scrutiny test?
A. Mergers and acquisitions
B. ADP
C. Maximum or minimum benefits
D. Industry segment
The answer is B. The ADP safe harbor is not a QSLOB safe harbor. There are six QSLOB safe harbors. The additional two are the different industries safe harbor and average benefits safe harbor.
Which of the following statements regarding QSLOBs is NOT TRUE?
A. They are treated as a single employer for vesting.
B. They are treated as a single employer for eligibility.
C. They are treated as a separate line of business for nondiscrimination.
D. They are treated as a separate line of business for IRC §415.
The answer is D. Testing for IRC §415 is performed as a single employer not on a QSLOB basis.
