Question 1

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 correct. Guaranteed payments to partners are deductible by the partnership in computing its ordinary income, and partners report guaranteed payments received as ordinary income on their personal tax returns.

Question 2

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

Accepted Answer

False

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 income and losses are reported on the owner's personal tax return. A loss can be used to offset other income earned during the year, reducing the amount of taxes owed.

Question 4

Matthew earned $150,000 in wages during 2015. FICA taxes withheld by his employer would have been $11,475.

Accepted Answer

The answer of Matthew earned $150,000 in wages during 2015....

Question 5

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 6

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 a separate legal entity from its owners and is therefore required to file an income tax return each year and pay any related taxes on its taxable income or loss.

Question 7

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.

Question 8

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 services rendered to the partnership. It is guaranteed in the sense that it is paid to the partner regardless of the partnership's profitability or losses. Therefore, it can be designed to compensate a partner for personal services rendered to the partnership.

Question 9

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

Accepted Answer

General partners in a partnership have unlimited liability for the debts and obligations of the partnership, meaning their personal assets may be seized to satisfy any outstanding obligations.

Question 10

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

Accepted Answer

A partner's distributive share of partnership profits is considered income and increases the partner's tax basis in the partnership interest.

Question 11

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

Accepted Answer

In an LLC, the personal assets of the members are protected from the debts and liabilities of the company, giving them limited liability. This is in contrast to a partnership where the partners have unlimited liability for the partnership's debts.

Question 12

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

The partners will report their share of the partnership profits on their personal income tax returns, even if no cash was distributed. If the partners are not required to withdraw money from the partnership, their share of the partnership profits will be added to their individual taxable 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

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 15

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 do not withhold payroll taxes from payments made to independent contractors, as they are not considered employees. Instead, independent contractors are responsible for paying their own taxes, including self-employment tax.

Question 16

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

Accepted Answer

The FICA taxes are not imposed on all of the employee's wages for the year. Social Security taxes are imposed on wages up to a certain limit, while Medicare taxes are imposed on all wages without any limit.

Question 17

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

Accepted Answer

Corporate shareholders have limited liability and are typically only liable for the amount of their investment in the company. They are not personally responsible for the debts and obligations of the corporation.

Question 18

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

Accepted Answer

This is true. According to the Internal Revenue Service (IRS), employers are required to withhold federal income tax from their employees' wages or salary as part of the federal payroll tax system. The amount of tax withheld depends on factors such as the employee's income and the number of exemptions they claim on their W-4 form.

Question 19

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

Accepted Answer

Partners receiving guaranteed payments are subject to self-employment tax on those payments.

Question 20

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

Accepted Answer

A partnership is a type of unincorporated business activity where two or more taxpayers join together and agree to share in the profits and losses of the business. Unlike corporations, partnerships are not treated as separate legal entities for tax purposes.

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