V. Federal Taxation of Entities - 8. Other Tax Issues

Question 1

V. Federal Taxation of Entities

138. Tax Planning Strategies for Business Entities

A business owner who also plans to work in the business wants to take maximum advantage of the favorable fringe benefit rules provided in the tax law. Which entity type should the owner choose?

1. Partnership
2. S corporation
3. Limited liability company
4. C corporation

Answer 1

D.

C corporation shareholders who also work in the business as employees are eligible to participate in all of the fringe benefit rules provided in the tax law.

Question 2

V. Federal Taxation of Entities

138. Tax Planning Strategies for Business Entities

A business is expecting large losses in the first three years of its life. The owner would like to maximize the benefit from these losses on her personal tax return. Which entity type should the owner choose?

1. Partnership
2. S corporation
3. Limited liability company
4. C corporation

Answer 2

A.

Partners can increase basis in partnership interest with partnership debt so that additional losses can be used by partners on their tax returns.

Question 3

V. Federal Taxation of Entities

138. Tax Planning Strategies for Business Entities

When should a corporate taxpayer elect to forgo carryback of a net operating loss and instead carry the net operating loss forward?

1. When the taxpayer expects net operating losses in the future.
2. When the taxpayer has high marginal tax rates in carryback years and expects to be in lower marginal rates in the future.
3. When the taxpayer expects lower rates in the future.
4. A taxpayer cannot carry back an NOL.

Answer 3

D.

Beginning in 2018 NOLs cannot be carried back. They can be carried forward indefinitely

Question 4

V. Federal Taxation of Entities

139. Business Entity Choice

III. Tax Entities Can be Compared and Contrasted on the Following Characteristics

Answer 4

1. Limited Liability—Corporate shareholders and LLC members have limited liability, as do limited partners.
2. Double Taxation—The only entity subject to double taxation is C corporations.
3. Retain Income at Lower Current Tax Cost—The entity that may be able to retain income at a lower tax cost is the C corporation
4. Tax-Deferred Contributions—While both corporations and partnerships can be formed in such a manner that realized gains/losses are deferred, the rules are much more favorable for partnerships (and LLCs) since there is no 80% control test requirement for deferrals for partnerships.
5. Distributions—The distributions rules favor partnerships (and LLCs). Gain is recognized on partnership distributions only if the cash distributed exceeds the partner’s basis in his or her partnership interest. If a corporation distributes appreciated property as a dividend, redemption, or liquidation, gain will be recognized to the corporation (for the appreciation) and potentially to the shareholder (double taxation) as well.
6. Owner Basis for Entity Level Debt—Only partners in a partnership and LLC members can increase their basis in their ownership interest for entity level debt. This benefits the partner/member since losses can be deducted on the owner’s tax return only to the extent of basis in the ownership interest. This is the reason that partnerships are often used for tax shelters.
7. Fringe Benefits—Partners in a partnership are not eligible to benefit from many fringe benefit exclusions because partners who work for the partnership are not considered to be employees. This same rule applies to S corporation shareholders who own 2% or more of the S corporation.

Question 5

V. Federal Taxation of Entities

139. Business Entity Choice

IV. Characteristics of Partnerships

Answer 5

1. Advantages
   
   1. Single taxation
   2. Flexibility—Partners can allocate income, expenses, credits, and all other tax items in any manner as long as the allocation has substantial economic effect.
   3. Basis increase for debt
   4. Tax-deferred contributions/admissions
   5. Distributions/withdrawals rarely produce gain to the partners
2. Disadvantages
   
   1. Unlimited liability for general partners
   2. Limited partners have limited management rights.

Question 6

V. Federal Taxation of Entities

139. Business Entity Choice

V. Comparison of Partnerships and S Corporations

Answer 6

1. Key Similarities
   
   1. Both are flow-through entities with single taxation.
   2. LLC members, limited partners, and S corporation shareholders have limited liability (but general partners do not),
   3. Both have restrictions on the year-end that must be used for the entity.
2. Key Differences
   
   1. Partners have flexibility with profit and loss sharing ratios. S corporations must allocate all tax items according to the percentage of stock owned by each shareholder.
   2. The built-in gain rules that apply to partnerships do not apply to S corporations.
   3. Income allocations from partnerships to general partners are subject to the self-employment tax. Income allocations from S corporations are not subject to the self- employment tax.
   4. Partners receive a basis increase for partnership debt whereas S corporation shareholders do not.

Question 7

V. Federal Taxation of Entities

139. Business Entity Choice

V. Comparison of Partnerships and S Corporations

Which of the following types of entities is entitled to the net operating loss deduction?

1. Partnerships.
2. S corporations.
3. Trusts and estates.
4. Not-for-profit organizations.

Answer 7

C.

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

Question 8

V. Federal Taxation of Entities

139. Business Entity Choice

V. Comparison of Partnerships and S Corporations

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?

1. S corporation.
2. C corporation.
3. Partnership.
4. Limited liability company.

Answer 8

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 9

V. Federal Taxation of Entities

139. Business Entity Choice

V. Comparison of Partnerships and S Corporations

The rule limiting the allowability of passive activity losses and credits applies to

1. Partnerships.
2. S corporations.
3. Personal service corporations.
4. Widely-held C corporations.

Answer 9

C.

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

Question 10

V. Federal Taxation of Entities

139. Business Entity Choice

V. Comparison of Partnerships and S Corporations

A sole proprietor wants to incorporate and has requested a projection of the first-year tax results as a C corporation and as an S corporation. Taxable income from ordinary operations is projected to be $100,000. The company expects to make a $20,000 charitable contribution and projects a long-term capital loss on stock of $7,000. Which of the following projections is correct?

1. C corporation, $73,000 taxable income; S corporation, $80,000 ordinary business income; long-term capital loss is separately stated.
2. C corporation, $90,000 taxable income; S corporation, $80,000 ordinary business income; long-term capital loss is separately stated.
3. C corporation, $90,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated.
4. C corporation, $80,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated.

Answer 10

C.

C corporations can deduct $10,000 of charitable contributions (limited to 10% of taxable income) and none of the capital losses since net capital losses are not deductible. Net income is $100,000 ordinary income less $10,000 equals $90,000. For S corporation, the charitable contribution and capital loss are separately stated. The ordinary income is reported on page 1 of form 1120S.