Question 1

A corporate shareholder usually cannot be held personally liable for the debts arising from the corporate business.

Accepted Answer

This is one of the key benefits of incorporating a business as it provides limited liability protection to the shareholders.

Question 2

Mr. Dilly has expenses relating to a qualifying home office of $14,320. The taxable income generated by the business before any deduction of home office expenses was $13,700. His allowable home office deduction is $14,320.

Accepted Answer

The allowable home office deduction cannot exceed the taxable income generated by the business before the deduction of home office expenses, so it would be limited to $13,700 in this case, not the full $14,320 of expenses.

Question 3

Gabriel operates his business as a sole proprietorship. This year the business incurred an operating loss. The loss can be used to offset other income he earned during the year.

Accepted Answer

As a sole proprietorship, the business's income and losses are considered the same as Gabriel's personal income and losses. Therefore, the operating loss can be used to offset other income he earned during the year.

Question 4

Partners receiving guaranteed payments are not required to pay self-employment tax on such payments.

Accepted Answer

Partners receiving guaranteed payments are still subject to self-employment tax on such payments, as they are considered a form of compensation for services rendered to the partnership.

Question 5

A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest.

Accepted Answer

According to the tax code, a partner's share of partnership profits is allocated to the partner's tax return and increases their tax basis in the partnership interest.

Question 6

Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.

Accepted Answer

Partnerships are pass-through entities, meaning that the profits and losses are passed through to the partners and reported on their personal income tax returns. Even if no cash is distributed, the partners will still report their share of the partnership's net profit on their personal tax returns.

Question 7

In contrast to a partnership, every member of an LLC has limited liability for the LLC's debts.

Accepted Answer

In a limited liability company (LLC), the members are not personally liable for the company's debts and obligations beyond their initial investment. This is different from a partnership where each partner has unlimited personal liability for the partnership's debts.

Question 8

Matthew earned $150,000 in wages during 2016. FICA taxes withheld by his employer would have been $11,475.

Accepted Answer

Without knowing the specific details of Matthew's FICA tax rate and any other deductions or credits he may be eligible for, it is impossible to determine if $11,475 is the correct amount of FICA taxes withheld.

Question 9

Partners may deduct on their individual income tax returns an amount equal to 100% of self-employment tax paid.

Accepted Answer

The answer of Partners may deduct on their individual income...

Question 10

A partnership is an unincorporated business activity owned by at least two taxpayers.

Accepted Answer

A partnership is a type of business entity in which two or more individuals own and manage the business together. It is a pass-through entity, meaning that the partnership itself does not pay taxes on its income, but rather the individual partners report their share of the partnership's income on their individual tax returns.

Question 11

Businesses are required by law to withhold federal income tax from the compensation paid to their employees.

Accepted Answer

Yes, businesses are required by law to withhold federal income tax from the compensation paid to their employees. These taxes are then submitted to the Internal Revenue Service (IRS) on behalf of the employees.

Question 12

A guaranteed payment may be designed to compensate a partner for personal services rendered to the partnership.

Accepted Answer

A guaranteed payment is a predetermined amount paid to a partner for personal services rendered to the partnership. It is not a distribution of profit or loss and is typically outlined in the partnership agreement.

Question 13

On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable.

Accepted Answer

The cash distribution is only taxable to the extent that it exceeds Jefferson's basis in his partnership interest. As Jefferson's basis was $75,000 and the distribution was only $28,000, none of it would be taxable.

Question 14

The allocations made to a partner are reported on Schedule K-1 and are referred to as his or her distributive share of partnership items.

Accepted Answer

This is correct. The allocations made to a partner are reported on Schedule K-1 and are referred to as his or her distributive share of partnership items.

Question 15

A partner's distributive share of partnership nondeductible expenses does not decrease his or her tax basis in the partnership interest.

Accepted Answer

A partner's distributive share of partnership nondeductible expenses does decrease their tax basis in the partnership interest, as these expenses reduce the partner's basis in the partnership.

Question 16

Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments.

Accepted Answer

Payroll taxes are not withheld from payments made to independent contractors as they are responsible for paying their own taxes. However, businesses must still report payments made to independent contractors on Form 1099 and provide a copy to the contractor and the IRS.

Question 17

Haddie's Hats is a regular corporation. The business must file an income tax return each year to report its taxable income or loss and pay any related taxes.

Accepted Answer

As a regular corporation, Haddie's Hats is required to file an income tax return each year and pay any applicable taxes on its taxable income or loss.

Question 18

The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year.

Accepted Answer

FICA taxes have a wage base limit for Social Security taxes, meaning there's a maximum amount of earnings subject to the Social Security portion, but Medicare taxes apply to all wages without a limit.

Question 19

A partnership deducts guaranteed payments paid to its partners in computing ordinary income, and partners report guaranteed payments received as ordinary income.

Accepted Answer

This is the correct method for calculating and reporting guaranteed payments in a partnership.

Question 20

All general partners have unlimited personal liability for the debts of the entity.

Accepted Answer

This is a defining characteristic of general partnerships. Each general partner is personally liable for all debts and obligations of the partnership.

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