Characteristics and Income Taxation of Business Entities - Sample Questions 1 - 6

1. The CFO of XYZ Corporation approached the board of directors with a concern that the company might be holding too much in retained earnings. The firm currently has $2,000,000 in accumulated earnings. Which of the following is TRUE?

(1) The corporation could be subject to an accumulated earnings tax if they don't reduce the retained earnings
(2) The penalty for excess accumulated earnings is 20%
(3) Corporations will sometimes retain their earnings to boost stock price
(4) XYZ corporation could keep $250,000 in earnings and not have to worry about any accumulated earnings tax
(5) The board can reduce earnings by declaring a stock dividend

A) 1 and 2 only
B)
2 and 3 only
C)
3, 4, and 5 only
D)
1, 3, 4, and 5 only
E) 1, 2, 3, 4, and 5


2. Roger has a profitable sole proprietor business that he would like to expand more rapidly to meet higher product demands. Roger makes a good income (over $750,000), but he really needs to raise at least another $5,000,000 to meet his expansion plans. Which would be the most appropriate business entity for Roger?

A) S-Corporation
B)
C-Corporation
C)
Partnership
D) Limited Liability Company

3. All of the following statements concerning S-Corporations are correct EXCEPT?

A) S-corporations are prohibited from having a trust as a shareholder
B)
S-corporations are not allowed to have more than 75 shareholders
C)
S-corporations cannot have more than one class of stock
D) S-corporations avoid double taxation with the payment of dividends

4. Betty owns shares of common stock in her local utility company which pays a $2.50 annual dividend directly into her individual brokerage account. Three years prior, she retired from XYZ Company (an S-corporation) and now travels with her husband. She still owns stock in XYZ Company. Which tax documents should Betty expect to receive at year end

I. Schedule C
II. Schedule K-1
III. W-2
IV. 1099-DIV

A) I and II only
B) I and III only
C) II and IV only
D) I and IV only

5.
Which of the following statements is correct concerning Partnerships?

A) A general partner has limited liability
B)
Partnerships continue after the death of a partner
C)
Partnerships must file a tax return Form 1120
D)
Partnerships are considered a "flowthrough" entity because income passes directly through to the individual partners

6. Greg Jones owns 100% of Jones Motors, Inc., which specializes in rebuilding high-end sports cars. Jones Motors, Inc. also owns 45% of an electronics company called FGR Electronics which pays large dividends to their shareholders. How much dividend exclusion (if any) will Jones Motors, Inc. receive?

A) 100% dividend exclusion
B)
80% dividend exclusion
C)
70% dividend exclusion
D) No exclusion


Answer Key


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