Question 1

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) $4,274
D) $4,389
E) $4,655

Accepted Answer

Jerry's share of the loss would be $13,300 ($38,000 x 35%) but the amount he can deduct in the first year is limited to his $12,950 basis [$4,200 invested + ($25,000 loan x 35%)]. The excess $350 loss is carried forward. His tax savings is $4,273.50 ($12,950 x 33%).

Question 2

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

A sole proprietor is taxed on the entire net income for the year even though she did not withdraw all of it from the business.

Question 3

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 S corporation or partnership
C) Both forms limit owner's participation in tax-free fringe benefits
D) Owner's increase basis for gains and decrease basis for losses

Accepted Answer

The answer of Which of the following is not 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

Losses from C corporations do not flow through to shareholders.

Question 5

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

The answer of In which of the following entities may...

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 shareholder is only taxed on the $8,000 dividend income received.

Question 7

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

The partner is taxed on her entire share of income for the year even though she did not receive all of it as
a distribution from the partnership ($130,000 x 20% = $26,000).

Question 8

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

[$8,000 - ($15,000 x .30) = $3,500 basis at beginning of second year] ($14,000 x .30 = $4,200 but limited to $3,500 basis)

Question 9

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

The partner is taxed on her entire share of income for the year even though she did not receive all of it as
a distribution from the partnership ($100,000 x 25% = $25,000).

Question 10

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 no provision that limits the liability of the owner. The owner is personally responsible for all the business debts and obligations.

Question 11

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 33% marginal tax bracket and Matt is in the 28% 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) $6,734
D) $6,916
E) $24,050

Accepted Answer

Matt's share of the loss would be $24,700 ($38,000 x 65%) but the amount he can deduct in the first year is limited to his $24,050 basis [$7,800 invested + ($25,000 loan x 65%)]. The excess $650 loss is carried forward. His tax savings is $6,734 ($24,050 x 28%).

Question 12

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

[$20,000 + (.2 x $15,000) - $2,000 = $21,000]

Question 13

Ian contributes $9,000 in exchange for a 30 percent interest in a C corporation. For 2016, the corporation reported a total loss of $35,000 and made no cash distributions. For 2017, 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 2017. Ian is in the 28% marginal tax bracket in both 2016 and 2017. How much income tax did Ian save for 2016 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 2017?
A) zero tax savings in 2016 and $750 tax in 2017
B) zero tax savings in 2016 and $3,360 tax in 2017
C) $2,520 tax savings in 2016 and $3,360 tax in 2017
D) $2,520 tax savings in 2016 and $2,550 tax in 2017
E) $2,940 tax savings in 2016 and $3,780 tax in 2017

Accepted Answer

$750 in 2017 ($5,000 x 15%). A C corporation is not a flow-through entity. Ian is only taxed on the $5,000 dividends he received in 2017 using the 15% dividend rate.

Question 14

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 33% marginal tax bracket and Matt is in the 28% 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 an S corporation?
A) $6,916
B) $5,320
C) $4,634
D) $2,184
E) $0

Accepted Answer

Matt's share of the loss would be $24,700 ($38,000 x 65%) but the amount he can deduct in the first year is limited to his $7,800 basis ($7,800 invested). The excess $16,900 loss is carried forward. His tax savings is $2,184 ($7,800 x 28%).

Question 15

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

[$75,000 - (.5 x $40,000) - $4,000 = $51,000]

Question 16

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's share of the loss would be $40,000 ($200,000 x 20%) but the amount she can deduct in the current year is limited to her $10,000 basis ($10,000 invested).

Question 17

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

$105,000 x 45% = $47,250.

Question 18

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 25% 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

A sole proprietor is taxed on the entire net income for the year even though he did not withdraw all of it from the business.

Question 19

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

An S corporation is a corporate form that allows pass-through taxation while also providing owners with limited liability. However, unlike a regular corporation, an S corporation is not taxed directly on operating income. Instead, the corporation's income is "passed through" to the owners or shareholders, who report it on their individual tax returns.  The other characteristics of an S corporation are that it can have no more than 100 shareholders and shareholders must consent to the S election by the corporation.

Question 20

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 33% marginal tax bracket and Matt is in the 28% 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) $1,386
C) $4,274
D) $4,389
E) $4,655

Accepted Answer

Jerry's share of the loss would be $13,300 ($38,000 x 35%) but the amount he can deduct in the first year is limited to his $4,200 basis ($4,200 invested). The excess $9,100 loss is carried forward. His tax savings is $1,386 ($4,200 x 33%).

Quiz 1: Introduction to Taxation

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

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?

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

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

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?

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?

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 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?

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

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?

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?

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?

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 25% marginal tax bracket. How much income from the above must Jordan include in his taxable income for the year?

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