CTP Business Taxation & Entity Structures Flashcards

A sole proprietor reports business income and expenses on which schedule attached to Form 1040?

Answer: Schedule C

Schedule C (Profit or Loss from Business) is used by sole proprietors to report business income and expenses on their individual return.

For federal tax purposes, how is a multi-member LLC treated by default?

Answer: As a partnership

A multi-member LLC is treated as a partnership by default under the check-the-box regulations and files Form 1065.

The personal holding company (PHC) tax applies when a corporation meets which two conditions?

Answer: More than 50% of stock owned by 5 or fewer individuals AND at least 60% of adjusted ordinary gross income is PHC income

The PHC tax under IRC §541 applies when more than 50% of stock is held by 5 or fewer individuals and at least 60% of adjusted ordinary gross income qualifies as PHC income.

When a shareholder's basis in S Corporation stock reaches zero, losses are next applied against:

Answer: The shareholder's basis in loans made to the corporation

After stock basis is exhausted, an S Corporation shareholder can deduct losses up to the basis of any direct loans they have made to the corporation.

A partnership's guaranteed payment to a partner is:

Answer: Deductible by the partnership and ordinary income to the recipient partner

Guaranteed payments are deductible by the partnership under IRC §707(c) and treated as ordinary income (subject to self-employment tax) by the receiving partner.

Which corporate reorganization type involves the acquisition of substantially all assets of one corporation by another for stock consideration?

Answer: Type C reorganization

A Type C reorganization under IRC §368(a)(1)(C) involves the acquisition of substantially all assets of the target corporation solely for voting stock of the acquiring corporation.