Question 1

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: $\begin{array}{llr}
  \text {  Sales revenue} &\$500,000\
 \text {Interest income  } &6,000\
 \text { Long-term capital gain } &10,000\
 \text {Cost of goods sold  } &(250,000)\
 \text {Salary and wages  } &(75,000)\
 \text { other operating expenses } &(55,000)\
\end{array}$
 Waters distributed $25,000 to each of its shareholders during the year. If Mia has no other sources of income, what is her gross income for the year?

Accepted Answer

The answer of Waters Corporation is an S corporation with...

Question 2

Which of the following amounts are not subject to self-employment tax?

Accepted Answer

Limited partners are not involved in the daily operations of the partnership and are not considered self-employed, therefore their share of partnership income is not subject to self-employment tax. The other choices (A, C, and D) are subject to self-employment tax.

Question 3

Sue's 2020 net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year?

Accepted Answer

To find the gross wages, add the net pay and the federal income tax withheld: $23,205 + $4,500 = $27,705. Since this does not match any of the choices, the correct answer is B) $30,000, assuming other payroll taxes account for the difference.

Question 4

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?

Accepted Answer

Martha must pay both income tax and self-employment tax on the total amount of $141,200, which includes both the guaranteed payment and her distributive share of the partnership's income.

Question 5

Which of the following statements about partnerships is false?

Accepted Answer

Partnerships may consist of individuals, other partnerships, corporations, trusts, or any other legal entities.

Question 6

Kelly operates a sole proprietorship with qualified business income of $920,000. Her business paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis of $410,000. Compute Kelly's allowable QBI deduction before the taxable income limitation.

Accepted Answer

The QBI deduction is calculated as the lesser of (a) 20% of qualified business income ($920,000 x 20% = $184,000) or (b) the greater of:
- 50% of W-2 wages paid ($250,000 x 50% = $125,000)
- 25% of W-2 wages paid ($250,000 x 2.5% ) + 2.5% of the unadjusted basis of depreciable property ($410,000 x 2.5% = $10,250), which equals $20,250.
Since $125,000 is greater than $20,250, Kelly's QBI deduction is $125,000.

Question 7

In 2020, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?

Accepted Answer

Mike's salary already covers the Social Security tax up to the base amount, so he only owes Medicare tax on his self-employment income.

Question 8

Which of the following statements concerning partnerships is false?

Accepted Answer

A partner may be taxed on their share of the partnership's taxable income whether or not it is distributed to them. This is known as "phantom income" and can arise if the partnership earns taxable income but does not make cash distributions to its partners.

Question 9

Which of the following items would be separately stated instead of included in ordinary income when reported by a partnership?

Accepted Answer

All of these items would be separately stated when reported by a partnership. This means that they would be reported separately on the partner's Schedule K-1 form and not included in the partnership's ordinary income. Instead, they would be passed through to the partners individually to be reported on their personal tax returns.

Question 10

Hay, Straw and Clover formed the HSC Partnership, agreeing to share profits and losses equally. Clover will manage the business for which he will receive a guaranteed payment of $30,000 per year. Cash receipts and disbursements for the year were as follows $\begin{array}{lr}
\text { Net income from operations (before guaranteed payment) }&\$90,000\
\text {Guaranteed payment to Clover }&30,000\
\end{array}$
 What is Clover's share of the partnership's ordinary income and guaranteed payment?

Accepted Answer

First, subtract the guaranteed payment to Clover ($30,000) from the net income before guaranteed payment ($90,000) to get $60,000. This amount is then divided equally among the three partners, giving each $20,000 as their share of the ordinary income. Clover also receives the guaranteed payment of $30,000, making his total $50,000, but the question specifically asks for the split between ordinary income and guaranteed payment, which are $20,000 and $30,000, respectively.

Question 11

During the current year, Margie earned wage income of $300,000. If Margie is single, which of the following statements regarding her Medicare tax liability is true?

Accepted Answer

Under the Affordable Care Act, individuals who earn more than $200,000 ($250,000 for married couples filing jointly) are subject to an additional Medicare tax of 0.9 percent on their wages above that threshold. Therefore, Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $200,000.

Question 12

Alice is a partner in Axel Partnership. Her share of the partnership's current ordinary business income was $100,000. She received a $60,000 cash distribution from the partnership on December 1. Alice qualifies for the QBI deduction, without regard to the wage or taxable income limitations. Assuming that Alice's marginal tax rate is 37%, calculate her after-tax cash flow from the partnership this year.

Accepted Answer

The answer of Alice is a partner in Axel Partnership....

Question 13

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income?

Accepted Answer

To calculate the net effect on William's taxable income, we combine his personal gains and losses with those reported on Schedule K-1. For capital gains and losses: William's personal capital gain of $4,500 minus his share of capital loss from the LLC of $1,200 equals a net capital gain of $3,300. For Section 1231 gains and losses: William's personal Section 1231 loss of $15,000 plus his share of Section 1231 gain from the LLC of $3,000 equals a net Section 1231 loss of $12,000.

Question 14

During 2020, Elena generated $24,500 of earnings on Schedule C. If Elena had no other earned income, how much self-employment tax will she owe on her Schedule C net profit?

Accepted Answer

The answer of During 2020, Elena generated $24,500 of earnings...

Question 15

During 2020, Scott Howell received a salary of $145,000. The social security base amount for 2020 was $137,700. How much payroll tax should have been withheld from Scott's salary for 2020?

Accepted Answer

The answer of During 2020, Scott Howell received a salary...

Question 16

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?

Accepted Answer

Only the ordinary business income and guaranteed payment are subject to self-employment tax for a general partner. Capital gains and dividend income are not subject to self-employment tax.

Question 17

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: $\begin{array}{llr}
  \text {  Sales revenue} &\$500,000\
 \text {Interest income  } &6,000\
 \text { Long-term capital gain } &10,000\
 \text {Cost of goods sold  } &(250,000)\
 \text {Salary and wages  } &(75,000)\
 \text { other operating expenses } &(55,000)\
\end{array}$

Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year.

Accepted Answer

Mia's adjusted tax basis at the end of the year is calculated by starting with her initial basis ($50,000), adding her share of the corporation's income, and subtracting her share of the distribution. The corporation's income is calculated as follows: Sales revenue ($500,000) + Interest income ($6,000) + Long-term capital gain ($10,000) - Cost of goods sold (-$250,000) - Salary and wages (-$75,000) - Other operating expenses (-$55,000) = $136,000. Each shareholder's share of the income is half of $136,000, which is $68,000. Subtracting Mia's distribution of $25,000 from her share of the income ($68,000) and adding this net amount to her initial basis ($50,000) gives her an adjusted basis of $93,000 at the end of the year.

Question 18

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: $\begin{array}{llr}
  \text {  Sales revenue} &\$500,000\
 \text {Interest income  } &6,000\
 \text { Long-term capital gain } &10,000\
 \text {Cost of goods sold  } &(250,000)\
 \text {Salary and wages  } &(75,000)\
 \text { other operating expenses } &(55,000)\
\end{array}$
 Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated.

Accepted Answer

- Rental income: $40,000
- Consulting income: $35,000
- Interest income: $10,000 (separately stated)
- Cost of goods sold: $30,000
- Depreciation expense: $19,000
- Long-term capital gain: $12,000 (separately stated)

Total ordinary income: $120,000

Question 19

Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax?

Accepted Answer

Limited partners typically do not have to pay self-employment taxes on their share of partnership income. This is because limited partners are not actively involved in the day-to-day operations of the business. Therefore, the ordinary business income, long-term capital gain, and dividend income reported on Debbie's Schedule K-1 are not subject to self-employment tax.

Question 20

Armond earned $10,000 of profit from a sole proprietorship in 2020. If he also has $140,000 of salary income, how much self-employment tax will he owe?

Accepted Answer

The answer of Armond earned $10,000 of profit from a...

Quiz 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations