Deck 15: Taxing Business Income

Question 1

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Answer 1

True

Question 2

Instead of providing a special deduction to non-corporate owners of passthrough businesses, Congress could have applied a special rate to the business income to achieve a similar result.

Answer 2

True

Question 3

The corporate marginal income tax rate is lower than the top individual tax rate.

Answer 3

True

Question 4

Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

Question 5

Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income.

Question 6

Don, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Question 7

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Question 8

The QBI deduction is set to expire after 2020.

Question 9

Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.

Question 10

One of the purposes of the qualified business income deduction is to reduce the taxes on businesses that are operating in non-corporate business forms (e.g., sole proprietors, partnerships, and S corporations).

Question 11

Thrush Corporation files Form 1120, which reports taxable income of $200,000 in the current year. The corporation's tax is $42,000.

Question 12

Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. In the current year, Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Question 13

Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

Question 14

The QBI deduction percentage matches the 21% tax rate applicable to C corporations.

Question 15

Under the "check-the-box" Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

Question 16

Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For income tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.

Question 17

A "qualified trade or business" includes any trade or business including providing services as an employee.

Question 18

Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Question 19

A C corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250.

Question 20

Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

Question 21

Ginger is a self-employed driver finding rides via a few different platform companies such as Lyft. She is single and claims the $12,000 standard deduction. For 2018, Ginger's income from driving is $67,000 and she has no other income. Ginger's QBI deduction for 2018 is $13,400.

Question 22

Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income (QBI) deduction. These thresholds ($315,000 for married taxpayers filing jointly and $157,500 for all other taxpayers) are indexed for inflation after 2018.

Question 23

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?

A) Eduardo must report $80,000 of income on his return.
B) Luis must report $80,000 of income on his return.
C) Eduardo's proprietorship is not required to pay income tax on $80,000.
D) Luis's corporation must pay income tax on $80,000.
E) None of the above.

Question 24

Qualified business income includes the "reasonable compensation" paid to the taxpayer by a qualified trade or business and guaranteed payments made to a partner for services rendered.

Question 25

Tammy has $200,000 of QBI from her neighborhood clothing store (a sole proprietorship).Tammy's proprietorship paid $30,000 in W-2 wages and has $20,000 of qualified property.Tammy's spouse earned $50,000 of wages as an employee, they earned $20,000 of interest income during the year, and will be filing jointly.What is their QBI deduction for 2018?

A) $-0-.
B) $40,000.
C) $50,000.
D) $54,000.
E) None of the above.

Question 26

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

A) If a limited liability company with more than one owner does not make an election, the entity is taxed as a corporation.
B) All 50 states have passed laws that allow LLCs.
C) An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D) If a limited liability company with one owner does not make an election, the entity is taxed as a sole ??????????????.
E) A limited liability company with one owner can elect to be taxed as a corporation.

Question 27

An individual in a specified service business, such as accounting, with taxable income over the threshold amounts ($207,500, or $415,000 if married filing jointly), will not lose the QBI deduction on such income if:

A) Taxable income exceeds the thresholds due to income of a spouse.
B) Taxable income did not exceed the thresholds in the prior three years.
C) Taxable income exceeds the thresholds because of net capital gain income.
D) None of the above.

Question 28

Qualified business income (QBI) is defined as the ordinary income less ordinary deductions a taxpayer earns from a "qualified trade or business" (e.g., from a sole proprietorship, S corporation, or partnership) conducted in the United States by the taxpayer.

Question 29

Sam and Betty, each single, each generate sole proprietor income of $240,000. Sam's income is generated from a wholesale business while Betty's is earned from her law practice. Neither has any employees or qualified assets. Both claim the standard deduction and have other income equal to the standard deduction amount.

A) Both Sam and Betty will have a QBI deduction of $48,000.
B) Sam can obtain a QBI deduction, but Betty cannot because of the taxable income level and law practice is a specified service business.
C) Neither Sam nor Betty will generate a QBI deduction due to their taxable income levels.
D) None of the above.

Question 30

Code § 199A permits an individual to deduct 25 percent of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

Question 31

For purposes of the qualified business income (QBI) deduction, qualified business income does not include certain types of investment income (e.g., capital gains or capital losses, dividends, and interest income (unless "properly allocable" to a trade or business, such as lending).

Question 32

Qualified property is used to determine one of the limitations to the qualified business income (QBI) deduction.
Specifically,2.5 percent of the unadjusted basis (immediately after acquisition) of "qualified property is added to 50 percent of W-2 wages to determine this limitation.

Question 33

Jane is a self-employed attorney and single. Her annual net earnings from her law practice always exceed $220,000.
Jane also has a business selling stained glass windows that she makes. Her earnings from this business are usually about $35,000 per year. Jane claims the standard deduction. Because Jane's taxable income exceeds the $207,500 threshold, she may not claim a QBI deduction for either business.

Question 34

A partnership will need to report wages paid to its employees as a separate line item on Schedule K-1 to help partners calculate their QBI deduction.

Question 35

The QBI deduction is:

A) An itemized deduction.
B) A deduction from AGI.
C) A deduction for AGI.
D) A deduction claimed on Schedule C.

Question 36

Ellie (a single taxpayer) is the owner of ABC, LLC.The LLC (a sole proprietorship) reports QBI of $900,000 and is no services" business.ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $ taxable income before the QBI deduction is $740,000 (this is also her modified taxable income).What is Ellie's QBI de 2018?

A) $75,750.
B) $148,000.
C) $150,000.
D) $180,000.
E) None of the above.

Question 37

Carla is a self-employed online retailer and single. She has no employees. Her annual taxable income is usually around $200,000. Carla could increase her QBI deduction if she incorporated her business, made an S election and paid herself wages.

Question 38

The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.

Question 39

Jenna Parker owns and manages her single member LLC which provides a wide variety of financial services to her clients.She is married and will file a joint tax return with her spouse, Paul.Her LLC reports $300,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000.Their taxable income before the QBI deduction is $285.000 (this is also their modified taxable income).What is their QBI deduction for 2018?

A) $-0-.
B) $57,000.
C) $60,000.
D) $70,000.
E) None of the above.

Question 40

There are three limitations on the qualified business income deduction.An overall limitation (based on modified taxable income), another that applies to high income taxpayers, and a third that applies to certain types of services businesses.

Question 41

What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?

Question 42

Which of the following taxpayers is potentially eligible for a qualified business income deduction based on the noted activity? (circle all that apply)

A) A shareholder of General Electric.
B) A sole proprietor operating a restaurant.
C) A self-employed doctor.
D) Jennifer, owner of a winery operated as an S corporation.
E) The Red Cross (a charitable organization).

Question 43

What are some of the issues remaining unresolved with the QBI deduction?

Question 44

Dawn is the sole shareholder of Thrush Corporation, a C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.

Question 45

Danielle is a partner in, and sales manager for, DG Partners, a domestic business that is not a specified service trade or business. During the tax year, she receives guaranteed payments of $250,000 from DG Partners for her services to the partnership as its sales manager. In addition, her distributive share of DG Partners' ordinary income (its only item of income or loss) was $175,000. What is Danielle's qualified business income?

A) $-0-.
B) $175,000.
C) $250,000.
D) $425,000.
E) None of the above.

Question 46

Ashley (a single taxpayer) is the owner of ABC, LLC. The LLC (a sole proprietorship) reports QBI of $900,000 and is not a "specified services" business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $30,000. Ashley's taxable income before the QBI deduction is $740,000 (this is also her modified taxable income). What is Ashley's QBI deduction for 2018?

Question 47

Describe the limitations on the qualified business income deduction that apply to high income taxpayers.

Question 48

Which of the following self-employed individuals are in a specified service trade or business? (circle all that apply)

A) Dentist.
B) Consultant.
C) Architect.
D) CPA.
E) None of the above.

Question 49

Jason and Paula are married. They file a joint return for 2018 on which they report taxable income before the QBI deduction of $200,000. Jason operates a sole proprietorship and Paula is a partner in the PQRS Partnership. Both are a qualified trade or business and neither is a specified services business. Jason's sole proprietorship reports $150,000 of net income, W-2 wages of $45,000, and has qualified property of $50,000. Paula's partnership reports a loss for the year, and her allocable share of the loss is $40,000. The partnership reports no W-2 wages and Paula's share of the partnership's qualified property is $20,000. What is their qualified business income deduction for the year?

A) $-0-.
B) $11,750.
C) $22,000.
D) $30,000.
E) None of the above.

Question 50

The qualified business income deduction is severely limited for "specified services" businesses. What is a "specified services" trade or business?

Question 51

Which of the following taxpayers is eligible for a qualified business income deduction regarding the activity noted? (circle all that apply)

A) Tom's Burger Place, a sole proprietorship.
B) A driver for Uber or Lyft.
C) An employee working for Apple Computer.
D) Apple Computer.
E) A partner of a Big 4 firm.

Question 52

How does property used in a qualified trade or business factor into the QBI deduction calculation? What types of property are considered for the QBI deduction?

Question 53

Compare the basic tax and nontax factors of doing business as a partnership, an S corporation, and a C corporation. Circle the correct answers.

Question 54

Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a specified services business. In 2018, the business pays $60,000 in W-2 wages, has $150,000 of qualified property, and $200,000 in net income (all of which is qualified business income). Susan also has a part-time job earning wages of $11,000, receives $3,000 of interest income, and will take the standard deduction. What is Susan's qualified busine income deduction?

Question 55

Taylor, a single taxpayer, has taxable income before the QBI deduction of $187,500. Taylor, a CPA, operates an accounting practice as a single member LLC (which he reports as a sole proprietorship). During 2018, his proprietorship reports net income of $150,000 and W-2 wages of $125,000 and $10,000 of qualified property. What is Taylor's qualified business income deduction?

A) $-0-.
B) $12,000.
C) $30,000.
D) $31,500.
E) None of the above.

Question 56

Alicia is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business. During the current year, ABC has net income of $325,000 after deducting Alicia's $100,000 salary. In addition to her compensation, ABC pays Alicia dividends of $250,000. After reviewing comparable companies, you determine that reasonable compensation for someone with Alicia's experience and responsibilities is $200,000. What is Alicia's qualified business income?

A) $-0-.
B) $200,000.
C) $225,000.
D) $325,000.
E) None of the above.

Question 57

Ben owns and operates as a sole proprietorship, a machine repair shop that generates a profit of about $150,000 annually. The business pays wages of about $50,000 annually. The building and most of the equipment is leased so there is no qualified property. Ben files as single and claims the standard deduction. He has a large unrealized gain in bitcoin that he acquired in 2014 and is wondering when he should sell it and whether he should sell it all in one year or over a few years. Advise Ben as to how the sale of the bitcoin and its resulting capital gain can affect his QBI deduction.

Question 58

Tanuja Singh is a CPA and operates her own accounting firm (Singh CPA, LLC). As a single member LLC, Tanuja reports her accounting firm operations as a sole proprietor. Tanuja has QBI from her accounting firm of $540,000, reports W-2 wages of $156,000, and the unadjusted basis of property used in the LLC is $425,000. Tanuja is married and will file a joint tax return with her spouse. Their taxable income before the QBI deduction is $475,000 and their modified taxable income is $448,000. What is Tanuja's QBI deduction for 2018.

A) $-0-.
B) $49,625.
C) $78,000.
D) $89,600.
E) None of the above.

Question 59

Rebecca and Brad are married and will file jointly.Rebecca earns $300,000 from her single member LLC (a law firm).She reports her business as a sole proprietorship.Wages paid by the law firm amount to $40,000? the law firm has no significant property.Brad is employed as a tax manager by a local CPA firm.Their modified taxable income is $375,000 (this is also their taxable income before the deduction for qualified business income).Determine their QBI deduction for 2018.

Question 60

Aaron is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business. During the current year, ABC has net income of $325,000 after deducting Aaron's $100,000 salary. In addition to his compensation, ABC pays Aaron dividends of $250,000. What is Aaron's qualified business income?

A) $-0-.
B) $100,000.
C) $250,000.
D) $325,000.
E) None of the above.