Question 1

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

Accepted Answer

The principle of limited liability protects the personal assets of shareholders from the debts and obligations of the corporation. However, there are some exceptions to this rule, such as when a shareholder personally guarantees a corporate debt or engages in fraudulent or illegal conduct.

Question 2

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

Accepted Answer

Businesses are not required to withhold payroll taxes from payments made to independent contractors. Instead, independent contractors are responsible for paying their own taxes and businesses must provide them with a Form 1099 at the end of the year to report their earnings.

Question 3

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 pass through their profits or losses to the individual partners, who then report that income on their personal income tax returns. In this case, the four partners will each report $100,000 of taxable income from the partnership. No cash distribution was made, so the entire net profit remains in the partnership.

Question 4

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 and pay taxes on its taxable income or report any losses.

Question 5

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 to be earned income for tax purposes.

Question 6

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 not entirely taxable as Jefferson's basis in his partnership interest will reduce the taxable portion of the distribution. The taxable portion is $28,000 minus the basis of $75,000, resulting in a taxable amount of $0.

Question 7

Limited partners are prohibited by state law from becoming actively involved in the day-to-day operations of the partnership.

Accepted Answer

Limited partners have limited liability and are not allowed to participate in the management or operation of the partnership by state law. This is to prevent them from being held liable for any debts or obligations incurred by the partnership beyond their original investment.

Question 8

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

Accepted Answer

When a partner receives a distributive share of partnership profits, it increases his or her tax basis in the partnership interest. This is because the partner is considered to have received additional income, which in turn increases the partner's investment in the partnership.

Question 9

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

Accepted Answer

This is a key characteristic of a general partnership. All general partners have unlimited personal liability for the debts of the partnership, meaning their personal assets can be used to satisfy the debts of the entity.

Question 10

Matthew earned $150,000 in wages during 2012. FICA taxes withheld by his employer would have been $11,475.

Accepted Answer

The answer of Matthew earned $150,000 in wages during 2012....

Question 11

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

Accepted Answer

A guaranteed payment is a payment made to a partner for personal services rendered to the partnership. It is guaranteed in the sense that it is paid regardless of the profitability of the partnership.

Question 12

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 13

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 14

A partner's tax basis in his or her partnership interest is decreased by partnership distributions.

Accepted Answer

When a partner receives a distribution from the partnership, it decreases the partner's tax basis in the partnership interest. This basis reduction can affect the tax consequences of future partnership operations and ultimately the tax liability of the partner upon the disposition of the partnership interest.

Question 15

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

Accepted Answer

This is true. As per the regulations of the Internal Revenue Service (IRS), employers are required to withhold federal income tax from their employees' compensation and submit it to the government on their behalf. This helps to ensure that individuals pay their income taxes throughout the year, rather than having to pay a large lump-sum when tax season rolls around.

Question 16

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

The statement is true. The partner's share of partnership items like income, gains, losses, deductions, and credits are reported on Schedule K-1 as the distributive share.

Question 17

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 18

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

Accepted Answer

The answer of A partner's distributive share of partnership nondeductible...

Question 19

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

Accepted Answer

A partnership is a type of business structure where two or more individuals co-own and operate a business together. It is an unincorporated entity, meaning it does not have a separate legal existence from its owners. Each partner reports their share of the partnership's income and losses on their individual tax returns.

Question 20

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 proprietor, the business income and losses are reported on Gabriel's personal income tax return. The loss can be used to offset other income he earned during the year, reducing his overall tax liability.

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