,True j/ jFalse
1. Tomas jowns ja jsole jproprietorship, jand jLucy jis jthe jsole jshareholder jof ja jC jcorporation. jIn jthe jcurrent jyear,
jboth jbusinesses jmake ja jnet jprofit jof j$60,000. jNeither jbusiness jdistributes jany jfunds jto jthe jowners jin jthe jyear. jFor
jthe jcurrent jyear, jTomas jmust jreport j$60,000 jof jincome jon jhis jindividual jtax jreturn, jbut jLucy jis jnot jrequired jto
jreport jany jincome jfrom jthe jcorporation jon jher jindividual jtax jreturn.
a. True
b. False
ANSWER: j True
2. Carol jand jCandace jare jequal jpartners jin jPeach jPartnership. jIn jthe jcurrent jyear, jPeach jhad ja jnet jprofit jof
j$75,000 j($250,000 jgross jincome j– j$175,000 joperating jexpenses) jand jdistributed j$25,000 jto jeach jpartner. jPeach
jmust jpay jtax jon
$75,000 jof jincome.
a. True
b. False
ANSWER: j False
3. Rajib jis jthe jsole jshareholder jof jCardinal jCorporation, ja jcalendar jyear jS jcorporation. jIn jthe jcurrent jyear,
jCardinal jgenerated ja jnet jprofit jof j$350,000 j($520,000 jgross jincome j– j$170,000 joperating jexpenses) jand
jdistributed j$80,000 jto jRajib. jRajib jmust jreport jthe jCardinal jCorporation jprofit jof j$350,000 jon jhis jFederal
jincome jtax jreturn.
a. True
b. False
ANSWER: j True
4. Donald jowns ja j45% jinterest jin ja jpartnership jthat jearned j$130,000 jin jthe jcurrent jyear. jHe jalso jowns j45% jof jthe
jstock jin ja jC jcorporation jthat jearned j$130,000 jduring jthe jyear. jDonald jreceived j$20,000 jin jdistributions jfrom jeach
jof jthe jtwo jentities jduring jthe jyear. jWith jrespect jto jthis jinformation, jDonald jmust jreport j$78,500 jof jincome jon jhis
jindividual jincome jtax jreturn jfor jthe jyear.
a. True
b. False
ANSWER: j True
5. Quail jCorporation jis ja jC jcorporation jthat jgenerates jnet jincome jof j$125,000 jduring jthe jcurrent jyear. jIf jQuail
jpaid jdividends jof j$25,000 jto jits jshareholders, jthe jcorporation jmust jpay jtax jon j$100,000 jof jnet jincome.
jShareholders jmust jreport jthe j$25,000 jof jdividends jas jincome.
a. True
b. False
ANSWER: j False
6. Eagle jCompany, ja jpartnership, jhad ja jshort-term jcapital jloss jof j$10,000 jduring jthe jcurrent jyear. jAaron, jwho jowns
j25% jof jEagle, jwill jreport j$2,500 jof jEagle’s jshort-term jcapital jloss jon jhis jindividual jtax jreturn.
a. True
b. False
, ANSWER: j True
7. Matt, jthe jsole jshareholder jof jPastel jCorporation j(a jC jcorporation), jhas jthe jcorporation jpay jhim ja jsalary jof
j$600,000 jin jthe jcurrent jyear. jThe jTax jCourt jhas jheld jthat j$200,000 jrepresents junreasonable jcompensation. jMatt jmust
jreport ja jsalary jof
$400,000 jand ja jdividend jof j$200,000 jon jhis jindividual jtax jreturn.
a. True
b. False
ANSWER: j True
8. Double jtaxation jof jcorporate jincome jresults jbecause jdividend jdistributions jare jincluded jin ja jshareholder’s jgross
jincome jand jare jnot jdeductible jby jthe jcorporation.
a. True
b. False
ANSWER: j True
9. Jake, jthe jsole jshareholder jof jPeach jCorporation j(a jC jcorporation) jhas jthe jcorporation jpay jhim j$100,000. jFor
jincome jtax jpurposes, jJake jwould jprefer jto jhave jthe jpayment jtreated jas ja jdividend jinstead jof jsalary.
a. True
b. False
ANSWER: j True
10. Thrush jCorporation jfiles jits jForm j1120, jwhich jreports jtaxable jincome jof j$200,000 jin jthe jcurrent jyear.
jThe jcorporation’s jtax jis j$42,000.
a. True
b. False
ANSWER: j True
11. The jcorporate jmarginal jincome jtax jrate jis jlower jthan jthe jtop jindividual jtax jrate.
a. True
b. False
ANSWER: j True
12. Under jthe jCheck-the-box jRegulations, ja jtwo-owner jLLC jthat jfails jto jelect jto jbe jto jtreated jas ja jcorporation
jwill jbe jtaxed jas ja jsole jproprietorship.
a. True
b. False
ANSWER: j False
13. Employment jtaxes japply jto jall jentity jforms jof joperating ja jbusiness. jAs ja jresult, jemployment jtaxes jare ja jneutral
jfactor jin jselecting jthe jmost jtax jeffective jform jof joperating ja jbusiness.
a. True
1. Tomas jowns ja jsole jproprietorship, jand jLucy jis jthe jsole jshareholder jof ja jC jcorporation. jIn jthe jcurrent jyear,
jboth jbusinesses jmake ja jnet jprofit jof j$60,000. jNeither jbusiness jdistributes jany jfunds jto jthe jowners jin jthe jyear. jFor
jthe jcurrent jyear, jTomas jmust jreport j$60,000 jof jincome jon jhis jindividual jtax jreturn, jbut jLucy jis jnot jrequired jto
jreport jany jincome jfrom jthe jcorporation jon jher jindividual jtax jreturn.
a. True
b. False
ANSWER: j True
2. Carol jand jCandace jare jequal jpartners jin jPeach jPartnership. jIn jthe jcurrent jyear, jPeach jhad ja jnet jprofit jof
j$75,000 j($250,000 jgross jincome j– j$175,000 joperating jexpenses) jand jdistributed j$25,000 jto jeach jpartner. jPeach
jmust jpay jtax jon
$75,000 jof jincome.
a. True
b. False
ANSWER: j False
3. Rajib jis jthe jsole jshareholder jof jCardinal jCorporation, ja jcalendar jyear jS jcorporation. jIn jthe jcurrent jyear,
jCardinal jgenerated ja jnet jprofit jof j$350,000 j($520,000 jgross jincome j– j$170,000 joperating jexpenses) jand
jdistributed j$80,000 jto jRajib. jRajib jmust jreport jthe jCardinal jCorporation jprofit jof j$350,000 jon jhis jFederal
jincome jtax jreturn.
a. True
b. False
ANSWER: j True
4. Donald jowns ja j45% jinterest jin ja jpartnership jthat jearned j$130,000 jin jthe jcurrent jyear. jHe jalso jowns j45% jof jthe
jstock jin ja jC jcorporation jthat jearned j$130,000 jduring jthe jyear. jDonald jreceived j$20,000 jin jdistributions jfrom jeach
jof jthe jtwo jentities jduring jthe jyear. jWith jrespect jto jthis jinformation, jDonald jmust jreport j$78,500 jof jincome jon jhis
jindividual jincome jtax jreturn jfor jthe jyear.
a. True
b. False
ANSWER: j True
5. Quail jCorporation jis ja jC jcorporation jthat jgenerates jnet jincome jof j$125,000 jduring jthe jcurrent jyear. jIf jQuail
jpaid jdividends jof j$25,000 jto jits jshareholders, jthe jcorporation jmust jpay jtax jon j$100,000 jof jnet jincome.
jShareholders jmust jreport jthe j$25,000 jof jdividends jas jincome.
a. True
b. False
ANSWER: j False
6. Eagle jCompany, ja jpartnership, jhad ja jshort-term jcapital jloss jof j$10,000 jduring jthe jcurrent jyear. jAaron, jwho jowns
j25% jof jEagle, jwill jreport j$2,500 jof jEagle’s jshort-term jcapital jloss jon jhis jindividual jtax jreturn.
a. True
b. False
, ANSWER: j True
7. Matt, jthe jsole jshareholder jof jPastel jCorporation j(a jC jcorporation), jhas jthe jcorporation jpay jhim ja jsalary jof
j$600,000 jin jthe jcurrent jyear. jThe jTax jCourt jhas jheld jthat j$200,000 jrepresents junreasonable jcompensation. jMatt jmust
jreport ja jsalary jof
$400,000 jand ja jdividend jof j$200,000 jon jhis jindividual jtax jreturn.
a. True
b. False
ANSWER: j True
8. Double jtaxation jof jcorporate jincome jresults jbecause jdividend jdistributions jare jincluded jin ja jshareholder’s jgross
jincome jand jare jnot jdeductible jby jthe jcorporation.
a. True
b. False
ANSWER: j True
9. Jake, jthe jsole jshareholder jof jPeach jCorporation j(a jC jcorporation) jhas jthe jcorporation jpay jhim j$100,000. jFor
jincome jtax jpurposes, jJake jwould jprefer jto jhave jthe jpayment jtreated jas ja jdividend jinstead jof jsalary.
a. True
b. False
ANSWER: j True
10. Thrush jCorporation jfiles jits jForm j1120, jwhich jreports jtaxable jincome jof j$200,000 jin jthe jcurrent jyear.
jThe jcorporation’s jtax jis j$42,000.
a. True
b. False
ANSWER: j True
11. The jcorporate jmarginal jincome jtax jrate jis jlower jthan jthe jtop jindividual jtax jrate.
a. True
b. False
ANSWER: j True
12. Under jthe jCheck-the-box jRegulations, ja jtwo-owner jLLC jthat jfails jto jelect jto jbe jto jtreated jas ja jcorporation
jwill jbe jtaxed jas ja jsole jproprietorship.
a. True
b. False
ANSWER: j False
13. Employment jtaxes japply jto jall jentity jforms jof joperating ja jbusiness. jAs ja jresult, jemployment jtaxes jare ja jneutral
jfactor jin jselecting jthe jmost jtax jeffective jform jof joperating ja jbusiness.
a. True
