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HS331 Planning for Business Owners & Professionals > T/F Lesson/Chapter Quizes > Flashcards

T/F Lesson/Chapter Quizes Flashcards

1
Q

Close corps, S corps and limited partnerships (LLPs & LLCs) are required to file documents of organization… general partnerships, partnerships and sole proprietors are not required to do so - L1C1

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2
Q

C corps, S corps, and partnerships and sole proprietors have either a separate tax status or file an informal tax return - L1C1

A

F - sole proprietors do not file a separate return

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3
Q

Dependent business interruption insurance does not cover a business owner’s lost profits from a supplier’s premises being destroyed by fire - L1C1

A

F - fire damage and loss are covered by business interruption insurance

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4
Q

Business interruption insurance can replace earnings lost due to a peril involving machinery or equipment, but not due to adverse business conditions - L1C1

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5
Q

Reasonable salary and bonuses are deductible to the corporation subject to current tax law, and the salaries and bonuses are taxable to the employee - L1C1

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6
Q

Limited Partners share in the future income of the business… not in the capital contributed, the operations, the personal liability for the business’s debts - L1C1

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7
Q

Extra expense insurance is designed to indemnify for additional costs of operations necessary as a result of destroyed physical facilities, including the costs to rebuild - L1C1

A

F - the costs to rebuild are not included in extra expense insurance

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8
Q

Partnership’s distributive share… a partner is taxed on the entire distributive share… and a partner’s basis in the partnership will be increased by the amount of a distributive share that is reinvested in the partnership - L1C1

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9
Q

General partners are liable for the partnership’s losses, and their liability extends to all assets of the partner - L1C1

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10
Q

Corporations must have two or more shareholders - L1C1

A

F - corporations can and do sometimes have just one shareholder

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11
Q

Limited liability partners are not liable for partnership losses but can lose all of their partnership interest if the partnership loses all of its assets in a lawsuit - L1C1

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12
Q

The economic effects of the liquidation of a partnership following the death of a partner include interfering with the surviving partner’s careers, a shrinkage of partnership assets, and a delay in the settlement of a deceased partner’s estate - L1C1

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13
Q

A corporation may acquire its own stock if it serves a business purpose and there will be no financial injury to the corporation’s creditors - L1C2

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14
Q

Corporations have to be incorporated in every state where they conduct business - L1C2

A

F - corporations need only incorporate in one state and can then register to do business in other states

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15
Q

Limited partnerships must have both general and limited partners - L1C2

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16
Q

Cumulative Voting may enable minority shareholders to get representation on the corporation’s board of directors - L1C2

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17
Q

The limitation of liability means that a shareholder in a corporation usually stands to lose only the amount he has invested in the business - L1C2

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18
Q

Property rights in a partnership property do not continue after the partnership is dissolved - L1C2

A

F - property rights do continue following dissolution of a partnership

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19
Q

Professional corporations typically redeem the stock of a deceased shareholder - L1C2

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20
Q

General partnerships do not need a written partnership agreement as they are subject to specific state laws - L1C2

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21
Q

Corporate Directors are generally liable to shareholders for errors in judgement even if they used reasonably prudent standards - L1C2

A

F - they are generally not liable for errors in judgement

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22
Q

LLCs usually elect to be taxed as partnerships and the members of an LLC have limited liability for business operations - L1C2

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23
Q

Termination of a partnership is not same as dissolution in legal terminology: dissolution ends the authority of the partners to enter into new business contracts, while termination occurs only when there is a winding up of partnership business - L1C2

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24
Q

Corporate Directors assume contractual liability for legal contracts formed by the corporation - L1C2

A

F - Corporate Directors assume no liability for legal contracts the corporation formed

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25
Q

In a two-partnership general partnership, at the death of a partner, the other partner becomes a liquidating trustee - L1C2

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26
Q

The corporate form of business provides continuity of the business, limited liabilities to shareholders, transferability of ownership interests, and lower marginal tax rates - L2C3

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27
Q

When business organized as corporations under state law will be taxed as corporations, so will “per se” unincorporated corporate business entities like banks, insurance companies, and state or foreign owned entities - L2C3

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28
Q

In forming a partnership, the initial contribution does not have to be substantial, however the contribution is a taxable event - L2C3

A

F - the contribution is not a taxable event

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29
Q

In a general partnership, current year operating losses can be deducted for federal income tax purposes - L2C3

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30
Q

In a general partnership, the initial contributions must be in cash - L2C3

A

F - it may be cash or property

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31
Q

Earnings in a business can be accumulated at reasonable levels of business purposes and taxation to the owners of the accumulated amounts can be deferred - L2C3

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32
Q

The accumulated earnings tax (beyond the minimum credit) does not automatically subject a business to excess earnings if they can prove a valid and acceptable business reason - L2C3

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33
Q

Pass through entities (sole proprietorships, partnerships, S corps) can take a 20% tax deduction for qualified business income (QBI). This deduction is enhanced for high income owners if there are significant W-2 wages or investments in qualified property - L2C3

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34
Q

A sole proprietor can deduct losses incurred in the business from their adjusted gross income from other sources - L2C3

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35
Q

A sole proprietor cannot create a retirement plan for themself similar to a corporate retirement plan - L2C3

A

F - they can do so

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36
Q

A sole proprietor may not deduct premiums for group term life insurance on their own life - L2C3

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37
Q

The IRS does not provide a mathematical formula for determining maximum reasonable compensation - L3C4

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38
Q

Life insurance funding of a Nonqualified Deferred Compensation Plan results in no deduction to the employer for premiums paid and benefits being taxed to employees - L3C4

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39
Q

Fringe benefits to employees result in a tax credit - L3C4

A

F - they do not

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40
Q

Section 79 life insurance proceeds (death benefits) are received by a named beneficiary income tax free - L3C4

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41
Q

Sec. 79 plans can be discriminatory and covered key employees usually receive the costs of coverage as bonuses - L3C4

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42
Q

Income to the owners of a closely-held business can be in the form of compensation for services provided as a director or employee as well as income in return for capital invested in the business - L3C4

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43
Q

Estate tax treatment of employer provided life insurance in a Section 162 plan can be avoided if an irrevocable trust is the applicant, owner, and beneficiary of the policy - L3C4

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44
Q

Cash Bonus plans are subject to nondiscrimination rules generally applicable to other benefits - L3C4

A

F - they are not subject to nondiscrimination rules

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45
Q

Equity (or Loan Regime) Split-Dollar life insurance plans generally pay a death benefit to the employer equal to the policy’s cash value - L3C4

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46
Q

Calculation Review: Section 162 Double Bonus or Zero Tax calculation - L3C4

A

premium paid divided by 1 minus the employee’s tax rate

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47
Q

If no stock redemption agreement exists, the executor or administrator has the right to vote for the then deceased shareholder - L4C5

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48
Q

A Deceased Shareholder’s heirs are favored over equal shareholders if an option agreement is in place that sets out a predetermined price - L4C5

A

F - just the opposite is true, the equal shareholders are favored

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49
Q

If a shareholder in a close corporation enters into a contract that allows the corporation an option to buy his shares in the event of his death, the option is not enforceable, but the option agreement can provide a price or a price formula - L4C5

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50
Q

If there is no partnership buy/sell agreement, a deceased partner’s heirs can force the partnership to liquidate - L4C5

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51
Q

If there is no partnership buy/sell agreement, a new partnership cannot be formed with the heirs - L4C5

A

F - a new partnership with the heirs can be formed

52
Q

When surviving partners becomes liquidating trustees, they may not seek new business from existing customers and they must account for all partnership profits - L4C5

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T

53
Q

If the executor of a deceased sole proprietor gets the consent from all heirs and creditors to continue the business, the executor becomes liable for acting in a negligent manner and incurring business losses - L4C5

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T

54
Q

If there is no buy/sell agreement in a close corporation, it will not be difficult for the heirs of a minority shareholder to sell the corporate stock following their death - L4C5

A

F - it may be very difficult

55
Q

Internal Revenue Code Section 6166 provides for the payment of estate taxes in ten installments. The first installment of principal must be paid 5 years after the date the federal estate tax return is due… with payments being made over the next 9 years… and the estate is kept open until the installments are paid - L4C5

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56
Q

Section 6166 would not be used if an insured buy/sell agreement is in place - L4C5

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T

57
Q

If a sole proprietor creates a buy/sell with a key employee funded with life insurance, the key employee should be the life insurance policy owner and beneficiary, and if the key employee cannot afford premiums, good options include a bonus to the key employee or using a split-dollar life insurance plan - L5C6

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T

58
Q

In a cross-purchase partnership buy/sell agreement, the beneficiary of a life insurance policy should be the policy owner and each partner should pay the premiums for the insurance she/he owns on the lives of other partners - L5C6

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T

59
Q

In establishing the value of a deceased partner’s interest for federal estate tax purposes under a buy/sell agreement with unrelated partners, the agreement does not usually need a first offer option during lifetime - L5C6

A

F - the agreement should contain a first offer option during lifetime to prevent a lifetime sale above the buy/sell price at death

60
Q

“Specific Performance” serves as an effective judicial remedy for surviving partners if there has been a breach of the buy/sell with the deceased partner’s estate (with or without life insurance funding) - L5C6

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T

61
Q

If a partnership has an insured binding cross purchase buy/sell agreement, it should include provisions stating the ownership, beneficiary arrangements, and premium payment details for all policies funding the agreement, including the “first offer commitment or restriction” to offer to sell to other partners first - L5C6

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T

62
Q

In an entity partnership buy/sell agreement, if there is specific language that provides for a definite and reasonable amount of the total price to be for goodwill, it does not affect the taxation to the seller, and the payment is deductible for partnership income tax purposes - L5C6

A

F - the payment is not deductible for partnership income tax purposes

63
Q

Even when a partnership buy/sell agreement sets a formula for the price of the business, and even if there is insurance in place, there can still be a problem of underfunding - L5C6

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T

64
Q

The primary purpose of a closely held corporation buy/sell agreement is to protect shareholders from an unwanted sale to outside interests if a shareholder wants to sell their stock - L5C7

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T

65
Q

A deceased’s shareholder’s business interest and life insurance policy proceeds are not subject to claims against the state of the shareholder - L5C7

A

F - they may be subject to claims against the estate

66
Q

In an insured corporate stock redemption plan, the beneficiary of the life insurance proceeds should be the corporation - L5C7

A

T

67
Q

Life insurance policy death proceeds to fund a stock redemption agreement are not taxable to the corporation even if a transfer-for-value occurred when the policy was transferred to the corporation - L5C7

A

T

68
Q

Premiums for life insurance funding in an S corporation stock redemption plan are paid by the shareholder/s - L5C7

A

F - premiums are paid out of the taxable income of the S corporation

69
Q

When a sole proprietor dies, their personal representative has a duty to complete unfinished obligations that do not require the sole proprietor’s personal performance - L5C7

A

T

70
Q

S corporation shares may not be transferred to family members who are not actively involved in the business - L5C7

A

F - shares may be transferred to family members not active in the business

71
Q

The estate of the insured should not be listed as the beneficiary of the insurance in an insured cross-purchase buy/sell agreement because the estate would hold both the deceased’s business interest and the life insurance policy proceeds - L5C7

A

T

72
Q

If a trustee is used in an insured buy/sell agreement, the trustee must pay the premiums on the policies - L5C7

A

F - the trustee does not necessarily have to pay the premiums on the policies

73
Q

Using a cross-sell buy/sell agreement does not require an accumulation of corporate earnings, so there is no accumulated earnings tax penalty - L5C7

A

T

74
Q

To be treated as a capital transaction, a Section 302 stock redemption can be substantially disproportionate with respect to the shareholder whose stock is redeemed, and it can be a complete redemption of all stock the corporation owned - L6C8

A

T

75
Q

Stock attribution rules state that shares of stock owned by an estate are considered being owned by a beneficiary with a 100% direct present interest in the estate - L6C8

A

T

76
Q

A Section 303 stock redemption allows the corporation to purchase stock without any adverse income tax effect to cover federal estate taxes, state estate or inheritance taxes, and funeral costs - L6C8

A

T

77
Q

An estate and beneficiaries can take advantage of a Section 303 stock redemption - L6C8

A

T

78
Q

Section 303 does not allow stock sales to the corporation to pay taxes due on the final income tax return of the deceased business owner, and the stock does not have to be redeemed before the estate tax return is filed - L6C8

A

T

79
Q

Family attribution rules state that a shareholder whose stock has been redeemed by the corporation will have stock attributed to them if owned by their spouse, child or grandchild - L6C8

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T

80
Q

Family attribution rules can be waived so long as the individual whose stock is redeemed agrees to the following over the 10-year period following redemption: to not serve as an officer of the corporation, to acquire no stock in the corporation except by inheritance or bequest, and to notify the IRS if a prohibited interest in the corporation occurs

NOTE: the former stockholder may become a creditor to the corp - L6C8

A

T

81
Q

If preferred stock issued as a dividend or issued in a recapitalization, the preferred stock can be used in a Section 303 stock redemption, and the preferred stock can be gifted without diluting control of the corporation - L6C8

A

T

82
Q

A private annuity can be designed to be excluded from the seller’s estate for tax purposes since there are no payments after the seller’s death - L6C9

A

T

83
Q

At the liquidation of a professional service corporation, if the IRS imputes a goodwill value, it will not be added to the capital gain to be recognized by the shareholders - L6C9

A

F - it will be added to the gain recognized by shareholders

84
Q

When a business is sold, the selling price need not be a predetermined exact or fixed amount, and the payment for the business need not be in cash - L6C9

A

T

85
Q

At complete liquidation, a corporate distribution of property to shareholders generally recognizes gain in the property for which the shareholders pay capital gains tax - L6C9

A

F - it will be property for which the shareholders will pay income tax

86
Q

ABCD, Inc. is a closely-held family business. A stock redemption agreement is always preferable to a cross-purchase agreement - L6C9

A

F - not always as there are several factors to consider

87
Q

An installment sale may be designed to remove stock from the seller’s estate. Any unpaid installment payments before the seller’s death will be included in the seller’s estate - L6C9

A

T

88
Q

A tax-free stock sale, known as a “B” reorganization, involves a sale made solely for the buyer’s voting stock. The seller receives stock in the corporation with a basis equivalent to the property sold - L6C9

A

T

89
Q

The IRS will accept merely any interest rate used in an installment contract on which the seller and buyer agree - L6C9

A

F - there is imputed interest and the U.S. Treasury publishes rates. The AFR, or applicable federal rate (a low rate) may be used depending on the terms of the agreement

90
Q

A buyer will prefer a tax-free asset purchase over a tax-free stock purchase, because the asset purchase would receive a step-up in basis - L6C9

A

T

91
Q

Tax free stock recapitalization of a corporation can provide preferred stockholders with a steady dividend income - L7C10

A

T

92
Q

Family attribution rules provide a tax burden for a senior family member who wants to transfer their business interest to heirs - L7C10

A

T

93
Q

An Irrevocable Life Insurance Trust (ILIT) is a very useful estate planning tool for a business owner and it can accomplish a lot of things, including providing retirement income - L7C10

A

F - an ILIT does not provide retirement income for the owner

94
Q

A business owner will likely experience difficulty in planning to transfer their ownership to family successors due to anti-freeze statutes that have added uncertainty and transfer tax costs (imposing a gift tax) to many estate freeze transfer techniques - L7C10

A

T

95
Q

Issuing nonvoting common stock as part of a corporate recapitalization can accomplish the following:
1. the nonvoting common is received by existing shareholders without current income tax

  1. the nonvoting common can be redeemed by the corporation via Section 303 without affecting voting control
  2. transfers of nonvoting common can be made to a shareholder’s children without reducing the parent’s control of the family corporation
    - L7C10
A

T

96
Q

If stock is transferred into a Grantor Related Annuity Trust (GRAT), the transfer is subject to gift taxation, and if the grantor dies before the trust pays out and is terminated, the principal of the trust is included in the grantor’s estate - L7C10

A

T

97
Q

Buy/sell agreements must be notarized and are binding under state law - L8C11

A

F - they need not be notarized and they are not necessarily binding under state law

98
Q

The “book value” of a business entity is the excess of the business’s total assets over total liabilities. Book value is usually not indicative of the fair market value, and book value does not include an allowance for goodwill - L8C11

A

T

99
Q

Intangible assets that tend to increase the value of a business above its book value include goodwill, like the reputation of the business, the quality of the management, and the ownership of a brand name - L8C11

A

T

100
Q

Goodwill (intangible assets) represents a business’s earnings in excess of a fair rate of return and is important in a business’s value when the business is sold - L8C11

A

T

101
Q

Preferred stock offers a right to income - L8C11

A

T

102
Q

Preferred stock has priority at liquidation - L8C11

A

T

103
Q

Preferred stock has restrictions that affect value - L8C11

A

T

104
Q

Preferred stock has a share in growth - L8C11

A

F

105
Q

Transfer restrictions will decrease the value of preferred stock - L8C11

A

T

106
Q

When a business liquidates, accounts receivables are not included at 100% and goodwill is not typically included as a significant part of the business’s value - L8C11

A

T

107
Q

Forced sales of property usually result in receiving the property’s fair market value - L8C11

A

F - usually less than fair market value is received

108
Q

Closely-held business owners see value in liquidation rights to business property and in having control as a majority owner or part of a majority group - L8C11

A

T

109
Q

It is true that the value of a minority stock interest in a closely-held business can be discounted. This is also true for a minority stock interest in a publicly-traded corporation - L8C11

A

F - minority stock interests in a publicly-traded corporation are not discounted

110
Q

Paying unusually large salaries to business owners is not considered an appropriate adjustment to earnings. The Internal Revenue Service would likely call the unusually large salaries disguised dividends which would not be deductible to the business entity - L8C11

A

T

111
Q

Calculation Review: Capitalization of Earnings Business Valuation Method - L8C11

A

weighted average of the last 5 years earnings divided by an appropriate rate of return

112
Q

If a sole proprietorship business has a salary continuation plan, the sole proprietor is not considered an employee in the plan - L9C12

A

T

113
Q

In an insured corporate disability buy/sell agreement, the definition of disability in the agreement should match the definition in the insurance policy - L9C12

A

T

114
Q

In an insured corporate disability buy/sell agreement, premiums paid are deductible - L9C12

A

F - the premiums are not deductible

115
Q

For an employer to receive favorable tax treatment of contribution to a disability income plan, the plan does not need to cover all employees - L9C12

A

T

116
Q

Business overhead insurance benefits do not typically include reimbursement for the disabled individual’s lost income/earnings - L9C12

A

T

117
Q

A disabled shareholder does not lose the right to vote their stock - L9C12

A

T

118
Q

The risk management technique designed to replace the chance of loss is called Loss Prevention - L9C13

A

T

119
Q

Common methods for a business interest to transfer risk include the purchase of insurance and using hold-harmless agreements with employees - L9C13

A

T

120
Q

Insurance and risk management is not concerned with speculative risk - L9C13

A

T

121
Q

A risk where losses could be indefinite in regards to amount and time is not an insurable risk - L9C13

A

T

122
Q

The death benefit should be selected to reflect the key person’s value to the business - L9C13

A

T

123
Q

The corporation does not need to give notice to the key person and obtain the key person’s consent - L9C13

A

F - the corporation must notify the key person and obtain consent

124
Q

The policy can be used to fund a nonqualified deferred compensation plan with retirement benefits if the key person lives to retirement - L9C13

A

T

125
Q

The corporation owns the policy, pays and deducts the premiums and is the beneficiary - L9C13

A

F - the corporation is owner and beneficiary and pays premiums, but the premiums are not deductible

126
Q

Calculation Review: Value of a Key Employee using Capitalization of Earnings Method - L9C13

A

excess earnings divided by rate of return

HS331 Planning for Business Owners & Professionals (3 decks)

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