Question 1

The qualified business income deduction is determined at the partnership level and then passed through to each individual partner based on his or her partnership interest.

Accepted Answer

The qualified business income deduction is determined at the individual level, allowing each partner to claim the deduction on their personal tax return based on their share of qualified business income from the partnership.

Question 2

Which of the following statements, if any, correctly describe the status or nature of limited liability companies?

Accepted Answer

Limited liability companies (LLCs) can elect partnership tax status even if incorporated under state law, but this statement is not a comprehensive description of LLCs. LLCs are a type of business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protection of a corporation. One of the main reasons why the check-the-box Regulations were issued by the IRS was to provide guidance on how LLCs should be taxed. LLCs can elect to be taxed as a corporation, but this option might not be advantageous for every LLC. Statutes creating LLCs have been adopted by a majority of the states, not a minority.

Question 3

Mega Corporation has been operating successfully for a number of years and needs additional capital to meets its expansion strategy.Warren Tuffett, a wealthy businessman, contributes $100 million of cash in exchange for shares in Mega.Mega recognizes gross income for the contribution.

Accepted Answer

The contribution of cash by Warren Tuffett in exchange for shares in Mega is not recognized as gross income by Mega Corporation since it is a capital contribution and not revenue earned from its regular business operations.

Question 4

Jordan and his two brothers are equal owners in Taupe Partnership.If Jordan sells business property (basis of
$230,000; fair market value of $280,000) to Taupe for $280,000, he must recognize the $50,000 realized gain.

Accepted Answer

Jordan must recognize the $50,000 gain because the sale is to a partnership in which he is not a controlling partner (i.e., he owns less than 50%), and thus the transaction is treated as a sale to an unrelated party for tax purposes.

Question 5

The choice of entity decision is typically made many years after the business is formed.

Accepted Answer

The choice of entity decision is typically made at the time of formation, as it determines the legal structure of the business and affects factors such as liability, taxes, and ownership.

Question 6

Only a corporation that qualifies under state law can be treated as a corporation for Federal income tax purposes.

Accepted Answer

For federal income tax purposes, an entity may be treated as a corporation based on its characteristics and how it chooses to be classified under the IRS regulations, not solely on its qualification under state law.

Question 7

Partners can carry over partnership losses that exceed the basis in their partnership interests.

Accepted Answer

Partners can carry over partnership losses that exceed the basis in their partnership interests. However, they cannot use these losses to offset income from other sources.

Question 8

The holding period to the partnership of property contributed by a partner includes the period during which the property was held by the contributing partner.

Accepted Answer

According to the tax code, the holding period of property contributed to a partnership by a partner includes the period during which the partner held the property. This is true for both the contributing partner and any subsequent partner who receives an interest in the partnership.

Question 9

Orange Corporation generates current E&P of $40,000 and has accumulated E&P of $35,000 at the beginning of the current year.During the year, Orange makes a $120,000 distribution to its shareholders.Orange's accumulated E&P at year-end is negative.

Accepted Answer

The accumulated E&P at year-end cannot be negative. It must be zero or positive. The calculation would be:

Beginning accumulated E&P: $35,000 
Current year E&P: $40,000 
Total E&P available for distribution: $75,000

However, the $120,000 distribution exceeds the available E&P, resulting in a deficit of $45,000. Therefore, the accumulated E&P at year-end would be zero minus $45,000, which is negative $45,000. But this negative balance would be carried forward to the next year and not reflected directly on the current year's E&P calculation.

Question 10

Guaranteed payments are deductible by the partnership and are taxable to the partner receiving the payments.

Accepted Answer

Guaranteed payments are considered a form of compensation to a partner for services rendered to the partnership. As such, they are deductible by the partnership and are taxable to the partner receiving the payments as ordinary income.

Question 11

Jenny contributes land (adjusted basis of $300,000; fair market value of $280,000) and cash of $40,000 to the newly formed Green Partnership.Green will have a basis of $280,000 in the land.

Accepted Answer

The basis of the land contributed by Jenny will be its fair market value, which is $280,000, since it is less than her adjusted basis. The partnership will have a total basis of $320,000 ($280,000 for the land and $40,000 for the cash).

Question 12

Tammy operates a small manufacturing business that is organized as an S corporation.The business has gross receipts of $8 million.Tammy may use the cash method of accounting for her business inventory.

Accepted Answer

S corporations are allowed to use cash method of accounting for inventory if their gross receipts are less than $25 million over the past three years. As Tammy's business has gross receipts of $8 million, she may use cash method of accounting for her business inventory.

Question 13

Which of the following statements, if any, incorrectly characterize the check-the-box Regulations?

Accepted Answer

The answer of Which of the following statements, if any,...

Question 14

Bilbeaux Corporation is a calendar year corporation that starts business on January 1, 2019.Bibeaux files an election to be treated as a S corporation on April 2, 2020, when it files its tax return for 2019.Bilbeaux will be treated as an S corporation for 2019.

Accepted Answer

In order for an S corporation election to be effective for a specific tax year, it must be filed by the 15th day of the third month of that tax year. Therefore, Bilbeaux's election filed on April 2, 2020, would only be effective for tax years beginning in 2020 and later, not for the 2019 tax year.

Question 15

After years of successful business, Mega Corporation recently stopped operating.The shareholders are going to pivot the business strategy into a new direction but are awaiting a new capital injection.As a result, the corporation sat idle for the entire tax year and generated no taxable income.Mega does not need to file a Federal income tax return.

Accepted Answer

Even if a corporation has no taxable income, it is still required to file a Federal income tax return to report its activities for the year.

Question 16

A partnership's ordinary income or loss is computed without considering any charitable contributions.This item is separately stated and passes through to the individual partners.

Accepted Answer

Charitable contributions are separately stated items in a partnership's tax return and they pass through to individual partners. Therefore, the statement is true.

Question 17

The corporate form of business is never preferred from a tax perspective because of the inherent double taxation.

Accepted Answer

The statement is incorrect. The corporate form of business is often preferred from a tax perspective because of the potential tax savings and benefits, such as lower tax rates, the ability to deduct certain expenses, and limited liability protection for shareholders. While double taxation can be a drawback, there are ways to mitigate it, such as paying out dividends or structuring the business as an S corporation.

Question 18

If the basis of a partnership interest is exhausted, a partner can use loans made to the partnership to absorb excess losses.

Accepted Answer

The answer of If the basis of a partnership interest...

Question 19

The dividends received deduction can be limited to the dividends received deduction percentage multiplied by the taxable income of the receiving corporation.

Accepted Answer

This is true according to the Internal Revenue Code Section 243. The deduction cannot exceed the percentage limit based on the taxable income of the receiving corporation.

Question 20

A partner's basis in the partnership interest is increased by his or her share of the tax-exempt income received by the partnership.

Accepted Answer

A partner's basis in the partnership interest is increased by his or her share of the partnership's tax-exempt income, reflecting the partner's increased investment in the partnership due to the allocation of income that is not subject to tax at the partnership level.

Quiz 20: Corporations and Partnerships