Question

Which of the following statements regarding the ways tax legislation may be designed to help encourage businesses is true?

1) Shareholders of small business corporations are not allowed to make a special election that allows profits of the corporation to flow through to its shareholders.
2) Shareholders of small business corporations are not allowed to make a special election that allows losses of the corporation to flow through to its shareholders.
3) Tax legislation does not allow a shareholder in a small business corporation to take an ordinary deduction for any loss recognized on the stock investment.
4) Tax legislation is never designed to encourage small businesses.
5) Shareholders of small business corporations are allowed to make a special election that allows profits and losses of the corporation to flow through to its shareholders, avoiding the corporate income tax.

Answer 1

Option 5 is true: Shareholders of small business corporations are allowed to make a special election that allows profits and losses of the corporation to flow through to its shareholders, avoiding the corporate income tax.

Step-by-step explanation:

The true statement regarding the ways tax legislation may be designed to help encourage businesses is option 5: Shareholders of small business corporations are allowed to make a special election that allows profits and losses of the corporation to flow through to its shareholders, avoiding the corporate income tax.

This election is called the S corporation election, which allows small business corporations to be treated as pass-through entities for tax purposes. This means that the corporation itself is not taxed at the corporate level, and instead, the profits and losses are passed through to the shareholders, who report them on their individual tax returns.

By allowing the flow-through of profits and losses, tax legislation encourages small businesses by providing them with flexibility and tax advantages to help promote their growth and success.