Question 1

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

Accepted Answer

False

Question 2

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

Accepted Answer

Partners receiving guaranteed payments are considered self-employed and therefore are required to pay self-employment tax on such payments.

Question 3

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 statement is true. The distributive share of partnership items allocated to a partner is reported on Schedule K-1 of their individual tax return.

Question 4

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

Accepted Answer

The partner's distributive share of partnership profits will be added to their tax basis, which is used to calculate gain or loss upon sale or disposal of the partnership interest.

Question 5

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

Accepted Answer

This is mandated by the Internal Revenue Service (IRS) and failure to do so can result in penalties and fines for the business.

Question 6

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 7

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

Accepted Answer

Partnership distributions are generally nontaxable to the extent of the partner's tax basis in the partnership interest. The partner's tax basis is decreased by the amount of any distribution.

Question 8

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 9

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, Gabriel can use the loss from his business to offset other sources of income on his personal tax return. This is known as a "pass-through" entity, where the business loss or profit is reported on the owner's individual tax return.

Question 10

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 for tax purposes, meaning the partnership itself does not pay taxes on its income. Instead, the partnership's income is distributed to the partners who report it on their personal income tax returns. In this case, the partners will report $100,000 each ($400,000 divided by 4 partners) as taxable income on their personal income tax returns, even if no cash was distributed.

Question 11

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

Accepted Answer

Limited partners are passive investors and are prohibited by state law from being actively involved in the management and operations of the partnership. Their liability is also limited to the capital they have invested in the partnership.

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 payment made by a partnership to a partner for personal services rendered to the partnership. It is guaranteed because it is paid regardless of the partnership's profits or losses. The payment is deductible as a partnership expense and is subject to the self-employment tax.

Question 13

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

Accepted Answer

This is because the corporate structure provides limited liability to its shareholders, meaning their personal assets are not at risk in case of business debts or liabilities. However, there may be some exceptions to this rule depending on certain circumstances, such as piercing the corporate veil or personal guarantees.

Question 14

Matthew earned $150,000 in wages during 2013. FICA taxes withheld by his employer would have been $11,475.

Accepted Answer

The answer of Matthew earned $150,000 in wages during 2013....

Question 15

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

All regular corporations are required to file income tax returns and pay any related taxes on their taxable income or loss.

Question 16

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 from the partnership to Jefferson would generally not be taxable up to the extent of his basis in the partnership interest. Since his basis was $75,000 and the distribution was $28,000, it would not exceed his basis and therefore, typically would not be taxable.

Question 17

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

Accepted Answer

A partnership is a type of business activity in which two or more people own and manage the business together. It is not considered a separate legal entity from its owners, and therefore, it is unincorporated.

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

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

Accepted Answer

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

Question 20

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. Independent contractors are responsible for paying their own taxes and are issued a form 1099-MISC at the end of the year, rather than a W-2.

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