Deck 11: Sole Proprietorships and Flow-Through Entities

Question 1

_____ 18. An S corporation shareholder can only deduct losses of the S corporation to the extent he or she has positive stock basis.

Answer 1

False

Question 2

_____ 5. A limited partnership must have a general partner.

Answer 2

True

Question 3

_____ 15. The income from a general partnership is passive income to all partners..

Answer 3

False

Question 4

_____ 6. Partners pay taxes on their share of all the partnership net income annually.

Question 5

_____ 7. The limited liability partnership form of business offers partners protection from all partnership debts.

Question 6

_____ 19. The AAA of the S corporation is a corporate-level account.

Question 7

_____11. The entity concept of a partnership views the partnership as separate from the partners and permits certain transactions between the partner and the partnership.

Question 8

_____ 8. The owners of a limited liability company are called members.

Question 9

_____ 3. A sole proprietor is considered a self-employed individual.

Question 10

_____ 10. A limited liability company that has only one member must be taxed as a sole proprietorship.

Question 11

_____ 9. Limited liability companies are generally taxed as partnerships unless the company elects to be taxed as a corporation.

Question 12

_____ 20. S corporations never pay any income taxes.

Question 13

_____ 1. A flow-through entity aggregates all its income and subtracts all expense items for reporting its net income.

Question 14

_____ 12. Once established at entry, a partner's basis account does not change.

Question 15

_____ 4. A general partner in a limited partnership is not protected from the partnership's liabilities.

Question 16

_____ 17. Only 50 percent or more of the shareholders of an S corporation must consent to the S election.

Question 17

____ 13. Recourse debts can only be satisfied with the property used as collateral.

Question 18

_____ 2. A sole proprietorship must use the cash method of accounting.

Question 19

_____ 16. A loss is never recognized on a nonliquidating distribution from a partnership.

Question 20

____ 14. The basis limitation rules are applied before the at-risk and passive loss limitation rules.

Question 21

Briefly explain the three loss limitation rules applicable to partners.

Question 22

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

Question 23

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

Question 24

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

Question 25

How is an S election terminated?

Question 26

Wilhelmina operates a daycare center in her home as a sole proprietorship. She has gross revenues of $15,000 and the following expenses:
Cost of food $1,200; allocated costs of using the home $900; allowable depreciation $500; reasonable salary for her 16 year old daughter for after-school help $3,000.
a. Determine Wilhelmina's net income from the sole proprietorship in 2017.
b. Determine Wilhelmina's total of self-employment and income taxes on this activity if her marginal tax rate is 25 percent.

Question 27

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

Question 28

____ 22. A person satisfies material participation requirements only through current activity.

Question 29

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

Question 30

What tax year end must a partnership use?

Question 31

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

Question 32

_____ 23. Active participation requires a higher level of activity than material participation.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

What taxes may be assessed an S corporation?

Question 38

_____ 21. There are special rules for an S corporation that must be followed when the corporation decides to liquidate.

Question 39

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

Question 40

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

Question 41

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
_____ 2. Owners pay self-employment taxes on income from entity.

Question 42

Willy is involved in a number of businesses as a consultant. Below are the businesses and the hours of activity that Willy spent in each. Identify any activities that are passive and explain why the income or loss from the other activities is not passive income or loss.
*F is Willy's sole proprietorship and he has no employees.

Question 43

For 2017, compare the income and FICA or self-employment tax burdens only for a couple in the 33 percent marginal income tax bracket who jointly own a business with $120,000 of operating income, first if the business is a partnership and then if it is an S corporation. The husband and wife each take $50,000 out of the business as salary.

Question 44

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 45

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 46

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 47

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

Question 48

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 49

A and B are equal shareholders in AB, a calendar-year S corporation. On June 30 (181 days into the year), A sells one-half of her stock to C. The corporation reports $30,000 of income for the year. How much of this income is allocated to A, B, and C?

Question 50

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 51

The Walden Partnership has two 20 percent general partners and six 10 percent limited partners. During the current year, the partnership paid off $50,000 of notes payable, purchased machinery for $100,000 on a nonrecourse note, borrowed $20,000 for working capital, and had $80,000 income from operations. If the general partners each had a basis of $30,000 in their partnership interests at the beginning of the year, what is each general partner's year-end basis?

Question 52

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
_____ 3. Distributions from entity are generally tax-free. (Assume the S corporation shareholder has stock basis and partner has partnership or debt basis.)

Question 53

The Walden Partnership has two 20 percent general partners and six 10 percent limited partners. During the current year, the partnership paid off $50,000 of notes payable, purchased machinery for $100,000 on a nonrecourse note, borrowed $20,000 for working capital, and had $80,000 income from operations. If one of the limited partners had a $10,000 basis at the beginning of the year, what is his year-end basis?

Question 54

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 55

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, 2017?

Question 56

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 57

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
_____ 1. Operating income taxed to entity.

Question 58

For 2017, compare the income and FICA or self-employment tax burdens only 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 59

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 60

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 61

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 62

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 63

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 64

Sam has $80,000 of net income from his sole proprietorship in 2017. What is his deduction for AGI for self-employment taxes?

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

Question 65

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
___ 10. Formation of the entity is generally a tax-free event.

Question 66

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 67

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 68

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 69

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
____ 9. Owners may participate in all tax-free employee fringe benefits.

Question 70

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
_____ 7. Must be formed under state law.

Question 71

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 72

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) $18,800

Question 73

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
____ 5. Loss recognized on entity liquidation.

Question 74

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
____ 8. Owner's salary is subject to FICA taxes.

Question 75

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
____ 6. Owner may deduct losses if there is basis because of loans to the entity by the owner.

Question 76

Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.
_____ 4. Gain recognized by owners on liquidation of entity.

Question 77

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 78

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 79

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 80

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