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

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

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.

Answer 3

True

Question 4

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

Question 5

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

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.

Question 7

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

Question 8

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

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.

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.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

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.

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.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

John's share of partnership loss was $60,000. He had only enough tax basis to deduct $34,000 of the loss. He may deduct the remaining loss against other income in the following year, regardless of what happens in the partnership.

Question 22

A limited liability company with more than one member is generally considered a partnership for federal tax purposes.

Question 23

During 2013, Scott Howell received a salary of $125,000. The social security base amount for 2013 was $113,700. How much payroll tax should have been withheld from Scott's salary for 2013?

A)$0
B)$7,049
C)$9,563
D)$8,862

Question 24

Carter's share of a partnership's operating loss is $17,200. His tax basis in his partnership interest before any adjustment for this loss is $26,000. Carter may deduct the full loss on his individual tax return.

Question 25

Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on:

A)Schedule C, Statement of Profit or Loss from Business
B)The first page of Form 1040 as other income
C)A separate tax return prepared for the business operation
D)Schedule E, Statement of Rent and Royalty Income

Question 26

Which of the following statements regarding the home office deduction is true?

A)In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers.
B)A home office deduction is not allowed for using the home office for administrative or management activities only.
C)The home office deduction is limited to the taxable income of the business before the deduction.
D)A depreciation deduction is not allowed for a home office.

Question 27

A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis.

Question 28

A limited liability company is always taxed as a partnership, regardless of the number of its members.

Question 29

Corporations cannot be shareholders in an S corporation.

Question 30

Kelly received a $60,000 salary during 2013. Her federal income tax withholding rate was 20%, and the Social Security base amount for 2013 was $113,700. What is the total amount that her employer should have withheld in 2013?

A)$16,590
B)$12,000
C)$4,590
D)$0

Question 31

A limited liability company that has only one member is generally treated as a disregarded entity for federal tax purposes.

Question 32

Sue's 2013 net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year?

A)$25,127
B)$30,000
C)$29,480
D)None of the above

Question 33

Which of the following statements regarding sole proprietorships is false?

A)A sole proprietorship has no legal identity separate from that of its owner.
B)Sole proprietorships are the most common form of business entity in the U.S.
C)The cash flow generated by a sole proprietorship belongs to the owner.
D)The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.

Question 34

A major advantage of an S corporation is the ability to specially allocate losses to specific members of the company.

Question 35

Tax savings achieved by operating a business through a pass-through entity, rather than as a C corporation, is an example of entity variable tax planning.

Question 36

The shareholders of an S corporation must pay self-employment tax on their share of the corporation's ordinary income.

Question 37

During 2013, Margie earned wage income of $300,000. If Margie is single, which of the following statements regarding her Medicare tax liability is true?

A)Margie will owe both the regular 1.45 percent Medicare tax and the additional .9 percent Medicare tax on her entire wage income.
B)Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $200,000.
C)Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $250,000.
D)Margie's employer is required to withhold both the regular Medicare tax but does not withhold the additional .9 percent Medicare tax.

Question 38

If a business is formed as an S corporation, its income may be subject to double taxation.

Question 39

The earnings of a C corporation are taxed only at the shareholder level.

Question 40

A shareholder in an S corporation includes in tax basis his or her share of the corporation's liabilities.

Question 41

At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash. Compute Paulina's gain or loss on the sale of her partnership interest.

A)$3,000 loss
B)$8,000 loss
C)$2,000 gain
D)$0 gain or loss

Question 42

Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest?

A)$500,000
B)$850,000
C)$650,000
D)$300,000

Question 43

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income?

A)$3,300 net capital gain; $12,000 deductible net Section 1231 loss
B)$4,500 net capital gain; $12,000 deductible net Section 1231 loss
C)$4,500 net capital gain; $15,000 deductible net Section 1231 loss
D)$3,300 net capital gain; -0- deductible net Section 1231 loss

Question 44

Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest?

A)$500,000
B)$1,200,000
C)$850,000
D)$650,000

Question 45

During 2013, Elena generated $24,500 of earnings on ScheduleC. If Elena had no other earned income, how much self-employment tax will she owe on her Schedule C net profit?

A)$3,749
B)$3,259
C)$3,009
D)$3,461

Question 46

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?

A)$50,000 ordinary income
B)$50,000 ordinary business income and $22,000 guaranteed payment
C)$50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain
D)All income reported on a general partner's Schedule K-1 are subject to self-employment tax

Question 47

Which of the following statements regarding limited liability companies is true?

A)Just like an S corporation, an LLC member's share of ordinary income is not subject to self-employment taxes.
B)Just like an S corporation, an LLC is restricted to 100 members.
C)Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved.
D)Just like a limited partnership, only LLC members who are not actively involved in the entity's business activities have limited liability for the LLC's debts.

Question 48

Which of the following statements regarding limited liability companies is false?

A)Every member of an LLC has limited liability for the LLC's debts.
B)An LLC with only one member is generally treated as a corporation for income tax purposes.
C)An LLC with more than one member is generally treated as a partnership for income tax purposes.
D)State laws do not limit the number of members or the type of entity that can be a member in an LLC.

Question 49

Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest?

A)$500,000
B)$1,200,000
C)$850,000
D)$650,000

Question 50

Which of the following statements regarding the basis limitation on deduction of partnership losses is false?

A)If a partner's share of partnership losses exceeds the partner's tax basis in the partnership interest, the excess is not deductible in the current year.
B)Partnership losses that are not deductible due to the basis limitation can be carried forward indefinitely.
C)Partners can increase tax basis in their partnership interest only by making additional capital contributions.
D)If a partnership becomes profitable in the future, the partner's share of such future income will create basis against which loss carry forwards can be deducted.

Question 51

Which of the following statements concerning partnerships is false?

A)A properly-drafted partnership agreement is crucial.
B)A general partner's basis in a partnership includes his share of partnership debt.
C)Limited partnerships must have at least one general partner.
D)A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

Question 52

Alice is a partner in Axel Partnership. Her share of the partnership's 2013 ordinary business income was $100,000. She received a $60,000 cash distribution from the partnership on December 1, 2013. Assuming that Alice's marginal tax rate is 39.6%, calculate her after-tax cash flow from the partnership in 2012.

A)$60,400
B)$39,600
C)$60,000
D)$20,400

Question 53

Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax?

A)None of the items are subject to SE tax because Debbie is a limited partner.
B)$19,000 ordinary business income
C)$19,000 ordinary business income and $2,000 long-term capital gain
D)All income reported on a partner's Schedule K-1 are subject to self-employment tax.

Question 54

Bernard and Leon formed a partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Bernard's tax basis in his partnership interest?

A)$1,200,000
B)$600,000
C)$800,000
D)$1,400,000

Question 55

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?

A)Martha must pay income tax on $141,200 and self-employment tax on $48,000.
B)Martha must pay income tax on $141,200 and self-employment tax on $93,200.
C)Martha must pay both income tax and self-employment tax on $141,200.
D)Martha must pay income tax on $48,000 and self-employment tax on $93,200.

Question 56

Which of the following statements about partnerships is false?

A)A partnership is a legal entity that may enter into valid contracts.
B)Partnerships are unincorporated entities.
C)Only individuals may be partners in a partnership.
D)Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax.

Question 57

In 2013, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?

A)Mike does not owe any self-employment tax because his salary exceeded the 2013 base amount ($113,700) for federal employment tax.
B)Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 earnings from his small business.
C)Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business.
D)Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business.

Question 58

Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest?

A)$500,000
B)$1,200,000
C)$850,000
D)$650,000

Question 59

Which of the following statements regarding a partner's tax basis in a partnership interest is true?

A)Partnership tax basis is increased annually by cash distributions from the partnership.
B)Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses.
C)Partnership tax basis is reduced by the partner's share of nontaxable partnership income.
D)Partnership tax basis becomes negative if allocable losses exceed basis.

Question 60

Jackie contributed $60,000 in cash to a partnership for a 50% interest. This year, the partnership earned $200,000 ordinary business income, made a $20,000 contribution to the United Way, and distributed $25,000 cash to Jackie. Her tax basis in the partnership at year end is:

A)$110,000
B)$85,000
C)$125,000
D)$215,000

Question 61

On January 1, 2013, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2013 ordinary business loss was $34,100, and she received no cash distributions during the year. Which of the following statements is accurate?

A)Laura can deduct $30,000 of the loss in 2013.On January 1, 2014, the basis in her Suki stock is zero, and the basis in her Suki note is $8,500.
B)Laura can deduct $34,100 of the loss in 2013.On January 1, 2014, the basis in her Suki stock is $4,400, and the basis in her Suki note is zero.
C)Laura can deduct $34,100 of the loss in 2013.On January 1, 2014, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400.
D)None of the above is accurate.

Question 62

Adam and Barbara formed a partnership to construct an apartment building. Adam contributed $500,000 cash and Barbara contributed land ($500,000 FMV and $250,000 basis) in exchange for a 50 percent interest in AB Partnership. Immediately after its formation, the partnership borrowed $600,000 from a local bank to begin construction. Compute each partner's initial basis in their partnership interest, assuming that:
a. Adam and Barbara are both general partners.
b. Adam is a limited partner and Barbara is a general partner.

Question 63

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization?

A)No payroll taxes will be owed as a result of the audit.
B)Loretta and Country Collectibles will each be liable for unpaid payroll taxes as a result of the audit.
C)Only Loretta will be liable for unpaid payroll taxes as a result of the audit.
D)Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit.

Question 64

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. Which of the following statements accurately describes the tax consequences of these withdrawals?

A)The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments.
B)The withdrawals are considered taxable dividends to Loretta.
C)There is significant risk that the IRS could recharacterize the payments to Loretta as salary.Such treatment would increase taxable income for both Loretta and the S corporation.
D)There is significant risk that the IRS could recharacterize the payments to Loretta as salary.Such treatment would not change taxable income for Loretta and reduce taxable income of the S corporation.

Question 65

XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false?

A)All of the corporation's shareholders must consent to make an S election.
B)If a shareholder in an S corporation sells his shares of stock to a nonresident alien, the election will terminate.
C)If an S corporation loses its election, the shareholders cannot make a new election for five years without IRS consent.
D)All of the shareholders must consent to voluntarily terminating an S election.

Question 66

Which of the following statements regarding S corporations is true?

A)An S corporation may have no more than 50 shareholders.
B)Any individual, estate, corporation, or trust may be an S corporation shareholder.
C)An S corporation may have only one class of stock.
D)An S corporation shareholder's allocable share of ordinary income is subject to self-employment tax.

Question 67

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders:

A)Grant and Amy must each be allocated $50,000 of the operating loss.
B)If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant.
C)Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss.
D)The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.

Question 68

At the beginning of 2013, Quentin purchased a 25 percent general partner interest in Maxim Partnership for $30,000. Quentin's 2013 Schedule K-1 reported that his share of Maxim's debt at year-end was $20,000 and his share of ordinary loss was $42,000. On January 1, 2014, Quentin sold his interest to another partner for $5,000 cash.
a. How much of his share of Maxim's loss can Quentin deduct on his 2013 return?
b. Compute Quentin's recognized gain on sale of his Maxim interest.

Question 69

On January 1, 2013, Conrad Nelson contributed $15,000 cash in exchange for 50 shares of stock in Sterling Inc., an S corporation. Sterling employs Conrad as its director of marketing. Conrad's 2013 salary was $70,000 and his pro rata share of Sterling's 2013 ordinary business income was $16,800. During the year, Conrad received a $9,000 cash distribution with respect to his Sterling stock. Compute Conrad's basis in his Sterling stock on January 1, 2014.

A)$15,000
B)$22,800
C)$31,800
D)$92,800

Question 70

In 2013, William Wallace's sole proprietorship, Western Wear Apparel, generated $140,769 Schedule C net profit ($130,000 net earnings from self-employment). In addition, William recognized a $25,000 Section 1231 gain on a sale of land formerly used by the business as a parking lot. The business checking account earned $250 interest income.
a. Which of these income items are subject to self-employment tax?
b. Compute Williams' 2013 self-employment tax, assuming he has no other earned income.
c. Compute the total increase in William's 2013 taxable income attributable to his business.

Question 71

On January 1, Leon purchased a 10% stock interest in an S corporation for $30,000. He also loaned the S corporation $5,000 in exchange for a written promissory note. The S corporation generated a $330,000 operating loss for the year. Leon deducted his 10% share of the loss, reducing his tax basis in his stock to zero, and his tax basis in the note to $2,000. The following year, the S corporation repaid the note before Leon restored his basis in the note. What are the consequences of the loan repayment to Leon?

A)$3,000 capital gain
B)$3,000 ordinary income
C)$2,000 capital gain
D)$2,000 ordinary income

Question 72

In applying the basis limitation on the deduction of S corporation losses, which of the following statements is true?

A)The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, is computed in the same manner as a partner's basis in a partnership interest.
B)A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder.
C)If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that obligation is considered ordinary income.
D)All of the above statements are false.