Tax Chapter 12

Stephany Fox
Quiz by Stephany Fox, updated more than 1 year ago
Stephany Fox
Created by Stephany Fox over 5 years ago
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Chapter 12 quesions

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Question 1

Question
Which of the following businesses would be better of in the case of a loss in the first year of operation?
Answer
  • Sue's Donut Shop, which is a partnership and a flow-through entity
  • Bill's Cake Emporium, which is a corporation

Question 2

Question
The main reason that tax savings are greater for flow-through entities with losses in the first year than for corporations with losses in the first year is related to the time value of money.
Answer
  • True
  • False

Question 3

Question
Which of the following people would be allowed to have income allocated to them?
Answer
  • Mary and her brother Arthur are partners in a car repair business. Arthur was a mechanic's apprentice for 5 years and Mary has always been a professional violinist.
  • George and Harry are cousins. They own and operate a barber shop as a partnership. Both studied went to technical college to learn to do hair.

Question 4

Question
In the event that a federal gift tax is leveraged on a transfer of equity in a business between family members, who must pay the tax?
Answer
  • Donor
  • Donee

Question 5

Question
Buy-sell agreements carry little power among family members.
Answer
  • True
  • False

Question 6

Question
Subchapter K governs S corporations.
Answer
  • True
  • False

Question 7

Question
Sandra wants to open a pet store with her daughter Linda. Sandra knows she does not want to create an S-corp, but she does not want to have bear the full liability of a partnership. What are some viable options for her?
Answer
  • LLP
  • C-Corp
  • LLC
  • Sole proprietorship
  • Add another member

Question 8

Question
What is the main reason why dividends are the least-preferred method of drawing money from a business?
Answer
  • There are large fees associated with distributing dividends.
  • Distribution of dividends can negatively affect the business' credit rating.
  • Dividends come from after-tax income, while other methods of drawing money usually come from before-tax income.

Question 9

Question
A constructive dividend is an unreasonably high distribution to a shareholder that the IRS taxes at a different rate.
Answer
  • True
  • False

Question 10

Question
Thin capitalization occurs when a company has extremely high amounts of equity from a single partner or shareholder.
Answer
  • True
  • False

Question 11

Question
What is an accumulated earnings tax?
Answer
  • An additional tax on any corporation formed for the purpose of avoiding income tax by accumulating earnings and profits instead of dividing and distributing them
  • A special tax on an entity formed with the main goal of earning nonbusiness income like dividends, interest, rents, and royalties

Question 12

Question
Where does most income come from in a personal holding company?
Answer
  • Revenue from sales to customers
  • Revenues from performance of personal services
  • Gains or income from investments

Question 13

Question
How much is the de minimus accumulation that will result in an accumulated earnings tax?
Answer
  • $250,000 average earnings per year
  • $250,000 total at a given time

Question 14

Question
One of the top ways to pull money from an S-corp without paying actual dividends is through salaries. Which of the following are other ways?
Answer
  • Allow the business to use a building owned by an owner so they can collect rent payments
  • Form a flow through entity with the sole purpose of collecting interest payments
  • Allow an owner to loan money to the business so they can collect interest payments

Question 15

Question
If you want to form a business with recently formulated regulations, no self-employment tax, and little liability as an individual owner, you should form an S-corp
Answer
  • True
  • False
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