Question 1

A sole proprietorship must use the cash method of accounting.

Accepted Answer

A sole proprietorship may use either the cash method or the accrual method of accounting.

Question 2

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

Accepted Answer

The AAA (Accumulated Adjustments Account) is a corporate-level account used to track the accumulated earnings and profits of an S corporation. It is not a shareholder-level account.

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.

Accepted Answer

The entity concept states that a partnership is a separate legal entity from its partners, allowing it to enter contracts or own property. As a result, transactions between the partnership and its partners can occur.

Question 4

All partnerships are passive activities.

Accepted Answer

Partnerships can be either active or passive depending on the level of involvement of the partners in the management and decision-making of the business.

Question 5

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

Accepted Answer

The answer of ____ 11.The basis limitation rules are applied...

Question 6

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

Accepted Answer

The answer of There are special rules for an S...

Question 7

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

Accepted Answer

The answer of An S corporation shareholder can only deduct...

Question 8

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

Accepted Answer

A loss is not recognized on a nonliquidating distribution from a partnership, as the distribution is not considered a taxable event for the partners.

Question 9

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

Accepted Answer

A partner's basis account can change due to various factors such as contributions, distributions, and allocation of profits and losses.

Question 10

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

Accepted Answer

The answer of The limited liability partnership form of business...

Question 11

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

Accepted Answer

Active participation generally requires a lower level of involvement than material participation, as material participation has specific hourly requirements and involvement criteria in an activity, especially in the context of tax regulations.

Question 12

S corporations never pay any income taxes.

Accepted Answer

S corporations are pass-through entities, meaning that they do not pay federal income taxes. However, their profits and losses are passed through to their shareholders, who are then responsible for reporting this income on their individual tax returns and paying any applicable taxes.

Question 13

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

Accepted Answer

The answer of ____ 10.Recourse debts can only be satisfied...

Question 14

A limited partnership must have a general partner.

Accepted Answer

A limited partnership must have at least one general partner who has unlimited liability and manages the partnership, while limited partners have limited liability and do not participate in the management of the partnership.

Question 15

The owners of a limited liability company are called members.

Accepted Answer

This is true. In a limited liability company (LLC), the owners are referred to as members.

Question 16

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

Accepted Answer

Material participation can be satisfied through current activity or by meeting certain criteria over a period of time, such as participating in the activity for more than 500 hours in a year or meeting other IRS tests.

Question 17

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

Accepted Answer

While a single-member LLC can choose to be taxed as a sole proprietorship, it is not required. It can also elect to be taxed as a corporation or S corporation.

Question 18

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

Accepted Answer

Partners are required to pay taxes on their share of partnership net income annually. This income is reported on the partner's individual tax return, and the partnership itself does not pay federal income tax.

Question 19

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

Accepted Answer

This is true. By default, a limited liability company (LLC) with more than one member is treated as a partnership for tax purposes. However, the LLC can choose to be taxed as a corporation if it wishes to do so.

Question 20

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

Accepted Answer

For an S corporation election to be valid, 100 percent of the corporation's shareholders must consent to the S election.

Quiz 10: Sole Proprietorships and Flow-Through Entities