Deck 10: Sole Proprietorships and Flow-Through Entities

Question 1

A sole proprietorship must use the cash method of accounting.

Answer 1

False

Question 2

The AAA of the S corporation is a corporate-level account.

Answer 2

True

Question 3

The entity concept of a partnership views the partnership as separate from the partners and permits certain transactions between the partner and the partnership.

Answer 3

True

Question 4

All partnerships are passive activities.

Question 5

____ 11.The basis limitation rules are applied after the at-risk and passive loss limitation rules.

Question 6

There are special rules for an S corporation that must be followed when the corporation decides to liquidate.

Question 7

An S corporation shareholder can only deduct losses of the S corporation to the extent he or she has positive stock basis.

Question 8

A loss is never recognized on a nonliquidating distribution from a partnership.

Question 9

Once established at entry,a partner's basis account does not change.

Question 10

The limited liability partnership form of business offers partners protection from partnership debts.

Question 11

Active participation requires a higher level of activity than material participation.

Question 12

S corporations never pay any income taxes.

Question 13

____ 10.Recourse debts can only be satisfied with the property used as collateral.

Question 14

A limited partnership must have a general partner.

Question 15

The owners of a limited liability company are called members.

Question 16

____ 19.A person satisfies material participation requirements only through current activity.

Question 17

A limited liability company that has only one member must be taxed as a sole proprietorship.

Question 18

Partners pay taxes on their share of all the partnership net income annually.

Question 19

Limited liability companies are generally taxed as partnerships unless the company elects to be taxed as a corporation.

Question 20

Only 50 percent or more of the shareholders of an S corporation must consent to the S election.

Question 21

What is required for a taxpayer to actively participate in a rental property activity to qualify for a limited deduction of losses?

Question 22

Simpco Partnership has gross operating revenue of $450,000,cost of sales of $150,000,salaries to employees of $40,000,a $25,000 Section 179 expense deduction,$10,000 of other depreciation,interest income of $2,000,a $4,000 capital loss,and a $500 charitable contribution deduction.Simpson is a 20 percent partner in Simpco Partnership.He has a $60,000 basis in his partnership interest at the end of the year after all income/loss items have been passed through to him.What was his beginning-of-the-year basis in his partnership interest?

Question 23

What taxes may be assessed an S corporation?

Question 24

Why are partnerships and S corporations called flow-through entities?

Question 25

Briefly explain the three loss limitation rules applicable to partners.

Question 26

What is the difference between a limited partnership and a general partnership?

Question 27

What is a sole proprietorship and how is this business entity taxed?

Question 28

Candi purchased a 10 percent limited partnership interest in rental property for $30,000.The partnership has a $1,300,000 mortgage that is secured by the building.During the current year,the partnership reports a total loss of $200,000 from the rental building.What is Candi's deductible loss and the amount of her loss carryover if her only other income/loss items are $50,000 in salary,an $8,000 capital loss on some stock,and $5,000 of bond interest income?

Question 29

When may a partner recognize gain on a nonliquidating distribution from the partnership?

Question 30

How may an S election terminate?

Question 31

How does a partner establish that his current activity meets the material participation requirements?

Question 32

What kind of an entity is a limited liability company for the purpose of taxing its income?

Question 33

Simpco Partnership has gross operating revenue of $450,000,cost of sales of $150,000,salaries to employees of $40,000,a $25,000 Section 179 expense deduction,$10,000 of other depreciation,interest income of $2,000,a $4,000 capital loss,and a $500 charitable contribution deduction.What are the partnership's bottom line net income and its separately stated items?

Question 34

What restrictions are placed on an S corporation to be able to make a valid S election?

Question 35

What is the difference between recourse and nonrecourse debt for a partnership?

Question 36

How does a shareholder's basis in his or her S corporation stock change?

Question 37

Briefly explain the difference between the entity and the aggregate concepts as related to partnership taxation.

Question 38

What tax year end must a partnership use?

Question 39

The LBJ Partnership has a March 31 year-end.It has three equal partners,L with a June 30 year-end,B with a January 31 year-end,and J with a December 31 year-end.What are the year-end dates for the tax returns of the partners that will include their shares of the partnership's income as of March 31,2015?

Question 40

How are income and loss apportioned to S corporation shareholders for taxation?

Question 41

Manuel purchased a 30% interest in MAC general partnership for $40,000 cash and materially participated in the partnership for the entire year.The partnership had $50,000 in liabilities when Manuel purchased his interest and the liabilities increased $10,000 during the year.If the partnership incurred a $300,000 loss this year,how much of this loss can Manuel deduct?

A)0
B)$40,000
C)$58,000
D)$65,000

Question 42

Which of the following is not a characteristic of sole proprietorships?

A)Owners pay self-employment taxes
B)Formation is always tax-free
C)Distributions of entity income are tax-free
D)Loss is recognized on liquidation

Question 43

Sam has $80,000 of net income from his sole proprietorship in 2015.What is his deduction for AGI for self-employment taxes?

A)$9,826
B)$6,120
C)$5,652
D)$4,913

Question 44

Klinger's AGI is $130,000 before the loss of $29,000 from a rental complex he owns and actively participates in.What is his AGI after this loss?

Question 45

A sole proprietor:

A)deducts his or her retirement plan contributions from business income.
B)may not pay a salary to a related party who works in the business.
C)deducts employee fringe benefit costs from business income.
D)files a separate tax return for business income.

Question 46

The Clio Corporation,an S corporation,makes a nonliquidating distribution of $10,000 cash and property (fair market value = $10,000; basis = $7,000)to James,a 50 percent shareholder.What are the effects of these distributions on Clio and James's incomes,Clio's AAA account,and James's basis in his stock?

Question 47

Clarence receives a liquidating distribution of receivables (fair market value and basis both equal $20,000)and land (fair market value = $25,000 and basis = $18,000)for his partnership interest with a $70,000 basis in a liquidating distribution.What is Clarence's realized and recognized gain or loss on this distribution and his basis in the property received?

Question 48

For 2015,compare the income and FICA or self-employment tax burdens of an individual in the 25 percent marginal income tax bracket who owns a business that has operating income of $50,000 if the business is (a)a C corporation or (b)a sole proprietorship.The owner takes $30,000 out of the business as a salary.

Question 49

For 2015,compare the income and FICA or self-employment tax burdens of a couple in the 33 percent marginal income tax bracket who jointly own a business with $120,000 of operating income if the business is a partnership or an S corporation.The husband and wife each take $50,000 out of the business as salary.

Question 50

A sole proprietorship:

A)must be owned by an individual.
B)provides basic liability protection for the owner.
C)must use the cash method of accounting.
D)can pay the owner a salary.

Question 51

Which of the following is not an acceptable partnership tax year?

A)The tax year used by any principal partner
B)The tax year used by the partners who own a majority interest
C)A tax year that results in only a 2-month deferral of income for the partners
D)C's tax year if C owns more than 50 percent of the partnership

Question 52

Which of the following cannot be taxed as a partnership?

A)An accounting PLLC
B)An LLC with only one member
C)An LLC owning only rental property
D)A partnership with no limited partners

Question 53

Which of the following is not a separately stated item on a partnership's Schedule K?

A)A $5,000 long-term capital loss
B)$20,000 of Section 1245 recapture
C)$3,000 charitable contribution
D)$5,000 bond interest

Question 54

Sue is a 50 percent working partner in a partnership.She is guaranteed an annual salary of $60,000.Jim,the other 50 percent partner,is to receive the first $10,000 of partnership profits before the balance is divided equally between them.During the year,the partnership's accounting results were $40,000 of income before any partner allocations.What amount of income will Sue be taxed on?

Question 55

Which of the following is not a characteristic of a partnership?

A)Must be formed under state law
B)Formation is generally tax free except for services received for a partnership interest
C)Distributions of entity income are tax-free
D)Loss is never recognized on a nonliquidating distribution

Question 56

Simpco,an S corporation,has gross operating revenue of $450,000,cost of sales of $150,000,salaries and FICA taxes for employees of $40,000,a $25,000 Section 179 expense deduction,$10,000 of other depreciation,interest income of $2,000,a $4,000 capital loss,and a $500 charitable contribution deduction.What are the corporation's net income and its separately stated items?

Question 57

Quincy received a liquidating distribution of $5,000 cash and inventory valued at $10,000 with a basis of $6,000 for his partnership interest with a basis of $20,000.What is Quincy's basis in the inventory? Does Quincy recognize any gain or loss on this distribution?

Question 58

ABC Partnership has two assets: inventory (fair market value = $20,000; basis = $25,000)and land (fair market value = $100,000; basis = $50,000)when Janine sells her 40 percent interest in ABC with a $30,000 basis for $48,000.What is the amount and type of Janine's gain or loss on the sale of her partnership interest?

Question 59

Samantha and Ashley form the MAS General Partnership.Samantha contributed $20,000 cash in exchange for her 50 percent partnership interest.During the first year of partnership operations,the partnership reported net taxable income of $10,000,Samantha withdrew $8,000 cash from the partnership,and the partnership took out an $18,000 loan on the last day of the year.Samantha's adjusted basis for her partnership interest at year end is:

A)$38,000
B)$30,000
C)$26,000
D)$17,000

Question 60

Which of the following is not a characteristic of a partnership?

A)Must meet 80 percent control requirement for formation to be tax free
B)Cash distributions to partners may be taxable
C)Loss is only recognized on liquidating distributions
D)General partners' salaries are subject to FICA taxes.

Question 61

Which of the following is not a characteristic of an S corporation?

A)Must be formed under state law
B)The transfer of property for stock is always tax-free
C)A shareholder's share of ordinary income increases his or her stock basis
D)The shareholder never recognizes loss on a nonliquidating distribution

Question 62

Which of the following is not a requirement to make an S election?

A)Maximum 100 shareholders
B)One class of stock
C)Shareholders must be U.S.citizens
D)It must be a domestic corporation

Question 63

The S corporation income tax return includes all of the following except

A)a Schedule K.
B)an M-1 Schedule.
C)a retained earnings reconciliation.
D)a reconciliation of the AAA account.

Question 64

Stewart is a 30 percent general partner in STP Partnership.His basis in his partnership interest at the beginning of the year was $40,000.During the year,the partnership reported a $30,000 loss and paid off a $120,000 recourse debt.What is Stewart's year-end basis in his partnership interest?

A)0
B)$4,000
C)$31,000
D)$67,000

Question 65

At the beginning of the year,Jill's basis in her 40 percent limited partnership interest was $10,000.During the year,the partnership reported a loss of $90,000 and the partnership obtained a $40,000 recourse loan on some machinery.How much loss may Jill deduct if she has $40,000 of passive income?

A)$10,000
B)$16,000
C)$26,000
D)$36,000

Question 66

Which of the following is not a potential S corporation tax?

A)The personal holding company tax
B)The built-in gains tax
C)The LIFO recapture tax
D)The excess net passive investment income tax

Question 67

What is Alexander's net gain or loss on the liquidation of his 100 percent interest in an S corporation if the corporation distributes the following three assets to him in exchange for his stock: Prior to any distributions,Alexander's basis in his S corporation interest was $160,000.

A)($12,000)
B)($22,000)
C)$10,000
D)$22,000

Question 68

What is the effect on the AAA if an S corporation distributes a piece of property valued at $10,000 with a $5,000 basis to 50 percent shareholder and $10,000 cash to the other 50 percent shareholder in a nonliquidating distribution?

A)$10,000 net increase
B)$5,000 net increase
C)$15,000 net decrease
D)$20,000 net decrease

Question 69

Carol owns 40 percent of CJ Partnership.The partnership reports $170,000 of revenue,$60,000 cost of goods sold,and $70,000 of other expenses that include $1,500 of doctor bills paid for Carol,a $2,000 charitable contribution,and a $5,000 Section 179 deduction.What is the bottom line net income reported on Carol's Schedule K-1?

A)$48,500
B)$40,000
C)$19,400
D)$16,000

Question 70

James and Jerry are equal partners in JJ partnership.James works full-time in the business and receives a $40,000 guaranteed salary from the partnership.Jerry is to receive the first $20,000 of profits before the remainder is divided equally between James and Jerry.If the accounting income before either of these payments is $30,000,what is the amount of income or loss allocated to Jerry?

A)0
B)$10,000
C)($5,000)
D)($10,000)

Question 71

When does a partner recognize gain on a distribution?

A)In a liquidating distribution when the fair market value of the property received exceeds partnership interest basis.
B)In a nonliquidating distribution and the property received exceeds the fair market value of the partnership interest.
C)In a nonliquidating distribution and the cash received exceeds the basis of the partnership interest.
D)Gain is not recognized until the property received for the partnership interest is sold.

Question 72

Which of the following does not affect the basis of S corporation stock?

A)Tax-exempt income
B)Nondeductible expenses
C)Capital gains
D)All affect stock basis

Question 73

Ray,Ronnie and Joe are partners in a limited partnership.Ray and Ronnie,the limited partners,each own 45 percent of the partnership and Joe,the general partner,owns the other 10 percent.The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt.What effect do the debts have on Ray's basis?

A)Increase of $22,500
B)Increase of $25,000
C)Increase of $45,000
D)Increase of $67,500

Question 74

Mary purchased 40 percent of an S corporation on February 28 of the current year and sells a 20 percent interest on November 30.If the corporation reports $10,000 of income for the year,what income does it report on Mary's Schedule K-1.

A)$7,534
B)$3,014
C)$4,000
D)$3,184

Question 75

Which of the following may not be partners in a partnership?

A)Corporation
B)S corporation
C)LLC
D)All may be partners.

Question 76

An S election terminates

A)when a shareholder dies.
B)when there is a nonresident alien shareholder
C)when the S corporation invests in a C corporation
D)when an S corporation has excess passive income

Question 77

Corbin has a $15,000 basis in his 50 percent ownership in an S corporation and lent the corporation $5,000 last year.The corporation has $30,000 of other debt.This year the corporation reported a $100,000 loss.How much of this loss may Corbin deduct?

A)$15,000
B)$20,000
C)$35,000
D)$50,000

Question 78

The accumulated adjustment account

A)is a shareholder account.
B)can be reduced below zero by an excess distribution.
C)determines when there is a tax-free distribution during the post-termination period.
D)is important in applying loss limitation rules.

Question 79

Ray,Ronnie and Joe are partners in a limited partnership.Ray and Ronnie,the limited partners,each own 45 percent of the partnership and Joe,the general partner,owns the other 10 percent.The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt.What is the effect on Joe's basis for these debts?

A)Increases by $155,000
B)Increases by $105,000
C)Increases by $100,000
D)Increases by $15,000

Question 80

Calvin sells his 40 percent interest in a partnership with a $70,000 basis for $75,000.The partnership has two assets,inventory valued at $100,000 with a $50,000 basis and investments valued at $87,500 that have a basis of $125,000.How will Calvin report the sale of the partnership interest?

A)$5,000 capital loss
B)$20,000 ordinary income
C)$20,000 ordinary income; $15,000 capital loss
D)$5,000 capital gain