CTP CTP Business Taxation & Entity Structures 1 — Questions and Answers
Question 1: Which business entity type is subject to double taxation in the United States?
- C Corporation (Correct answer)
- S Corporation
- Partnership
- LLC taxed as disregarded entity
Correct answer: C Corporation
C Corporations pay corporate-level income tax, and shareholders also pay tax on dividends received, resulting in double taxation.
Question 2: An S Corporation shareholder must meet which requirement to avoid paying self-employment tax on their share of business income?
- The shareholder must be an active employee receiving reasonable compensation (Correct answer)
- The shareholder must own at least 50% of the corporation
- The shareholder must materially participate for 500+ hours
- The shareholder must be a U.S. citizen
Correct answer: The shareholder must be an active employee receiving reasonable compensation
S Corporation shareholders who are employees must receive reasonable compensation subject to payroll taxes; remaining pass-through income is not subject to self-employment tax.
Question 3: A partnership's basis in property contributed by a partner is generally equal to:
- The contributing partner's adjusted basis in the property (Correct answer)
- The fair market value at the date of contribution
- The original cost of the property
- The lower of FMV or adjusted basis
Correct answer: The contributing partner's adjusted basis in the property
Under IRC §723, a partnership takes a carryover basis equal to the contributing partner's adjusted basis in the contributed property.
Question 4: Which IRS form is used by a C Corporation to file its annual federal income tax return?
- Form 1120 (Correct answer)
- Form 1120-S
- Form 1065
- Form 1040
Correct answer: Form 1120
C Corporations file Form 1120 to report their income, deductions, and tax liability to the IRS each year.
Question 5: Under the check-the-box regulations, a single-member LLC is treated as which entity by default for federal tax purposes?
- Disregarded entity (sole proprietorship) (Correct answer)
- C Corporation
- S Corporation
- Partnership
Correct answer: Disregarded entity (sole proprietorship)
By default under Treas. Reg. §301.7701-3, a single-member LLC is disregarded and its activity is reported on the owner's personal return.
Question 6: Which of the following best describes the accumulated earnings tax?
- A tax imposed on C Corporations that retain earnings beyond reasonable business needs to avoid dividend taxation (Correct answer)
- A tax on S Corporation distributions exceeding shareholder basis
- A penalty for late payment of corporate estimated taxes
- A tax on unreported foreign earnings held abroad
Correct answer: A tax imposed on C Corporations that retain earnings beyond reasonable business needs to avoid dividend taxation
The accumulated earnings tax under IRC §531 penalizes C Corporations that accumulate earnings beyond reasonable business needs to shield shareholders from dividend tax.
CTP CTP Business Taxation & Entity Structures 1
Which business entity type is subject to double taxation in the United States?