CTC Business Taxation & Entity Structures 2 — Questions and Answers
Question 1: An S corporation shareholder's basis in their stock is increased by which of the following?
- Separately stated losses passed through to the shareholder
- Non-separately stated income items (Correct answer)
- Distributions paid to the shareholder
- Loans made by the corporation to the shareholder
Correct answer: Non-separately stated income items
Non-separately stated (ordinary) income items passed through from an S corporation increase a shareholder's stock basis.
Question 2: Which entity type allows for a 'check-the-box' election to be taxed as a corporation?
- General partnership
- Limited liability company (LLC) (Correct answer)
- S corporation
- C corporation
Correct answer: Limited liability company (LLC)
LLCs can use the check-the-box regulations to elect their tax classification, including electing to be taxed as a corporation.
Question 3: For a partnership, what is the tax treatment of guaranteed payments made to a partner for services?
- They are treated as capital gains to the partner
- They are deductible by the partnership and ordinary income to the partner (Correct answer)
- They reduce the partner's distributive share with no additional tax
- They are treated as return of capital to the partner
Correct answer: They are deductible by the partnership and ordinary income to the partner
Guaranteed payments are deductible by the partnership as a business expense and are treated as ordinary income to the receiving partner.
Question 4: A C corporation with $100,000 of taxable income pays corporate income tax at what current flat rate?
- 21% (Correct answer)
- 25%
- 28%
- 35%
Correct answer: 21%
The Tax Cuts and Jobs Act of 2017 established a flat 21% corporate income tax rate for C corporations.
Question 5: Which of the following is a disadvantage unique to C corporations compared to pass-through entities?
- Unlimited personal liability for shareholders
- Double taxation of corporate profits (Correct answer)
- Inability to have more than 100 shareholders
- Restriction to only one class of stock
Correct answer: Double taxation of corporate profits
C corporations face double taxation because profits are taxed at the corporate level and again when distributed as dividends to shareholders.
Question 6: Under IRC Section 199A, which type of entity's qualified business income is eligible for the 20% deduction by its owners?
- C corporations
- S corporations (Correct answer)
- Foreign corporations
- Personal holding companies
Correct answer: S corporations
The Section 199A deduction is available to owners of pass-through entities including S corporations, partnerships, and sole proprietorships.
Question 7: A limited partner in a partnership generally cannot deduct losses in excess of what amount?
- Their adjusted gross income
- Their at-risk basis in the partnership (Correct answer)
- The partnership's total assets
- Twice their capital contribution
Correct answer: Their at-risk basis in the partnership
At-risk rules under IRC Section 465 limit loss deductions to the amount the taxpayer has at risk, which for limited partners typically equals their capital contributions plus recourse debt obligations.
CTC Business Taxation & Entity Structures 2
An S corporation shareholder's basis in their stock is increased by which of the following?