Lesson 8 Flashcards
Which of the following statements concerning compensation planning for owners of a closely held
business is correct?
A. The corporate form of ownership provides the most opportunities for fringe benefit planning
for the owners of a closely held business.
B. Nonqualified deferred compensation plans are often adopted by pass-through business entities for
owner-employees.
C. Owner-employees of any business entity can be treated as an employee for federal tax purposes if
they provide legitimate services to the business.
D. Owners of a pass-through business entity must receive equal compensation or the IRS will readjust
the compensation for federal income tax purposes.
A. The corporate form of ownership provides the most opportunities for fringe benefit planning
for the owners of a closely held business.
The owner of a closely held corporation needs to expand and purchase an additional building. She is
concerned about liability from her business activity and the liability risks associated with the new
building. Which of the following strategies for the ownership of the building is appropriate?
A. She should lease the new building rather than purchase it.
B. She should form an LLC to own the new building and lease the building to the corporation.
C. She should purchase the building individually and lease the building to the corporation.
D. She should form a family limited partnership to purchase the building and hold the general
partnership interest to maintain control.
B. She should form an LLC to own the new building and lease the building to the corporation.
According to the new Tax Cuts and Jobs Act of 2017 (TCJA), what is the new tax treatment for pass
through businesses?
A. They must incorporate as either an S Corp or a C Corp.
B. The first $45,000 of income is exempt from taxation.
C. All income is taxed at a flat 21% rate.
D. There is a new Qualified Business Income (QBI) deduction for owners of certain pass
through businesses.
D. There is a new Qualified Business Income (QBI) deduction for owners of certain pass
through businesses.
Two contractors are planning to go into business together to provide services and share income
equally. They would like to form their entity with the minimum possible startup costs. Which of the
following entities would be most appropriate for their entity?
A. Sole proprietorship
B. LLC
C. S corporation
D. General partnership
D. General partnership
A closely held business is operated in the form of an LLC. The managing member of the business
personally owns a building and leases it to the LLC to be used in its operation. Which of the following
statements concerning the federal tax treatment of form of business is correct?
A. The rental income from the lease of the building to the LLC is treated as net investment income
(NII) and is subject to the 3.8 percent Medicare Contributions Tax.
B. The LLC is subject to income tax on the earnings of the business not paid out to the managing
member as salary.
C. The managing member is treated as self-employed for income tax purposes.
D. The taxable income incurred by the managing member is limited to the value of the services he or
she provides.
C. The managing member is treated as self-employed for income tax purposes.
Which of the following statements concerning the federal income taxation of a business entity is
correct?
A. A corporation is more favorable than a pass-through entity if income must be distributed to passive
owners.
B. The members of an LLC who provide services are treated as statutory employees for federal
income tax purposes.
C. The managing partners of a partnership are often compensated through guaranteed
payments.
D. Pass-through taxation requires that all accounting income of a pass-through entity be distributed to
the owners proportionately by the close of the tax year.
C. The managing partners of a partnership are often compensated through guaranteed
payments.
Which of the following statements concerning C corporation taxation, effective in the Tax Cuts and
Jobs Act of 2017 (TCJA), is (are) correct?
I. There is now a 21 percent tax rate on corporate income.
II. Two key corporate tax repeals are the corporate AMT and accumulated
earnings tax.
A. I only
Which of the following statements concerning the tax treatment of a regular business corporation is
(are) correct?
I. An accumulated-earnings tax could be imposed if accumulated earnings and
profits of more than $200,000 are retained without any business purpose.
II. A corporation is unfavorable for a small closely held business because the
maximum corporate tax rates are always higher than individual rates.
D. Neither I nor II
Which of the following statements concerning the impact of the 3.8 percent Medicare Contributions
Tax on net investment income (NII) on the owner of a closely held business is (are) correct?
I. The 3.8 percent tax applies to the wages of a shareholder-employee of a
corporation whose total modified adjusted gross income is in excess of a threshold
amount.
II. The 3.8 percent tax applies to the dividend income received by shareholders of a
corporation whose total modified gross income is in excess of a threshold amount.
B. II only
Advantages of operating a business in a pass-through form of entity for federal income purposes
include all of the following EXCEPT:
A. losses suffered by the business can be used to offset other income of the business owners with
some limitations.
B. passive owners can receive distributions of business income for their capital investment without
double taxation.
C. business income is taxable only on the business owner’s personal income tax return.
D. business owners can elect to defer compensation into future tax years by adopting one of
the allowable forms of nonqualified deferred compensation.
D. business owners can elect to defer compensation into future tax years by adopting one of
the allowable forms of nonqualified deferred compensation.
Three architects have decided to join forces to form a firm as co-owners. They are particularly
concerned with the liability risks associated with their endeavor. All of the following entity types might be
favorable to operate their business EXCEPT:
A. S corporation
B. Limited liability company (LLC)
C. General partnership
D. Limited liability partnership (LLP)
C. General partnership
