Deck 11: Sole Proprietorships and Flow-Through Entities

Question 1

Once established at entry, a partner's basis account does not change.

Answer 1

False

Question 2

A sole proprietorship must use the cash method of accounting.

Answer 2

False

Question 3

Only 50 percent or more of the shareholders of an S corporation must consent to the S election.

Answer 3

False

Question 4

A limited liability company that has only one member must be taxed as a sole proprietorship.

Question 5

A general partner in a limited partnership is not protected from the partnership's liabilities.

Question 6

S corporations never pay any income taxes.

Question 7

A limited partnership must have a general partner.

Question 8

The owners of a limited liability company are called members.

Question 9

The basis limitation rules are applied before the at-risk and passive loss limitation rules.

Question 10

Recourse debts can only be satisfied with the property used as collateral.

Question 11

A loss is never recognized on a nonliquidating distribution from a partnership.

Question 12

An S corporation shareholder can only deduct losses of the S corporation to the extent he or she has positive stock basis.

Question 13

Limited liability companies are generally taxed as partnerships unless the company elects to be taxed as a corporation.

Question 14

The limited liability partnership form of business offers partners protection from all partnership debts.

Question 15

The income from a general partnership is passive income to all partners..

Question 16

The entity concept of a partnership views the partnership as separate from the partners and permits certain transactions between the partner and the partnership.

Question 17

A flow-through entity aggregates all its income and subtracts all expense items for reporting its net income.

Question 18

A sole proprietor is considered a self-employed individual.

Question 19

The AAA of the S corporation is a corporate-level account.

Question 20

Partners pay taxes on their share of all the partnership net income annually.

Question 21

A sole proprietor:

A)deducts his or her retirement plan contributions from business income.
B)may not pay a salary to a related party who works in the business.
C)deducts employee fringe benefit costs from business income.
D)files a separate tax return for business income.

Question 22

Sam has $80,000 of net income from his sole proprietorship in 2019.What is his deduction for AGI for self-employment taxes?

A)$9,826
B)$6,120
C)$5,652
D)$4,913

Question 23

Which of the following is not a separately stated item on a partnership's Schedule K?

A)A $5,000 long-term capital loss
B)$20,000 of Section 1245 recapture
C)$3,000 charitable contribution
D)$5,000 bond interest income

Question 24

Carol owns 40 percent of CJ Partnership.The partnership reports $170,000 of revenue, $60,000 cost of goods sold, and $70,000 of other expenses that include a $2,000 charitable contribution and a $5,000 Section 179 deduction.CJ Partnership also paid $1,500 of doctor bills for Carol, What is the ordinary business income reported on line 1 of Carol's Schedule K-1?

A)$40,000
B)$20,300
C)$18,800
D)$16,000

Question 25

There are special rules for an S corporation that must be followed when the corporation decides to liquidate that differs from the rules for C corporations.

Question 26

At the beginning of the year, Jill's basis in her 40 percent limited partnership interest was $10,000.During the year, the partnership reported a loss of $90,000 and the partnership obtained a $40,000 recourse loan on some machinery.How much loss may Jill deduct if she has $40,000 of passive income?

A)$10,000
B)$16,000
C)$26,000
D)$36,000

Question 27

A person satisfies material participation requirements only through current activity.

Question 28

Which of the following cannot be taxed as a partnership?

A)An accounting PLLC
B)An LLC with only one member
C)An LLC owning only rental property
D)A partnership with no limited partners

Question 29

Which of the following is not a characteristic of a partnership?

A)Must meet 80 percent control requirement for formation to be tax free
B)Cash distributions to partners may be taxable
C)Loss is only recognized on liquidating distributions
D)General partners' salaries are subject to FICA taxes.

Question 30

Sabrina is single and has taxable income of $200,725 of which $140,000 is attributable to her consulting sole proprietorship.She paid W-2 pages to her employees of $75,000.If the threshold amount for 2019 is $160,725, what is Sabrina's qualified business income deduction?

A)$39,500
B)$28,000
C)$20,360
D)$5,600

Question 31

Active participation requires a higher level of activity than material participation.

Question 32

Manuel purchased a 30% interest in MAC general partnership for $40,000 cash and materially participated in the partnership for the entire year.The partnership had $50,000 in liabilities when Manuel purchased his interest and the liabilities increased $10,000 during the year.If the partnership incurred a $300,000 loss this year, how much of this loss can Manuel deduct?

A)0
B)$40,000
C)$58,000
D)$65,000

Question 33

Kylie is single and has taxable income of $320,000 of which $130,000 is attributable to her consulting sole proprietorship.She paid W-2 wages to her employees of $75,000.If the threshold amount for 2019 is $160,725, what is Kylie's qualified business income deduction?

A)$0
B)$11,000
C)$26,000
D)$32,500

Question 34

Which of the following is not a characteristic of sole proprietorships?

A)Owners pay self-employment taxes
B)Formation is always tax-free
C)Distributions of entity income are tax-free
D)Loss is recognized on liquidation

Question 35

Samantha and Ashley form the MAS General Partnership.Samantha contributed $20,000 cash in exchange for her 50 percent partnership interest.During the first year of partnership operations, the partnership reported net taxable income of $10,000, Samantha withdrew $8,000 cash from the partnership, and the partnership took out an $18,000 loan on the last day of the year.Samantha's adjusted basis for her partnership interest at year end is:

A)$38,000
B)$30,000
C)$26,000
D)$17,000

Question 36

Ray, Ronnie and Joe are partners in a limited partnership.Ray and Ronnie, the limited partners, each own 45 percent of the partnership and Joe, the general partner, owns the other 10 percent.The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt.What effect do the debts have on Ray's basis?

A)Increase of $22,500
B)Increase of $25,000
C)Increase of $45,000
D)Increase of $67,500

Question 37

Ray, Ronnie and Joe are partners in a limited partnership.Ray and Ronnie, the limited partners, each own 45 percent of the partnership and Joe, the general partner, owns the other 10 percent.The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt.What is the effect on Joe's basis for these debts?

A)Increases by $155,000
B)Increases by $105,000
C)Increases by $100,000
D)Increases by $15,000

Question 38

Which of the following is not a characteristic of a partnership?

A)Must be formed under state law
B)Formation is generally tax free except for services received for a partnership interest
C)Distributions of entity income are tax-free
D)Loss is never recognized on a nonliquidating distribution

Question 39

Which of the following is not an acceptable partnership tax year?

A)The tax year used by any principal partner
B)The tax year used by the partners who own a majority interest
C)A tax year that results in only a 2-month deferral of income for the partners
D)C's tax year if C owns more than 50 percent of the partnership

Question 40

A sole proprietorship:

A)must be owned by an individual.
B)provides basic liability protection for the owner.
C)must use the cash method of accounting.
D)can pay the owner a salary.

Question 41

Jose, who is single, is allocated $510,000 of income and $788,000 of deductions from KYX General Partnership resulting in a $278,000 loss allocated to him for 2019.Jose's basis in the partnership is $300,000.How much of this loss can Jose deduct in 2019?

A)0
B)$255,000
C)$278,000
D)$300,000

Question 42

Michael was a partner in the M&M Partnership until November 1, when he received a liquidating distribution of investment property with a tax basis of $28,000 and a fair market value of $75,000.Prior to this distribution, his tax basis in his partnership interest was $40,000.What is his tax basis in the property received from the partnership?

A)$75,000
B)$40,000
C)$28,000
D)0

Question 43

When does a partner recognize gain on a distribution?

A)In a liquidating distribution when the fair market value of the property received exceeds partnership interest basis.
B)In a nonliquidating distribution and the property received exceeds the fair market value of the partnership interest.
C)In a nonliquidating distribution and the cash received exceeds the basis of the partnership interest.
D)Gain is not recognized until the property received for the partnership interest is sold.

Question 44

Mario, who is married filing a joint return, is allocated $510,000 of income and $788,000 of deductions from Perez General Partnership resulting in a $278,000 loss allocated to him for 2019.Mario's basis in the partnership is $300,000.How much of this loss must Mario carry forward to 2020?

A)$278,000
B)$250,000
C)$28,000
D)0

Question 45

Sarah is a 25% partner in a partnership that produces $750,000 ordinary income from manufacturing a product, her share of partnership income is $187,500.The partnership paid $150,000 of W-2 wages.Sarah is single and has taxable income of $500,000.What is Sarah's qualified business income deduction for 2019?

A)$7,500
B)$18,750
C)$30,000
D)$45,000

Question 46

James and Jerry are equal partners in JJ partnership.James works full-time in the business and receives a $40,000 guaranteed salary from the partnership.Jerry is to receive the first $20,000 of profit before the remainder is divided equally between James and Jerry.If the accounting income before either of these payments is $30,000, what is the amount of income or loss allocated to Jerry?

A)0
B)$10,000
C)($5,000)
D)($10,000)

Question 47

Logan's basis in his partnership interest is $20,000 when he receives a pro rata nonliquidating distribution from the partnership of $22,000 cash and inventory with a basis of $2,000 and fair market value of $3,000.What is Logan's recognized gain on this distribution?

A)0
B)$2,000
C)$3,000
D)$4,000

Question 48

Stewart is a 30 percent general partner in STP Partnership.His basis in his partnership interest at the beginning of the year was $40,000.During the year, the partnership reported a $30,000 loss and paid off a $120,000 recourse debt.What is Stewart's year-end basis in his partnership interest?

A)0
B)$4,000
C)$31,000
D)$67,000

Question 49

Victoria is a 50 percent partner in VR Partners.Her partnership tax basis is $28,000 on December 31 when she receives a current distribution of property with a partnership tax basis of $25,000 and a fair market value of $46,000.What is Victoria's tax basis in the distributed property?

A)$14,000
B)$25,000
C)$28,000
D)$46,000

Question 50

Natalie, a partner in a real estate partnership, receives a nonliquidating distribution consisting of $25,000 cash and property (a Section 1231 asset) valued at $60,000 in July.The partnership's tax basis in the property is $18,000 and Natalie's tax basis in her partnership interest is $21,000.What is Natalie's recognized gain on the distribution and her tax basis in the property received?

A)Zero gain; zero basis in the property.
B)$4,000 gain; zero basis in the property.
C)$22,000 gain; $18,000 basis in the property.
D)Zero gain; $18,000 basis in the property.

Question 51

Jose, who is single, is allocated $510,000 of income and $788,000 of deductions from KYX General Partnership resulting in a $278,000 loss allocated to him for 2019.Jose's basis in the partnership is $300,000.How much of this loss must Jose carry forward to 2020?

A)$278,000
B)$255,000
C)$23,000
D)0

Question 52

Amber has a tax basis of $67,000 in her partnership interest in Lightfoot Partnership, which consists of her $27,000 net contribution to partnership capital and her $40,000 share of partnership debt.Amber receives a distribution of land (a capital asset) with a tax basis of $39,000 and a fair market value of $106,000 in complete liquidation of her partnership interest.The property is not encumbered by any of the partnership's liabilities.What is Amber's tax basis for the distributed property?

A)$27,000
B)$39,000
C)$67,000
D)$106,000

Question 53

Calvin sells his 40 percent interest in a partnership with a $70,000 basis for $75,000.The partnership has two assets, inventory valued at $100,000 with a $50,000 basis and investments valued at $87,500 that have a basis of $125,000.How will Calvin report the sale of the partnership interest?

A)$5,000 capital loss
B)$20,000 ordinary income
C)$20,000 ordinary income; $15,000 capital loss
D)$5,000 capital gain

Question 54

Noah, a partner in the LMN Partnership, had a tax basis in his partnership interest of $47,000 when he received a liquidating distribution of $25,000 cash and real property (a Section 1231 asset) with a tax basis of $15,000 to the partnership and a fair market value of $75,000.How much gain or loss does Noah recognize on the distribution and what is his basis in the property received?

A)Zero gain or loss recognized; $15,000 basis in the property.
B)Zero gain or loss recognized; $22,000 basis in the property.
C)$53,000 gain recognized; $75,000 basis in the property.
D)$7,000 loss recognized; $15,000 basis in the property.

Question 55

Nicole, a partner in NAB Partners, has a tax basis in her partnership interest of $47,000 when she completely liquidates her interest in the partnership.Nicole receives a distribution of $20,000 cash and Section 1231 property with a tax basis to the partnership of $18,000 and a fair market value of $12,000.What is Nicole's recognized tax loss on the liquidating distribution?

A)0
B)($9,000)
C)($15,000)
D)($27,000)

Question 56

Jacob is a partner in the JB Partnership with a basis in his partnership interest is $35,000.He receives a nonliquidating distribution of $25,000 cash and real property with a partnership basis of $18,000 and a fair market value of $30,000.How much taxable gain will Jacob recognize on the distribution?

A)0
B)$8,000
C)$20,000
D)$43,000

Question 57

Logan's basis in his partnership interest is $20,000 when he receives a pro rata nonliquidating distribution from the partnership of $22,000 cash and inventory with a basis of $2,000 and fair market value of $3,000).What is Logan's basis for the inventory he received?

A)0
B)$1,000
C)$2,000
D)$3,000

Question 58

Juan's interest in the Gonzalez Partnership is liquidated when his basis in the interest is $30,000.He receives a liquidating distribution of $20,000 cash and inventory with a basis of $8,000 and a fair market value of $30,000.Juan will recognize:

A)No gain or loss
B)$2,000 loss
C)$10,000 loss
D)$20,000 gain

Question 59

The Dominguez Partnership has the following assets on December 31: $\begin{array}{lrr}&\underline{\text { Basis }}&\underline{\text { Fair Market Value }}\\\text { Cash } & \$ 10,000 & \$ 10,000 \\\text { Receivables } & 5,000 & 10,000 \\\text { Inventory } & 20,000 & 30,000\end{array}$
Antonio is a 20 percent partner and has a $7,000 basis in his partnership interest.The partnership has no liabilities.Antonio receives a liquidating distribution of $10,000 cash.What is the amount and character of the gain or income Antonio recognizes on this liquidating distribution?

A)0
B)$1,000
C)$2,000
D)$3,000

Question 60

Nathan's basis for his interest in the Nabors Partnership was $24,000.In complete liquidation of his interest, Nathan received cash of $4,000 and investment land having a fair market value of $40,000.Nabors Partnership's adjusted basis for this land was $15,000.Nathan's basis for this land is:

A)$9,000
B)$15,000
C)$16,999
D)$20,000

Question 61

If a shareholder does not have sufficient stock basis to deduct his or her share of an S corporation's losses and deductible items, what are the tax consequences?

A)The excess losses and deductions may be carried back 3 years and then forward up to 5 years to offset other income items of identical character.
B)The excess losses and deductions are suspended until the corporation's or shareholder's future activities generate sufficient new basis against which to deduct the losses
C)The excess losses and deductions may not be deducted at any time and can never provide tax benefit.
D)None of the above.

Question 62

The S corporation income tax return includes all of the following except

A)a Schedule K.
B)an M-1 Schedule.
C)a retained earnings reconciliation.
D)a reconciliation of the AAA account.

Question 63

Which of the following is not a characteristic of an S corporation?

A)Must be formed under state law
B)The transfer of property for stock is always tax-free
C)A shareholder's share of ordinary income increases his or her stock basis
D)The shareholder never recognizes loss on a nonliquidating distribution

Question 64

An S election terminates

A)when a shareholder dies.
B)when there is a nonresident alien shareholder
C)when the S corporation invests in a C corporation
D)when an S corporation has excess passive income for two years

Question 65

Corbin has a $15,000 basis in his 50 percent ownership in an S corporation and loaned the corporation $5,000 last year.The corporation has $30,000 of other debt.This year the corporation reported a $100,000 loss.How much of this loss may Corbin deduct this year?

A)$15,000
B)$20,000
C)$35,000
D)$50,000

Question 66

Which of the following does not affect the basis of S corporation stock?

A)Tax-exempt income
B)Nondeductible expenses
C)Capital gains
D)All affect stock basis

Question 67

Which of the following may not be partners in a partnership?

A)Corporation
B)S corporation
C)LLC
D)All may be partners.

Question 68

Leo is a 50% shareholder in Small Corporation, an S Corporation from its incorporation.Leo receives a property distribution when his basis in his Small stock is $45,000.The property distributed has a fair market value of $45,000 and a basis to Small Corporation of $25,000.What is the gain recognized by Small Corporation as a result of the distribution and what is Leo's basis for the property he received?

A)0 gain and $25,000 basis
B)0 gain and $45,000 basis
C)$20,000 gain and $25,000 basis
D)$20,000 gain and $45,000 basis

Question 69

Kevin and Jennifer are 60% and 40% shareholders, respectively, in an S corporation.If the corporation reports $10,000 of nonseparately stated income and $2,000 of capital gain, how much is allocated to Jennifer?

A)$4,000 income only
B)$4,000 income and $2,000 of capital gain
C)$4,000 income and $800 of capital gain
D)$6,000 income and $2,000 of capital gain

Question 70

Which of the following statements does not apply to a qualifying S corporation?

A)It may have 55 shareholders
B)It may have a resident alien shareholder
C)It may only have one class of stock outstanding
D)It is subject to the corporate income tax

Question 71

Lopez Corporation, an existing C corporation, wants to make an S election.If it has a June 30 year end, by what date must it make its election to be effective as of July 1, 2020?

A)March 15, 2020
B)June 30, 2020
C)September 15, 2020
D)December 30, 2020

Question 72

What is the effect on the AAA if an S corporation distributes a piece of property valued at $10,000 with a $5,000 basis to 50 percent shareholder and $10,000 cash to the other 50 percent shareholder in a nonliquidating distribution?

A)$10,000 net increase
B)$5,000 net increase
C)$15,000 net decrease
D)$20,000 net decrease

Question 73

Duet Co.is a calendar year S Corporation owned equally by Patricia and Scott.Duet Co.had taxable income of $40,000 for the current year.Patricia and Scott each received distributions from Duet Co.of $5,000.What is Patricia's taxable income from Duet Co.for the current year?

A)0
B)$5,000
C)$20,000
D)$25,000

Question 74

Which of the following is not a potential S corporation tax?

A)The personal holding company tax
B)The built-in gains tax
C)The LIFO recapture tax
D)The excess net passive investment income tax

Question 75

Greg and Samantha plan to establish a business in which they will both materially participate.They are both in the 32% marginal tax bracket.Although they expect the business to be very successful in the long-run, they project losses of approximately $100,000 for each of the first five years.Due to potential environmental concerns, limited liability is very important for the owners.Which form of business entity should they select considering both tax and nontax factors?

A)General partnership
B)Limited partnership
C)S corporation
D)It makes no difference; any of the above should satisfy Greg and Samantha.

Question 76

Mary purchased 40 percent of an S corporation on February 28 of the current year and sells a 20 percent interest on November 30.If the corporation reports $10,000 of income for the year, what income does it report on Mary's Schedule K-1.

A)$7,534
B)$3,014
C)$4,000
D)$3,184

Question 77

Jonathan's basis in his S corporation stock is $4,000 at the end of the year before the corporation reports his $1,500 share of income and distributes $2,500 cash to him.What is his basis at the beginning of the following tax year?

A)0
B)$2,500
C)$3,000
D)$4,000

Question 78

Which of the following is not a requirement to make an S election?

A)Maximum 100 shareholders
B)One class of stock
C)Shareholders must be U.S.citizens
D)It must be a domestic corporation

Question 79

The accumulated adjustment account

A)is a shareholder account.
B)can be reduced below zero by an excess distribution.
C)determines when there is a tax-free distribution during the post-termination period.
D)is important in applying loss limitation rules.

Question 80

What is Alexander's net gain or loss on the liquidation of his 100 percent interest in an S corporation if the corporation distributes the following three assets to him in exchange for his stock: $\begin{array} { l l l } \underline{\text { Asset }} &\underline{ \text { FMV } } & \underline{\text { Adj. Basis }} \\\text { Inventary } & \$ 20,000 & \$ 13,000 \\\text { Machines } & \$ 50,000 & \$ 60,000 \\\text { Building } & \$ 100,000 & \$ 75,000\end{array}$ Prior to any distributions, Alexander's basis in his S corporation interest was $160,000.

A)($12,000)
B)($22,000)
C)$10,000
D)$22,000