Chapter 17

Question 1

A ______ is not a taxable entity separate form the individual who owns the proprietorship.

Answer 1

sole proprietorship

Question 2

The owner of a ______ reports all business income and expenses of the proprietorship on Schedule C of Form 1040

Answer 2

sole proprietorship

Question 3

_____ are not subject to a Federal income tax.

Answer 3

Partnerships

Question 4

A ______ is required to file Form 1065, which reports the results of the partnership;s business activities.

Answer 4

partnership

Question 5

The partnership ordinary business income (loss) and the separately reported items are allocated to the partners according to the ________.

Answer 5

partnership’s profit and loss sharing agreement

*each partner receives a Schedule K-1 that reports the partner’s share of the partnership ordinary business income and separately reported income and expense items

Question 6

Corporations are governed by ____ or ______ of the Internal Revenue Code.

Answer 6

Subchapter C

Subchapter S

Question 7

_____, which generally do not pay federal income tax, are similar to partnerships in that ordinary business income (loss) flows through through to the shareholders to be reported on their seperate returns

Answer 7

S corporations

Question 8

______ are subject to an entity-level federal income tax. This is known as ____

Answer 8

C Corporation

double taxation effect.

Question 9

A C corporation reports its income and expenses on _____

Answer 9

Form 1120

Question 10

When a corporation distributes its income, the corporation’s shareholders ______

Answer 10

report dividend income on their own tax returns

Question 11

Income that has already been taxed at the corporate level is ______.

Answer 11

also taxed at the shareholder level

Question 12

In many cases, the tax burden will be _____ if the business is operated as a corporation, but sometimes operating as a corporation can result in _____

Answer 12

greater

tax savings

Question 13

Double taxation stems from the fact that _____ are not deductible by the corporation. It also stems from the face that ______ are taxable to the shareholder

Answer 13

dividends distributed

dividend distributions

Question 14

Qualified dividend income is taxed at _____

Answer 14

the same preferential rate as long term capital gain

Question 15

The net income of a proprietorship is subject to ______, as are some partnership allocations of income to partners

Answer 15

self-employment tax

Question 16

Wages paid to a shareholder-employee of a corporation are subject to ____

Answer 16

payroll taxes

Question 17

At the entity level, state corporate income taxes and/or franchise taxes are applicable for businesses formed as ______

Answer 17

corporations

Question 18

The income of sole proprietorship, S corporations, and partnerships (including most LLC) is subject to ________ and without any rate preference for such income

Answer 18

state income taxation

Question 19

Sole proprietors and general partners face the danger of _____

Answer 19

unlimited liability

Question 20

Shares of stock in a corporation are freely transferable, whereas a partner’s sale of his or her partnership interest is subject to ____

Answer 20

approval by the other partners

Question 21

Shareholders may come and go, but a corporation ca continue to exist. Death or withdrawal of a partner may terminate the existing partnership and cause financial difficulties that result in dissolution of the entity. This _____ is a distinct advantage of the corporate form of doing business

Answer 21

continuity of life

Question 22

Corporations have _____. All managment responsibility is assigned to a board of directors, which appoints officers to carry out the corporation’s business

Answer 22

centralized management

Question 23

Operating as an LLC allows its owners to avoid ______, which is primary nontax consideration in choosing this form of a business organization

Answer 23

unlimited liability

Question 24

The tax advantage of LLCs is that qualifying businesses may be treated as ____ or ____ for tax purposes, thereby avoiding the problem of double taxation associated with regular corporations

Answer 24

proprietorship or partnership

Question 25

Some states allow an LLC to have ____, but not continuity of life or free transferability of interests. Other states allow LLCs to adopt any or all of the _____.

Answer 25

centralized management | corporate characteristics of centralized management, continuity of life, and free transferability of interests

Question 26

An entity would be treated as a corporation if it had a majority of characteristics common to _______

Answer 26

corporations

Question 27

Under the check-the-box rules, non-corporate entities with more than one owner can elect to be classified as _______ An entity with only one owner can elect to be classified as ______

Answer 27

partnership or corporation sole proprietorship or corporation *this election is not available to entities that are actually incorporated under state law or to entities that are required to be taxed as corporations under Federal law

Question 28

LLCs are not treated as being _____

Answer 28

incorporated under state law

Question 29

____ and ____ result from the taxable sale or exchanges of capital assets

Answer 29

capital gains and capital losses

Question 30

Individuals generally pay a preferential tax rate of 15% on ____

Answer 30

net capital gains

Question 31

Corporations receive ____ preferential tax rate

Answer 31

no

Question 32

Corporate taxpayers are not permitted to claim any net capital losses as ___ Capital losses can only be used as _____

Answer 32

a deduction against ordinary income an offset against capital gains

Question 33

Recapture rules under §1245 and §1250 are equally applicable to _______

Answer 33

individuals and corporate taxpayers *corporations may have more depreciation recapture (ordinary income) on the disposition of §1250 property than individuals

Question 34

Under §291 a corporation will have additional ordinary income equal to 20% of the excess of the amount of depreciation recapture that would arise if the property §1245 property over the amount of depreciation computer under §1250. As a result the §1231 portion of the corporation's gain on the disposition is correspondingly reduced by the additional recapture.

Answer 34

.

Question 35

The _____ loss rules apply to individual taxpayers and to closely held C corporations and personal service corporations (PSC).

Answer 35

passive loss

Question 36

For S corporations and partnerships, passive income and loss flows through to the owners, and the passive loss rules are applies at the _____

Answer 36

owner level

Question 37

The passive loss rules are applied to closely held C corporations and the PSCs to prevent taxpayers from incorporating to avoid the _____

Answer 37

passive loss limitation

Question 38

A corporation is _____ is, at any time during the last half of the taxable year, more than 50 percent of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals.

Answer 38

closely held

Question 39

A corporation is classified as a PSC if it meets these requirements

Answer 39

1. the principal activity of the corporation is the performance of personal services 2. The services are substantially performed by shareholder-employees 3. More than 10 percent of the stock is held by shareholder-employees. Any stock held by an employee on any one day causes the employee to be a shareholder-employee

Question 40

Passive losses cannot be offset agains either _____

Answer 40

active income or portfolio income

Question 41

The application of the passive loss rules is not as harsh for _____

Answer 41

C corporations they may offset passive losses against active income but not against portfolio income

Question 42

Subject to certain exceptions, individual taxpayers are not allowed to offset passive losses against _____

Answer 42

either active income or portfolio income

Question 43

Both corporate and individual taxpayers may deduct _____ if the recipient is a qualified ______.

Answer 43

charitable contributions qualified charitable organizations *Generally a deduction will be allowed only for the year in which the payment is made.

Question 44

With regards to charitable contributions an exception is made for ____. They can claim the deduction in the year preceding payment if these requirements are met.

Answer 44

accrual basis corporations 1. the contribution must be authorized by the board of directors by the end of that year 2. It must be paid on or before the 15th day of the 3rd month of the next year

Question 45

Generally, a charitable contribution of property results in a deduction equal to _____.

Answer 45

to the property's fair market value at the date of the gift. *loss property should be avoided as the loss inherent in the property would be never recognized. A sale of the property to recognize the loss, followed by a charitable contribution of the sale proceeds, would produce a more favorable tax result

Question 46

_____ also is the valuation amount for most charitable contributions of capital gain property.

Answer 46

Fair market value

Question 47

_____ is property that, if sold, would result in long-term capital gain or §1231 gain for the taxpayer

Answer 47

Capital gain property

Question 48

In what 2 situations would a capital gain property be measured by the basis of the property, rather than the fair market value.

Answer 48

1. If the corporation contributes tangible personal property and the charitable organization puts the property to an unrelated use, the appreciation on the property is not deductible. 2. If the charitable contribution was made to certain private non-operating foundations

Question 49

The deduction for a contribution of ordinary income property is limited to _____

Answer 49

the basis of the property *§1231 property is treated as ordinary income property to the extent of any depreciation recapture under §1245 and §1250.

Question 50

____ is property that if sold, would result in ordinary income for the taxpayer

Answer 50

ordinary income property

Question 51

On certain contributions of inventory by corporations the amount of the deduction sis equal to ______

Answer 51

the lesser of 1. the sum of the property's basis plus 50% of the appreciation on the property 2. twice the property's basis

Question 52

For any tax year, a corporate taxpayer's contribution deduction is limited to ____

Answer 52

10% of taxable income *taxable income is computed without regard to the charitable contribution deduction, any net operating loss carryback or capital loss carryback, dividends received deduction, and domestic production activities deduction.

Question 53

Any contribution in excess of 10% limitation (for corporations) may be _____

Answer 53

carried forward to the 5 succeeding tax years. *any carryforward must be added to subsequent contributions and will be subject to 10% limitation. In applying the current year's contribution must be deducted first, with carryover amounts from previous years deducted in order of time

Question 54

The American Jobs Creation ACt of 2004 created a deduction based on the income from ______

Answer 54

manufacturing activities

Question 55

Domestic production activities deduction is 9% of the lower of :

Answer 55

1. qualified production activities income | 2. taxable income or alternative minimum taxable income (computed without regards to the DPAD)

Question 56

As for individuals, the net operating loss of a corporation generally may be carried back ____ years and forward ____ years to offset taxable income for those years.

Answer 56

2 20 *corporations may elect to forgo the carry back period and just carry forward an NOL

Question 57

A corporation does not adjust its tax loss for the year for capital losses because ____.

Answer 57

a corporation is not permitted ta deduction for net capital losses *Nor does a corporation make adjustments to nonbusiness deductions as individual taxpayers do

Question 58

A corporation is allowed to include the ____ in computing its NOL

Answer 58

dividends received reduction

Question 59

The purpose of the _____ is to mitigate multiple taxations of corporate income.

Answer 59

Dividends received deduction *without the deduction, income paid to a corporation in the form of a dividend would be taxed to the recipient corporation with no corresponding deduction to the distributing corporation. When the recipient corporation paid the income to its shareholders, the income would again be subject to taxation with no corresponding deduction to the corporation. The dividends received deduction alleviates this inequity by causing only some or none of the dividend income to be taxable to the recipient corporation.

Question 60

The amount of the dividends received deduction depends on ___

Answer 60

the percentage of ownership the recipient corporate shareholder holds in a domestic corporation making the dividend distribution

Question 61

No dividends received deduction is allowed unless the corporations has ____

Answer 61

held the stock for more than 45 days

Question 62

Another restriction applies to the dividends received deduction when the underlying stock is _____

Answer 62

debt financed *debt-financed stock restriction reduces the dividends received deduction with respect to any dividend paying stock by the percentage of the investment in the stock that is debt financed. The reduction in the dividends received deduction cannot exceed the amount of the interest deduction allocable to the dividend

Question 63

Under §248 a corporation may elect to amortize ____ over 180 month period beginning with the month in which the corporation begins business.

Answer 63

organizational expenditures these include: 1. legal services incident to organization 2. necessary accounting services 3. Expenses of temporary directors and of organizational meetings of directors or shareholders, and fees paid to the state of incorporation

Question 64

These expenditures do not qualify as organizational expenditures

Answer 64

those connected with issuing or selling shares of stock or other securities or with the transfer of assets to a corporation. These expenditures reduce the amount of capital raised and are not deductible at all.

Question 65

The first ____ of organizational costs can be immediately expensed, with any remaining amount of organizational costs amortized over a 180 month period

Answer 65

$5000 *This 5000 expensing amount is phased out on a dollar for dollar basis when these costs exceed $50,000

Question 66

To qualify for the election of expensing organizational costs, the expenditures must be incurred ____

Answer 66

before the end of the tax year in which the corporation begins business

Question 67

_____ include various investigation expenses involved in entering a new business, whether incurred by a corporate or an individual taxpayer. They also include operating expenses such as rent and payroll that are incurred by a corporatino before it actually begins to produce any gross income

Answer 67

Startup expenditures

Question 68

A corporation must file a ____ whether it has taxable income or not

Answer 68

federal income tax return

Question 69

A corporation must make payments of ____ unless its tax liability can reasonably be expected to be less than $500.

Answer 69

estimated tax

Question 70

The required annual payment of estimated tax is the lesser of :

Answer 70

1. 100% of the corporation's tax for the current year | 2. 100% of the tax for the preceding year

Question 71

Estimated payments of taxes can be paid in 4 installments due on or before the 15th day of the __, ___, ___, ___ months

Answer 71

4,6,9,12

Question 72

Income reconciliation for corporations who's assets exceed $10 million are reported on ____

Answer 72

Schedule M-3