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Exam 15: Entities Overview

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Question 31

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Becca would like to organize BMI as either an LLC or as a corporation (taxed as a C corporation) generating a 4 percent annual before-tax rate of return on a $450,000 investment. Individual ordinary rates are 28 percent, corporate rates are 15 percent, and individual capital gains anddividends tax rates are 15 percent. BMI will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Becca keep after taxes if BMI is organized as either aLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if BMI is organized as either an LLC or as a corporation (taxed as a C corporation)?

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Question 32

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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 incomepotentially exposed to?

A) Triple taxation.
B) Single taxation.
C) No taxation.
D) Double taxation.

E) C) and D)
F) A) and B)

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Question 33

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Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises.Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in SanFrancisco, CA. Bright Light generated a $125,000 profit companywide made up of a$75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?

Corporation A owns 10% of Corporation C. The marginal tax rate on non-dividend income for both A and C is 34%. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income and distributes the remainder proportionately to its shareholders as adividend. In addition, Corporation A owns 20% of partnership P that earns $500 million in the currentyear. Given this fact pattern, answer the following questions:a. How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend assuming Corporation A is eligible for the 70 percent dividends received deduction?b. If partnership P distributes all of its current year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership?c. If you were to replace corporation A with individual A [her marginal tax rate on ordinary income is 28% and on qualified dividends is 15% (the net investment income tax does not apply)] in the original factpattern above, how much cash does individual A have from the Corporation C dividend after alltaxes assuming the dividends are qualified dividends? Consistent with the original facts, assume thatCorporation C distributes all of its after-tax income to its shareholders.

Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year:Trevor Inc.'s pre-tax income = $16,000Trevor Inc.'s marginal tax rate = 35%Percentage of after-tax earnings retained by Trevor Inc. = 0% (i.e. all after-tax earnings distributed)Rodger's dividend tax rate = 5%Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

For the current year, Creative Designs Inc., a C corporation, reports taxable income of $300,000 before paying salary to Ben the sole shareholder of Creative Designs Inc. (CD). Ben's marginal tax rate on ordinary incomeis 28 percent and 15 percent on dividend income. Assume CD's tax rate is 39 percent.a. How much total income tax will Creative Designs and Ben pay on the $300,000 taxable income for the year if CD doesn't pay any salary to Ben and instead distributes all of its after-tax income to Ben as a dividend?b. How much total income tax will Creative Designs and Ben pay on the $300,000 of income if CD pays Ben asalary of $100,000 and distributes its remaining after-tax earnings to Ben as a dividend?c. Compare your answer in part a. with your answer to part b. Explain why these numbers are different.

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

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?

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

On which form is income from a single member LLC with one corporate (C corporation) owner reported?

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

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?

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

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

Which of the following is not an effective strategy for mitigating double taxation in a Ccorporation?

Which of the following is most effective in mitigating the double tax?

A single-member LLC is taxed as a partnership.

Taylor would like to organize DRK as either an LLC or as a corporation (taxed as a C corporation) generating a 13 percent annual before-tax rate of return on a $250,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividends tax rates are 5 percent. DRK will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Taylor keep after taxes if DRK is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if DRK is organized as either an LLC or as a corporation (taxed as a C corporation)?