ExpertMedium1 markMultiple Choice
CPA · Question 24 · Area III: Entity Tax Planning
A taxpayer is forming a new business and expects losses for the first 3 years, followed by significant profits. The taxpayer wants to use the losses to offset their high personal income from other sources during the start-up years. Which entity type is most appropriate to achieve this tax goal?
A taxpayer is forming a new business and expects losses for the first 3 years, followed by significant profits. The taxpayer wants to use the losses to offset their high personal income from other sources during the start-up years. Which entity type is most appropriate to achieve this tax goal?
Answer options:
A.
C Corporation
B.
Single Member LLC electing C Corporation status
C.
Partnership with a C Corporation partner
D.
S Corporation or Partnership
How to approach this question
Identify the goal: Pass losses to owner. C Corps trap losses. Pass-throughs (S Corp, Partnership) pass losses to owners.
Full Answer
D.S Corporation or Partnership✓ Correct
Pass-through entities (S Corps, Partnerships) allow owners to deduct business losses on their personal returns (subject to limitations), offsetting other income. C Corporations retain losses as NOL carryforwards.
Common mistakes
Thinking C Corp losses pass through; confusing liability protection with tax treatment.
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