Question 1

If a partnership allocates losses to the partners, the partners must first apply the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, the partner may deduct the loss.

Accepted Answer

The correct order is: first apply the basis limitation, then the at-risk limitations, and finally the passive loss limitations.

Question 2

One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner, even if it is not distributed.

Accepted Answer

According to the Internal Revenue Service (IRS), partners are required to pay taxes on their share of partnership income even if it is not distributed to them. This is known as "phantom income" and is a disadvantage of the partnership form of business.

Question 3

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Accepted Answer

Harry's remaining basis after the loss ($10,000 - $8,000 = $2,000) is not sufficient to cover the $4,000 distribution. Therefore, he has a $2,000 capital gain ($4,000 distribution - $2,000 remaining basis) that he must recognize.

Question 4

Micah's beginning capital account on his Schedule K-1 is $60,000. During the year, he is allocated $20,000 of partnership income, $8,000 of nondeductible expenses, and a $12,000 share of tax-exempt income. His Schedule K-1s show allocations of nonrecourse debt of $20,000 (last year) and $30,000 (this year). Micah's ending capital account is $94,000.

Accepted Answer

The calculations do not support the ending capital account of $94,000. The correct balance should be $86,000. Here's the breakdown: 
Beginning Capital Account: $60,000 
Add: Allocation of Partnership Income: $20,000 
Subtract: Nondeductible Expenses: ($8,000) 
Add: Tax-Exempt Income: $12,000 
Add: Allocation of Nonrecourse Debt (last year): $20,000 
Add: Allocation of Nonrecourse Debt (this year): $30,000 
Total: $134,000 
Subtract: Ending Capital Account: ($86,000) 
Therefore, the correct answer is B.

Question 5

William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of $10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment, but not on his distributive share of partnership income.

Accepted Answer

Both the $10,000 guaranteed payment for services and his $30,000 distributive share of partnership income are subject to self-employment tax, as both are considered earnings from self-employment for a general partner.

Question 6

The total tax burden on entity income is greater for a partner in a partnership (up to 37% for an individual partner) than on a shareholder in a corporation (21% for an individual shareholder), so partnerships are only used in special situations.

Accepted Answer

This statement is false. The tax burden on entity income is not necessarily greater for a partner in a partnership compared to a shareholder in a corporation. The tax burden depends on various factors, such as the type of income, deductions, and credits available to the partnership or corporation. Additionally, partnerships may be more advantageous than corporations in certain situations, such as when the entity wants to pass through losses to its owners, or when there are foreign partners.

Question 7

Maria owns a 60% interest in the KLM Partnership. Four years ago her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use? consequently, she sold the land to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

Accepted Answer

According to the information given, Maria sold the land to the partnership for $50,000, which is less than her gift basis of $60,000. Therefore, she has a tax loss of $10,000. However, since she sold the land to a partnership in which she owns a 60% interest, the transaction may be considered a related party transaction. In this case, the loss may be disallowed or deferred under the related party rules of the tax code. Therefore, Maria may not be able to recognize her $10,000 loss on the sale.

Question 8

Steve's basis in his SAW Partnership interest is $200,000 at the beginning of the tax year, including all adjustments.
His allocable share of partnership items are as follows: ($120,000) of ordinary loss, $6,000 tax-exempt interest income, and a $14,000 long-term capital gain. In addition, the LLC distributed $20,000 of cash to Steve during the year. During the year, Steve's share of partnership debt increased by $10,000. Steve's ending basis in his LLC interest is $80,000.

Accepted Answer

It is not possible for Steve's ending basis in his LLC interest to be lower than his beginning basis if he received cash distributions and his share of partnership debt increased during the year. This suggests that there may be an error in the calculations or information provided.

Question 9

The qualified business income deduction is calculated at the partner level. The partnership reports information the partner needs to calculate the deduction, such as W-2 wages and the unadjusted basis of the partnership's depreciable property.

Accepted Answer

The qualified business income deduction is calculated at the partner level and the partnership reports necessary information for partners to calculate their individual deduction, such as W-2 wages and the unadjusted basis of partnership property.

Question 10

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. She received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is $15,000. Her share of partnership liabilities on the last day of the partnership year is $20,000. Ashley's outside basis for her partnership interest at the end of the year is $45,000.

Accepted Answer

The answer of Ashley purchased her partnership interest from Lindsey...

Question 11

Julie and Kate form an equal partnership during the current year. Julie contributes cash of $200,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $60,000. As a result of these transactions, Kate has a basis in her partnership interest of $120,000.

Accepted Answer

Kate's basis in her partnership interest would be calculated as her adjusted basis in the contributed property ($90,000) plus her share of the liability ($30,000, assuming the liability is shared equally), totaling $120,000. However, to find her correct basis, you must subtract the liability she is relieved of ($60,000), resulting in a basis of $60,000, not $120,000.

Question 12

Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

Accepted Answer

Nonrecourse debt allocation rules apply to allocate the debt of an LLC among its members, unless a member has provided a personal guarantee for the debt.

Question 13

The sum of the partners' ending basis amounts on all Schedules K-1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

Accepted Answer

The partners' ending basis amounts on Schedules K-1 do not necessarily equal the partners' ending capital account balance on Schedule L, as basis includes liabilities and other adjustments not reflected in the capital account.

Question 14

Before allocations for the current year, Marvin's basis in the MR LLC, in which Marvin is not an active member, is $50,000. His basis includes $10,000 of debt that he guaranteed, and $20,000 of nonrecourse debt that is not qualified nonrecourse financing. Marvin has passive income from other sources of $40,000. The LLC allocates a loss of $60,000 to Marvin. After application of the loss limitation rules, Marvin can deduct $40,000.

Accepted Answer

Marvin can only deduct the loss up to his basis in the LLC, which is $50,000. However, the nonrecourse debt that is not qualified nonrecourse financing does not increase his basis for loss deduction purposes. Therefore, his deductible loss is limited to $30,000 ($50,000 basis - $20,000 nonrecourse debt).

Question 15

Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

Accepted Answer

Emma's basis in her LLC interest can be calculated as follows:
Beginning basis = $60,000
Add: Allocable share of ordinary income = $20,000
Add: Allocable share of tax-exempt interest income = $2,000
Add: Allocable share of long-term capital gain = $6,000
Add: Cash distributed to Emma = $12,000
Total basis = $100,000
Ending basis = Total basis - any distributions during the year = $100,000 - $12,000 = $88,000
Since her ending basis is given as $76,000, it means she must have had a $12,000 distribution during the year. So, the given statement is true.

Question 16

Belinda owns a 30% profit and loss interest in the BOW LLC and her basis in the interest is $30,000, excluding her share of the LLC's liabilities. Belinda guarantees a $40,000 LLC debt. Remaining liabilities (not guaranteed by any of the LLC members) are $100,000. Belinda's basis in the LLC is $100,000.

Accepted Answer

The answer of Belinda owns a 30% profit and loss...

Question 17

Gina is a single taxpayer and an active partner in the GMA LLC. Gina's Schedule K-1 reflects a $20,000 ordinary income share, $2,000 of interest income, and a $10,000 guaranteed payment for services. Gina's self-employment income from other sources and modified adjusted gross income is about $300,000. With respect to the income from the LLC, Gina is subject to the 0.9% additional Medicare tax on $30,000 and the 3.8% net investment income tax of $2,000.

Accepted Answer

Gina's ordinary income share of $20,000, guaranteed payment of $10,000, and interest income of $2,000 total to $32,000 of income from the LLC. Since Gina's modified adjusted gross income exceeds the threshold for the additional Medicare tax ($200,000 for single taxpayers), she must pay an additional 0.9% tax on the excess over $200,000, which is $10,000. Additionally, since Gina's modified adjusted gross income exceeds the threshold for the net investment income tax ($200,000 for single taxpayers), her $2,000 of interest income is subject to the 3.8% net investment income tax.

Question 18

When it liquidates, a partnership is not generally subject to tax on the appreciation of its assets.

Accepted Answer

Partnerships are typically pass-through entities, meaning that income, deductions, and credits pass through to the partners, who then report them on their individual tax returns. Upon liquidation, the partnership itself does not pay tax on asset appreciation; instead, any tax consequences are borne by the partners.

Question 19

Nicholas, a 1/3 partner, received a guaranteed payment in the current year of $50,000. Partnership income before consideration of the guaranteed payment was $20,000. Assuming no loss limitation rules apply, Nicholas reports a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income.

Accepted Answer

Nicholas is entitled to a guaranteed payment of $50,000, which is treated as ordinary income. The partnership income before the guaranteed payment was $20,000, and Nicholas reports a $10,000 ordinary loss from partnership operations. Therefore, his net ordinary income from the partnership is $40,000, which is the $50,000 guaranteed payment minus the $10,000 ordinary loss.

Question 20

A partnership deducts all of its interest expense on Form 1065, page 1.

Accepted Answer

Interest expense is typically reported on Schedule K of Form 1065, not directly on page 1.

Quiz 21: Partnerships