CTP CTP Business Taxation & Entity Structures 2 — Questions and Answers
Question 1: A sole proprietor reports business income and expenses on which schedule attached to Form 1040?
- Schedule C (Correct answer)
- Schedule E
- Schedule F
- Schedule B
Correct 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.
Question 2: For federal tax purposes, how is a multi-member LLC treated by default?
- As a partnership (Correct answer)
- As a C Corporation
- As an S Corporation
- As a disregarded entity
Correct 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.
Question 3: The personal holding company (PHC) tax applies when a corporation meets which two conditions?
- More than 50% of stock owned by 5 or fewer individuals AND at least 60% of adjusted ordinary gross income is PHC income (Correct answer)
- More than 50% of stock owned by 5 or fewer individuals AND the corporation operates in a regulated industry
- Less than 35 shareholders AND the corporation has undistributed earnings
- More than 100 shareholders AND passive income exceeds 75% of gross income
Correct 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.
Question 4: When a shareholder's basis in S Corporation stock reaches zero, losses are next applied against:
- The shareholder's basis in loans made to the corporation (Correct answer)
- The corporation's retained earnings
- The shareholder's other passive activity gains
- The shareholder's capital gain carryforward
Correct 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.
Question 5: A partnership's guaranteed payment to a partner is:
- Deductible by the partnership and ordinary income to the recipient partner (Correct answer)
- Not deductible by the partnership and tax-free to the recipient partner
- A capital gain to the recipient partner
- Subject to the passive activity loss rules at the partnership level
Correct 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.
Question 6: Which corporate reorganization type involves the acquisition of substantially all assets of one corporation by another for stock consideration?
- Type C reorganization (Correct answer)
- Type A reorganization
- Type B reorganization
- Type D reorganization
Correct 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.
CTP CTP Business Taxation & Entity Structures 2
A sole proprietor reports business income and expenses on which schedule attached to Form 1040?