Question 1

Which of the following business entities does not file a separate tax return to report business operations?
A) Sole proprietorship
B) S corporation
C) C corporation
D) Partnership

Accepted Answer

A Sole Proprietorship does not file a separate tax return, as the business income and expenses are reported on the owner's personal tax return.

Question 2

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. What is Matt's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as a partnership?
A) $0
B) $2,184
C) $5,772
D) $6,916
E) $24,050

Accepted Answer

The answer of Jerry and Matt decide to form a...

Question 3

Ian contributes $9,000 in exchange for a 30 percent interest in a C corporation. For 2017, the corporation reported a total loss of $35,000 and made no cash distributions. For 2018, the corporation reported net income of $45,000 and made a cash distribution to the shareholders. Ian received $5,000 of this cash distribution in 2018. Ian is in the 24% marginal tax bracket and 15% dividend rate in both 2017 and 2018. How much income tax did Ian save for 2017 as a result of his share of loss from this corporation and how much income tax does Ian pay as a result of his ownership in the corporation for 2018?
A) zero tax savings in 2017 and $750 tax in 2018
B) zero tax savings in 2017 and $3,360 tax in 2018
C) $2,520 tax savings in 2017 and $3,360 tax in 2018
D) $2,520 tax savings in 2017 and $2,550 tax in 2018
E) $2,940 tax savings in 2017 and $3,780 tax in 2018

Accepted Answer

The answer of Ian contributes $9,000 in exchange for a...

Question 4

Emma owns 40% of Johnson, Inc., a regular C corporation, that reported a net loss of $50,000 for the year. Emma acquired her stock on January 1 of the current year by investing $4,000 cash. In July, the corporation took out a bank loan for $25,000. How much of the loss can Emma deduct on her tax return for the year?
A) $0
B) $4,000
C) $9,000
D) $10,000

Accepted Answer

Emma cannot deduct any of the loss on her personal tax return because losses from C corporations are not passed through to their shareholders. Shareholders of a C corporation cannot deduct the corporation's losses on their personal tax returns; instead, the corporation itself carries the loss forward or backward to offset its own future or past taxable income.

Question 5

Crystal invested $8,000 cash in CRK Partnership for a 30% general partnership interest. In its first year of operations, CRK lost $15,000. In its second year of operations, CRK lost an additional $14,000. How much of the second year's losses can Crystal deduct in that year?
A) $700
B) $2,400
C) $3,500
D) $4,200

Accepted Answer

The answer of Crystal invested $8,000 cash in CRK Partnership...

Question 6

Elena owns 40% of Martinez, Inc., a regular C corporation, that reported net income of $80,000 for the year. During the year $8,000 was distributed to Elena from the corporation. How much income from the corporation should Elena include in her taxable income for the year?
A) $40,000
B) $32,000
C) $8,000
D) $3,200

Accepted Answer

The answer of Elena owns 40% of Martinez, Inc., a...

Question 7

Which of the following business entities has no provision that limits some or all of the liability of the owner?
A) C corporation
B) Sole proprietorship
C) S corporation
D) Limited liability company

Accepted Answer

A sole proprietorship has only one owner who has unlimited liability, meaning their personal assets are at risk if the business incurs debt or faces legal action. The other options (C corporation, S corporation, and limited liability company) all have provisions that limit the owner's liability to varying degrees.

Question 8

Which of the following is not a characteristic of an S corporation?
A) Owners have limited liability
B) The corporation is taxed directly on operating income
C) The corporation can have no more than 100 shareholders
D) Shareholders must consent to the S election by the corporation

Accepted Answer

One of the main characteristics of an S corporation is that it is not taxed directly on operating income. Instead, the profits and losses are passed through to the shareholders and are reported on their personal tax returns. The other three choices are all correct characteristics of an S corporation.

Question 9

Jordan is the sole proprietor of Adams Company that reported net income of $57,000 for the year. During the year he withdrew $11,000 from the business for personal use. Jordan is in the 24% marginal tax bracket. How much income from the above must Jordan include in his taxable income for the year?
A) $68,000
B) $57,000
C) $14,250
D) $11,000

Accepted Answer

The answer of Jordan is the sole proprietor of Adams...

Question 10

In which of the following entities may an owner-employee benefit from all employee tax-free fringe benefits?
A) C corporation
B) S corporation
C) Partnership
D) Sole proprietorship

Accepted Answer

Owner-employees of C corporations can benefit from all employee tax-free fringe benefits, as the tax code allows C corporations to provide these benefits to all employees, including those who are also owners, without discrimination. S corporations, partnerships, and sole proprietorships have restrictions that limit the extent to which owner-employees can receive tax-free fringe benefits.

Question 11

Terri owns a 50 percent interest in the TT Partnership. At the beginning of the year, her basis in her partnership interest was $75,000. The partnership reports a $40,000 loss for the year and distributes $4,000 cash to Terri. What is her basis in her partnership interest at the end of the year?
A) $111,000
B) $75,000
C) $51,000
D) $31,000

Accepted Answer

The answer of Terri owns a 50 percent interest in...

Question 12

Elena owns 25% of a partnership that reported net income of $100,000 for the year. During the year $5,000 was distributed to Elena from the partnership. How much should Elena include in her taxable income for the year?
A) $30,000
B) $25,000
C) $5,000
D) $0

Accepted Answer

Elena's share of the net income is 25% of $100,000, which is $25,000. The $5,000 distribution is already included in her share of the net income, so she only needs to include the $25,000 on her tax return.

Question 13

What is Jerry's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as a partnership?
A) $0
B) $1,386
C) $4,144
D) $4,389
E) $4,655

Accepted Answer

The answer of What is Jerry's income tax savings (rounded...

Question 14

Which of the following is not a characteristic of both S corporations and partnerships?
A) Both are flow through entities
B) Owners increase basis for debt undertaken by an S corporation or partnership
C) Both forms limit owner's participation in tax-free fringe benefits
D) Owners increase basis for gains and decrease basis for losses

Accepted Answer

S corporations do not allow owners to increase their basis for debt undertaken by the corporation, whereas partnerships do allow their partners to increase their basis for their share of partnership debt. This is a key difference between how debt affects owner's equity in these two types of entities.

Question 15

Emily is a 20% shareholder in an S corporation. Emily acquired her interest on January 1 of the current year by investing $10,000 for 20% of the corporation's stock. In March, the corporation took out a bank loan for $100,000. The corporation reported a net loss for the current year of $200,000. How much of this loss can Emily deduct on her current year's tax return?
A) $40,000
B) $30,000
C) $20,000
D) $10,000

Accepted Answer

Emily can deduct $10,000, which is limited to her basis in the S corporation. Her basis starts with her initial investment of $10,000. While shareholders in an S corporation can increase their basis by their share of any corporate debt, Emily does not personally guarantee the bank loan, so it does not increase her basis. Therefore, her deduction is limited to her initial investment of $10,000.

Question 16

Jason purchased a 20 percent interest in JKL Partnership for $20,000 at the beginning of the year. At year-end, the partnership reported net income of $15,000 and distributed $2,000 cash to Jason. What is Jason's year-end basis?
A) $20,000
B) $21,000
C) $23,000
D) $33,000

Accepted Answer

Jason's initial investment of $20,000 gave him a 20% interest in the partnership, which means the partnership had a total value of $100,000 (since 20% of $100,000 is $20,000). 
At year-end, the partnership reported net income of $15,000, so the total value of the partnership would have increased to $115,000 ($100,000 + $15,000). 
Jason's share of that increase would have been 20%, or $3,000. Since he received $2,000 in cash distributions, his year-end basis would be $21,000 ($20,000 initial investment + $3,000 share of net income - $2,000 cash distribution).

Question 17

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. What is Jerry's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as an S corporation?
A) $0
B) $1,344
C) $4,274
D) $4,389
E) $4,655

Accepted Answer

The answer of Jerry and Matt decide to form a...

Question 18

Mason owns 45% of an S corporation that reported net income of $105,000 for the year. During the year, $20,000 was distributed to Mason from the corporation. How much should Mason include in his taxable income for the year?
A) $20,000
B) $47,250
C) $56,250
D) $67,250

Accepted Answer

The answer of Mason owns 45% of an S corporation...

Question 19

Deazia is the sole proprietor of Baldwin Hair Salon that reported net income of $44,000 for the year. During the year she withdrew $20,000 from the business for personal use. How much income from the above must Deazia include in her taxable income for the year?
A) $20,000
B) $24,000
C) $44,000
D) $64,000

Accepted Answer

The answer of Deazia is the sole proprietor of Baldwin...

Question 20

Sophia owns 20% of a partnership that reported net income of $130,000 for the year. During the year $18,000 was distributed to Sophia from the partnership. How much should Sophia include in her taxable income for the year?
A)  $44,000.
B) $29,000
C)$26,000.
D)  $44,000

Accepted Answer

Sophia's share of the net income is 20% x $130,000 = $26,000. The $18,000 distribution she received during the year is not all taxable income, as some of it may be a return of her capital contribution to the partnership. To determine how much of the distribution is taxable income, Sophia should consult her partnership agreement or consult with a tax professional. Therefore, Sophia should include $26,000 in taxable income, and the correct choice is C.

Quiz 1: Introduction to Taxation

Which of the following business entities does not file a separate tax return to report business operations?

Crystal invested $8,000 cash in CRK Partnership for a 30% general partnership interest. In its first year of operations, CRK lost $15,000. In its second year of operations, CRK lost an additional $14,000. How much of the second year's losses can Crystal deduct in that year?

Elena owns 40% of Martinez, Inc., a regular C corporation, that reported net income of $80,000 for the year. During the year $8,000 was distributed to Elena from the corporation. How much income from the corporation should Elena include in her taxable income for the year?

Which of the following business entities has no provision that limits some or all of the liability of the owner?

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

Jordan is the sole proprietor of Adams Company that reported net income of $57,000 for the year. During the year he withdrew $11,000 from the business for personal use. Jordan is in the 24% marginal tax bracket. How much income from the above must Jordan include in his taxable income for the year?

In which of the following entities may an owner-employee benefit from all employee tax-free fringe benefits?

Terri owns a 50 percent interest in the TT Partnership. At the beginning of the year, her basis in her partnership interest was $75,000. The partnership reports a $40,000 loss for the year and distributes $4,000 cash to Terri. What is her basis in her partnership interest at the end of the year?

Elena owns 25% of a partnership that reported net income of $100,000 for the year. During the year $5,000 was distributed to Elena from the partnership. How much should Elena include in her taxable income for the year?

What is Jerry's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as a partnership?

Which of the following is not a characteristic of both S corporations and partnerships?

Jason purchased a 20 percent interest in JKL Partnership for $20,000 at the beginning of the year. At year-end, the partnership reported net income of $15,000 and distributed $2,000 cash to Jason. What is Jason's year-end basis?

Mason owns 45% of an S corporation that reported net income of $105,000 for the year. During the year, $20,000 was distributed to Mason from the corporation. How much should Mason include in his taxable income for the year?

Deazia is the sole proprietor of Baldwin Hair Salon that reported net income of $44,000 for the year. During the year she withdrew $20,000 from the business for personal use. How much income from the above must Deazia include in her taxable income for the year?

Sophia owns 20% of a partnership that reported net income of $130,000 for the year. During the year $18,000 was distributed to Sophia from the partnership. How much should Sophia include in her taxable income for the year?