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Exam 12: Entities Overview

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Question 21

Multiple Choice

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Which of the following statements is true for a C corporation incurring a net operating loss (NOL) for a tax year that begins in 2019?

A) It may carry the NOL back two years and forward 20 years.
B) It may not carry the NOL back to prior years but it may carry it forward 20 years.
C) It may not carry the NOL back to prior years but it can carry the loss forward indefinitely.
D) It may carry the loss back two years and carry the loss forward indefinitely.
E) None of the choices are correct.

F) A) and C)
G) A) and B)

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Question 22

Multiple Choice

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Crocker and Company (CC) is a C corporation.For the year, CC reported taxable income of $550,000.At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder.Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax.What is the overall tax rate on Crocker and Company's pretax income?

A) 18.8%
B) 23.8%
C) 21%
D) 39.8%
E) 44.8%

F) All of the above
G) C) and E)

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Question 23

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

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

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments.

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

If a C corporation incurs a net operating loss in 2019, it may carry the loss back two years and forward 20 years to offset income in those years.

Which tax classifications can potentially apply to LLCs?

Stacy would like to have SST (a business entity)organized as either an LLC (taxed as a partnership)or as a corporation (taxed as a C corporation)generating a 10 percent annual before-tax return on a $600,000 investment.Stacy's marginal tax rate on ordinary income is 37 percent.Stacy's marginal tax rate on individual capital gains and dividends is 23.8 percent, including the net investment income tax.SST will pay out its after-tax earnings every year to either its members or its shareholders.If SST is taxed as a partnership, Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax.Assume that SST's income is not qualified business income for purposes of the qualified business income deduction.How much would Stacy have after taxes if SST is organized as either an LLC or a C corporation?

Losses from C corporations are never available to offset a shareholder's personal income.

Business income allocations to owners from an LLC that is taxed as a partnership are subject to self-employment tax if the owners are significantly involved in the entity's business activities.

Unincorporated entities with only one individual owner are taxed as sole proprietorships.

Corporations are legally better suited for taking a business public compared with LLCs and general partnerships.

If a C corporation incurred a net operating loss in 2017, it could carry the loss back two years and forward 20 years to offset income in those years.However, it may offset only 80 percent of the taxable income before the NOL deduction in those years.

Rodger owns 100 percent of the shares in Trevor Inc., a C corporation.Assume the following for the current year: Trevor Inc. 's pretax income $= \$ 16,000$ Percentage of after-tax earnings retained by Trevor Inc. $= 0 \%$ (i.e., all after-tax earriings distributed) Rodger's dividend tax rate $= 15 \%$ Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

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?

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

Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?

P corporation owns 60 percent of the stock of S corporation.If S corporation distributes a dividend to P corporation, what is the tax rate on the dividend after the dividends received deduction (DRD)if P is entitled to a 65 percent DRD?