Topic 1

Question 1

Corporations are legally formed by filing articles of organization with the state in which the corporation will be created.

Answer 1

False

Corporations file articles of incorporation.

Question 2

General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed.

Answer 2

False

General Partnerships only need Partnership agreements.

Question 3

Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.

Answer 3

True

Question 4

Sole proprietorships are not treated as legal entities separate from their individual owners.

Answer 4

True

Owner is personally liable for any debts or obligations of the business

Question 5

S corporation shareholders are legally responsible for paying the S corporation’s debts because S corporations are treated as flow-through entities for tax purposes.

Answer 5

False

Limited Liability

Question 6

LLC members have more flexibility than corporate shareholders to alter their legal arrangements with respect to one another, the entity, and with outsiders.

Answer 6

True

Question 7

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.

Answer 7

False
S Corps are flow through
C Corps are not Flow through

Question 8

An unincorporated entity with more than one owner is, by default, taxed as a partnership.

Answer 8

True

Question 9

Which of the following legal entities file documents with the state to be formally recognized by the state?

1. Limited Liability
2. General Partnership
3. Sole Proprietorship
4. None of the above

Answer 9

1. Limited Liability (Must file Articles of Organization)

Question 10

Which legal entity provides the least flexible legal arrangement for owners?

1. Corporation
2. LLC
3. Partnership
4. Sole Prop

Answer 10

Corporation

Question 11

What document must LLCs file with the state to organize their business?

1. Articles of Incorporation
2. Certificate of LLC
3. Articles of Organization
4. Partnership Agreement
5. None of the above.

Answer 11

Articles of Organization

Question 12

On which tax form does a single member LLC with one individual owner report its income and losses?

1. Form 1120
2. Form 1120S
3. Form 1065
4. Form 1040, Schedule C

Answer 12

Form 1040, Schedule C (Single member LLC also Sole Prop)

Form 1065 (More than one member LLC)

Question 13

On which tax form do LLCs with more than one owner generally report their income and losses?

1. Form 1120
2. Form 1120S
3. Form 1065
4. Form 1040, Schedule C

Answer 13

Form 1065

Question 14

S corporations have more restrictive ownership requirements than other entities.

Answer 14

True

Question 15

Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.

Answer 15

True

Question 16

Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.

Answer 16

True

Question 17

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

Answer 17

False

Question 18

The C corporation tax rate is significantly lower than the top individual marginal tax rate.

Answer 18

True

Question 19

Owners who work for entities taxed as a partnership receive guaranteed payments as compensation. The guaranteed payments are not self-employment income.

Answer 19

False

Question 20

If a C corporation incurs a net operating loss in 2018, it may carry the loss back two years and forward 20 years to offset income in those years.

Answer 20

False (Can’t carry back NOL back to prior years)

Question 21

If individual taxpayers are the shareholders of PST Corporation and PST corporation is a shareholder of MNO Corporation, how many levels of tax is MNO’s pre-tax income potentially exposed to?

1. No Taxation
2. Single Taxation
3. Double Taxation
4. Triple Taxation

Answer 21

Tripe Taxation

Question 22

The deduction for qualified business income applies to income of all but which of the following tax entity types?

1. Sole Prop
2. Entity taxed as a partnership
3. S Corps
4. C Corps

Answer 22

C Corporations

Question 23

Which of the following statements is true for a C corporation incurring a net operating loss (NOL) for a tax year that begins in 2018?

1. It may carry the NOL back two years and forward 20 years
2. It may not carry the NOL back to prior years but it may carry it forward 20 years.
3. It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.
4. It may carry the loss back two years and carry the loss forward indefinitely.

Answer 23

It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.

Question 24

What kind of deduction is the deduction for qualified business income?

1. A for AGI deduction
2. A from AGI deduction that is not an itemized deduction
3. A from AGI deduction that is an itemized deduction
4. None of the above

Answer 24

A from AGI deduction that is not an itemized deduction

Question 25

When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?

1. FICA tax only
2. Self employment tax only
3. FICA and self employment tax
4. Regular income tax

Answer 25

Regular Income Tax.
An S corporation employee/shareholder must pay FICA tax on any salary received from an S corporation; however, any S corporation ordinary business income allocated to them is not subject to either FICA or self-employment tax.

Question 26

Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would not allow you to offset the entity losses against your income from other sources?

1. C Corp
2. LLC
3. General Partnership
4. S Corporation

Answer 26

C Corporation
A C corporation’s losses must be used at the entity level. That is, the losses don’t flow-through to owners to offset their income from other sources.

Question 27

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

1. Partnership
2. S Corporation
3. C Corporation
4. S Corp and C Corp

Answer 27

Partnership
Partnerships and their owners generally don’t recognize any gain during a liquidating distribution. Conversely, both S corporations and C corporations must recognize gain when appreciated assets are distributed in a liquidating distribution.

Question 28

If you were seeking an entity with the most favorable tax treatment regarding (1) the number of owners allowed, (2) the flexibility to select your accounting period, and (3) the availability of preferential capital gains rates when selling your ownership interest, which entity should you decide to use?

1. C Corp
2. S Corp
3. Partnership
4. Sole proprietorship

Answer 28

C Corp
These three tax considerations are most favorable for a company that chooses to be taxed as a taxable corporation. There is no limit to the number of owners allowed, no restrictions on what accounting period to use, and all of the gains from selling shares in a C corporation are capital gains.

Question 29

What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have respectively?

1. 100, no limit, no limit
2. no limit, 100, 2
3. no limit, 100 no limit
4. 100, 100, no limit

Answer 29

no limit, 100, no limit

Question 30

Which of the following statements is true regarding compensation paid to an owner of an entity taxed as a partnership who works for the entity?

1. The compensation is deductible by the entity.
2. The compensation is self-employment income to the owner-worker.
3. The entity is not required to withhold FICA tax on the compensation it pays to the owner.
4. All of the above

Answer 30

All of the above

Question 31

Which type of business organization combines the tax treatment of a partnership with the legal accountability of a corporation?

1. S Corporations
2. C Corps
3. Sole Proprietorship
4. Limited Liability Companies

Answer 31

Limited Liability Companies

Question 32

What is one of the tax disadvantages of a sole proprietorship?

1. Assets withdrawn from the business will be subject to double taxation.
2. The corporate tax rate may be lower than the personal income tax rate.
3. Business losses will carry forward, negatively affecting the net income of future years.
4. Profits are taxed first as they are recognized by the business and again as they are distributed to the shareholder.

Answer 32

The corporate tax rate may be lower than the personal income tax rate.

Question 33

Which example shows a disadvantage of operating as a partnership?

1. Partnership income is taxed on the partner’s individual return.
2. A partner’s basis is increased by the partner’s share of the partnership’s income.
3. Some tax-exempt fringe benefits, such as life insurance, are not available to partners.
4. Partnership profits are taxed when distributed regardless of when they are earned.

Answer 33

Some tax-exempt fringe benefits, such as life insurance, are not available to partners.

Question 34

Which example demonstrates a disadvantage of being a C corporation?

1. The first $50,000 of income of a C corporation is taxed at 15%.
2. Shareholders employed by the corporation are considered employees.
3. The C corporation’s earnings are taxed to the shareholders when they are distributed as dividends.
4. Shareholder-employees must fund fringe benefits such as life insurance and health plans funded with before-tax dollars.

Answer 34

The C corporation’s earnings are taxed to the shareholders when they are distributed as dividends.

Question 35

Which favorable rule applies to S corporations?

1. The entity has no restrictions on the number and type of owners.
2. The entity may be taxed on built-in gains rather than distributed gains.
3. The entity can retain earnings without being subject to the accumulated earnings tax.
4. The entity’s owners can deduct more losses because their stock basis increases with the entity’s debt.

Answer 35

The entity can retain earnings without being subject to the accumulated earnings tax.