Question & Answer

Do tax-exempt organizations pay tax on dividends received from C corporations? Do tax-exempt organizations pay tax on business income earned? Explain.

How many times is income from a C corporation taxed if a retirement fund is the owner of the corporation’s stock? Explain.

If XYZ Corporation is a shareholder of BCD Corporation, how many times will  BCD’s before-tax income potentially be taxed? Has Congress provided any tax relief for this result? Explain.

Evaluate the following statement: “When dividends and long-term capital gains are taxed at the same rate, the overall tax rate on corporate income is the same whether the corporation distributes its after-tax earnings as a dividend or whether it reinvests the after-tax earnings to increase the value of the corporation.”

Assume Congress increases the dividend tax rate to the ordinary tax rate while leaving all other tax rates unchanged. How would this change affect the overall tax rate on corporate taxable income? 

Assume Congress increases individual tax rates on ordinary income while leaving all other tax rates unchanged. How would this change affect the overall tax rate on corporate taxable income? How would this change affect overall tax rates for owners of flow-through business entities?

Is it possible for the overall tax rate on corporate taxable income to be lower than the tax rate on flow-through entity taxable income? If so, under what conditions would you expect the overall corporate tax rate to be lower?

How does a corporation’s decision to pay dividends affect its overall tax rate? 

Is it possible for shareholders to defer or avoid the second level of tax on corporate income altogether? Briefly explain.

Who pays the second level of tax on a C corporation’s income? What is the tax rate applicable to the second level of tax, and when is it levied?

Who pays the first level of tax on a C corporation’s income? What is the tax rate applicable to the first level of tax? 

Did tax law changes effective in 2018 increase or decrease the amount of the double tax on C corporation income?  Explain.

Is business income allocated from a flow-through business entity to its owners self-employment income? Explain.

Daria is considering investing in one of two partnerships that will build, own, and operate a hotel. One is located in Canada and one is located in Arizona. Assuming both investments will generate the same before-tax rate of return, which entity should Daria invest in when considering the after-tax consequences of the investment?  Assume Daria’s marginal tax rate is 37 percent, she will be a passive investor in the business, and she will report the flow-through income from either entity on her tax return. Explain (ignore any foreign tax credit issues).

What is the qualified business income deduction, and how does it affect the tax rate on flow-through business entity income? 

For flow-through business entities with individual owners, how many times is flow-through entity income taxed, who pays the tax, and what is the tax rate? 

What types of business entities does the U.S. tax system recognize?

What are the differences, if any, between the legal and tax classifications of business entities?

Can unincorporated legal business entities ever be treated as corporations for tax purposes? Can legal corporations ever be treated as flow-through entities for tax purposes? Explain.

In general, how are unincorporated business entities classified for tax purposes?

Other than corporations, are there other legal business entities that offer liability protection? Are any of them taxed as flow-through entities? Explain.

How do legal corporations protect shareholders from liability? If you formed a small corporation, would you be able to avoid repaying a bank loan from your community bank if the corporation went bankrupt? Explain.

Why is it a nontax advantage for corporations to be able to trade their stock on the stock market? 

Explain how legal business entities differ in terms of the liability protection they provide their owners.

What is an operating agreement for an LLC? Are operating agreements required for limited liability companies? If not, why might it be important to have one?