REG 49 - Other Tax Issues - Tax Planning/Business Entity Choice

Question 1

Jose has owned stock for eight years that has a basis of $20,000 and fair market value of $100,000. Jose contributes the stock to a qualified charity. Which of the following is a proper tax consequence from this transaction?
A. Jose has recognized gain of $80,000.
B. Jose has a charitable contribution of $100,000.
C. Jose has a charitable contribution of $80,000.
D. Jose has a charitable contribution of $20,000.

Answer 1

B. When long-term capital gain property is contributed to a qualified charity, the fair market value of the property can be deducted as a charitable contribution.

Question 2

Appropriate strategies for reducing the alternative minimum tax include all of the following except:
A. Do not exercise incentive stock options.
B. Make additional charitable contributions.
C. Increase home mortgage interest on primary mortgage.
D. Increase 2% miscellaneous itemized deductions.

Answer 2

D. 2% miscellaneous itemized deductions are not deductible for AMT purposes so increasing these will not reduce the AMT.

Question 3

Ms. Planner is in the 25% tax bracket and itemizes on her tax return. She plans to make a charitable contribution of $12,000 to her alma mater this year. The net cost of this contribution to Ms. Planner is:
	A.  	$0
	B.  	$3,000
	C.  	$9,000
	D.  	$12,000

Answer 3

C. Her tax savings is $3,000 ($12,000 x 25%) since the contribution is deductible. Therefore, her net cost is $9,000 ($12,000 - $9,000).

Question 4

Orleans has owned land as an investment for five years. His basis in the land is $70,000 and the land’s current fair market value is $50,000. Which of the following statements is correct with regard to this land?
A. If Orleans sells the land to his father he can deduct the $20,000 loss in the land.
B. If Orleans gives the property to an unrelated friend he can deduct the $20,000 loss in the land.
C. Orleans should sell the land, recognize the $20,000 capital loss, and then gift the $50,000 cash from the sale to his friend.
D. If the land is sold to an unrelated party, the $20,000 loss cannot be recognized since the land is not depreciable.

Answer 4

C. If Orleans gives the property to his friend, the $20,000 loss disappears since the friend’s loss basis in the land will be its fair market value of $50,000. Therefore, Orleans should sell the land so he can recognize the loss. He can then contribute the cash from the sale to his friend.

Question 5

T/F: The goal of tax planning is to minimize the taxes paid by the taxpayer.

Answer 5

False.

The goal of tax planning is to maximize after-tax income, not minimize taxes.

Question 6

T/F: The effective tax rate is the rate that should be used for decision making.

Answer 6

False.
The effective income tax rate for a taxpayer is the federal income tax liability for the year divided by taxable income. This rate should not be used for tax planning, but it does provide an estimate of the overall income tax burden for a taxpayer.

Question 7

For which of the following entities is the owner's basis increased by the owner's share of profits and decreased by the owner's share of losses but is NOT affected by the entity's bank loan increases or decreases?
	A.  	S corporation.
	B.  	C corporation.
	C.  	Partnership.
	D.  	Limited liability company.

Answer 7

A. The owner’s basis is increased for her distributive share of profits and losses for S corporations, partnerships, and limited liability companies. However, owner’s basis is not affected by the debt of S corporations, while it is for partnerships and limited liability companies.

Question 8

Which of the following types of entities is entitled to the net operating loss deduction?
	A.  	Partnerships.
	B.  	S corporations.
	C.  	Trusts and estates.
	D.  	Not-for-profit organizations.

Answer 8

C. Trusts and estates can carryback or carryforward a net operating loss.

Question 9

Which of the following statements concerning S corporations is False?
A. S corporations must be incorporated under state law in the same fashion as C corporations.
B. S corporation shareholders are not liable for the debt of the corporation.
C. An S corporation can issue both voting and non-voting common stock.
D. S corporations are subject to the alternative minimum tax.

Answer 9

D. This statement is false. Since S corporation income flows directly to the shareholders, the corporation is not subject to the AMT.

Question 10

The rule limiting the allow ability of passive activity losses and credits applies to
	A.  	Partnerships.
	B.  	S corporations.
	C.  	Personal service corporations.
	D.  	Widely-held C corporations.

Answer 10

C. Passive activity limits are applied to the following entities: individuals, estates, trust, personal service corporations and closely-held personal service corporations.

Question 11

T/F: An election to be taxed as a corporation under the check-the-box regulations is effective for the current year if made within the first 75 days of the year.

Answer 11

True

Question 12

T/F: All gains are deferred for contributions of appreciated property to an S corporation.

Answer 12

False.

The built-in gain rules that apply to partnerships do not apply to S corporations.

Question 13

T/F: Limited partners have limited liability, but can nonetheless participate in the management of the partnership.

Answer 13

False.

Limited partners have limited management rights.