The Three Crosby Children Intend to Form a Business

question 65

Multiple Choice

The three Crosby children intend to form a business. The business will borrow $900,000 from a local bank. Which of the following statements is true?

• A) Regardless of whether the business is a partnership or an S corporation, the owners will include the bank debt in the tax basis of their ownership interests.
• B) From a liability standpoint, the owners should be indifferent as to whether they are a general partnership or an S corporation.
• C) If the business is an S corporation, the owners can allocate income and losses in any reasonable manner.
• D) If the business is a partnership the owners can allocate income and losses in any reasonable manner.

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Definitions:

Lease Payments

Regular payments made by a lessee to a lessor for the use of some asset.

After-Tax Lease Payment

The lease payment amount minus any tax savings resulting from deductible lease expenses.

Tax Rate

The rate at which a person or business is taxed on their earnings or profits.

Borrowed Funds

Money that is borrowed from banks or other lenders that must be repaid, often with interest, according to agreed upon terms.