Question 1

Which of the following is not a taxpaying entity?
A) C Corporation
B) Partnership
C) Individual
D) All of the above are taxpayers.

Accepted Answer

B)A partnership is a flow-through entity.

Question 2

Chris, a single taxpayer, had the following income and deductions during 2016:
 $\begin{array}{ll}
\text { Salary } & \$ 55,000 \
\text { Interest on bank account } & 300 \
\text { Tax-exempt interest } & 200 \
\text { Deduction for AGI } & 3,500 \
\text { Itemized deductions } & 8,000 \
\text { Taxes withheld } & 6,500
\end{array}$ Calculate Chris's tax liability due or refund.

Accepted Answer

The answer of Chris, a single taxpayer, had the following...

Question 3

AB Partnership earns $500,000 in the current year. Partners A and B are equal partners who do not receive any distributions during the year. How much income does partner A report from the partnership?
A) $0
B) $250,000
C) $500,000
D) None of the above.

Accepted Answer

Partner A and B are equal partners, thus they share the income equally. Therefore, each partner would report $250,000 of income from the partnership.

Question 4

Brad and Angie had the following income and deductions during 2016:
 $\begin{array}{lr}
\text { Salaries } & \$ 110,000 \
\text { Interest income } & 10,000 \
\text { Itemized deductions } & 16,000 \
\text { Taxes withheld during year } & 15,000
\end{array}$ Calculate Brad and Angie's tax liability due or refund, assuming that they have 2 personal exemptions. They file a joint tax return.

Accepted Answer

The answer of Brad and Angie had the following income...

Question 5

Fireball Corporation is an S corporation. Leyla owns all of the stock. During the current year Fireball earned taxable income of $500,000 and paid a $300,000 distribution to Leyla. Which of the following statements is correct?
A) Fireball will pay corporate income tax on its earnings, and Leyla will paid individual income tax on the distribution.
B) Only Fireball will pay taxes. Leyla will not pay any taxes due to her holdings in Fireball.
C) Fireball's income will flow through to Leyla's tax return, and she will pay the taxes on the $500,000 of corporate income.
D) Fireball will not pay any taxes, but Leyla will pay taxes on the distribution received.

Accepted Answer

As an S corporation, Fireball's income is passed through to Leyla, and she will pay taxes on the $500,000 of corporate income. The $300,000 distribution is not taxable as long as it does not exceed Leyla's basis in the stock. Therefore, Fireball will not pay corporate income tax, and Leyla will only pay individual income tax on the distribution if it exceeds her basis in the stock.

Question 6

What is an important aspect of a limited liability partnership?
A) It is the same as a limited partnership where the general partner has unlimited liability.
B) A partner has unlimited liability arising from his or her own acts of negligence or misconduct or similar acts of any person under his or her direct supervision, but does not have unlimited liability in other matters.
C) All partners have limited liability regarding all partnership activities.
D) All partners have unlimited liability.

Accepted Answer

The important aspect of a limited liability partnership is that partners have limited liability regarding all partnership activities, except for their own acts of negligence or misconduct, or those of any person under their direct supervision. This means that partners will not be personally liable for the debts and obligations of the partnership, except in cases where their own actions or oversight resulted in harm. Therefore, option B is correct. The other options are incorrect as they either state that partners have unlimited liability (option D) or do not provide the full explanation of the extent of limited liability (option A and C).

Question 7

Limited liability companies may elect to be taxed as corporations.

Accepted Answer

LLCs have the option to choose how they want to be taxed, and one of those options is taxation as a corporation.

Question 8

Doug and Frank form a partnership, D and F Advertising, each contributing $50,000 to start the business. During the first year of operations, D and F earns $80,000, which is allocated $40,000 each to Doug and Frank. At the beginning of the second year, Doug sells his interest to Marcus for $90,000. What is the amount of Doug's taxable gain on the sale?

Accepted Answer

The answer of Doug and Frank form a partnership, D...

Question 9

Rocky and Charlie form RC Partnership as equal partners. Rocky contributes $100,000 into RC while Charlie contributes real estate with a cost and fair market value of $100,000. During the current year, RC earned net income of $600,000. The partnership distributes $200,000 to each partner. The amount that Rocky should report on his individual tax return is
A) $0.
B) $100,000.
C) $200,000.
D) $300,000.

Accepted Answer

Rocky should report his share of the partnership's net income, which is $300,000 ($600,000 x 50%). He should also report his share of the partnership's distribution, which is $200,000 ($400,000 x 50%). Therefore, the total amount Rocky should report on his individual tax return is $500,000 ($300,000 + $200,000).

Question 10

In a limited liability partnership, a partner is not liable for his partner's acts of negligence or misconduct.

Accepted Answer

In a limited liability partnership, each partner is protected from personal liability for the negligence or misconduct of other partners.

Question 11

During the current tax year, Frank Corporation generated gross income of $1,900,000 and had ordinary and necessary deductions of $1,400,000. What is the amount of Frank Corporation's corporate income tax for the year?

Accepted Answer

The answer of During the current tax year, Frank Corporation...

Question 12

Firefly Corporation is a C corporation. Freya owns all of the stock. During the current year Firefly earned taxable income of $500,000 and paid a $300,000 dividend to Freya. Which of the following statements is correct?
A) Firefly will pay corporate income tax on its earnings, and Freya will paid individual income tax on the dividends.
B) Only Firefly will pay taxes. Freya will not pay any taxes due to her holdings in Firefly.
C) Firefly's income will flow through to Freya's tax return, and she will pay the taxes on the $500,000 of corporate income.
D) Firefly will not pay any taxes, but Freya will pay taxes on the dividend received.

Accepted Answer

As a C corporation, Firefly will pay corporate income tax on its earnings. Freya, as the shareholder receiving the dividend, will also pay individual income tax on the $300,000 dividend received. Therefore, both Firefly and Freya will pay taxes separately.

Question 13

Organizing a corporation as an S Corporation results in a single level of taxation.

Accepted Answer

When a corporation is organized as an S Corporation, it is not subject to federal income tax. Instead, the corporation's income, deductions, and credits flow through to its shareholders' personal income tax returns and are taxed at their individual tax rates, resulting in a single level of taxation.

Question 14

Limited liability company members (owners) are responsible for the liabilities of their limited liability company.

Accepted Answer

Limited liability company members are not personally responsible for the liabilities of their company. The extent of their liability is limited to their capital contribution to the company.

Question 15

During the current tax year, Charlie Corporation generated gross income of $1,800,000 and had ordinary and necessary deductions of $1,300,000, resulting in taxable income of $500,000. If Charlie Corporation paid qualifying dividends of $200,000 to shareholders, all of whom are in the 25% marginal tax bracket, what is the total tax paid on both corporate income and the corporate dividends?

Accepted Answer

The answer of During the current tax year, Charlie Corporation...

Question 16

In an S corporation, shareholders
A) are taxed on their proportionate share of earnings.
B) are taxed only on dividends.
C) may allocate income among themselves in order to consider special contributions.
D) are only taxed on salaries.

Accepted Answer

In an S corporation, shareholders are taxed on their proportionate share of earnings. This means that they are taxed on the income that the corporation earns, whether or not it is distributed as dividends. The income is reported on the shareholders' personal tax returns, and they are responsible for paying taxes on it. Therefore, option A is the correct answer.

Question 17

Which of the following is not an advantage of a limited liability company (LLC)?
A) limited liability for all members of a LLC
B) ability to choose between taxation as a partnership or corporation
C) default tax treatment as a corporation, unless otherwise elected
D) All of the above are advantages of an LLC.

Accepted Answer

The answer of Which of the following is not an...

Question 18

Flow-through entities do not have to file tax returns since they are not taxable entities.

Accepted Answer

While flow-through entities, such as partnerships or S corporations, pass their income through to their owners for taxation, they are still required to file tax returns to report their income and provide information about their structure and operations to the IRS.

Question 19

All of the following statements are true except
A) the net income earned by a sole proprietorship is reported on the owner's individual income tax return.
B) the net income of an S corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the S corporation to individual shareholders are also taxed.
C) the net income of C corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the C corporation to individual shareholders is also taxed.
D) LLCs are generally taxed as partnerships.

Accepted Answer

The net income of an S corporation is not subject to double taxation. It is only taxed at the individual shareholder level and dividends paid to shareholders are not subject to additional tax.

Question 20

All of the following are classified as flow-through entities for tax purposes except
A) partnerships.
B) C corporations.
C) S corporations.
D) limited liability companies.

Accepted Answer

C corporations are not classified as flow-through entities for tax purposes because they are taxed at the corporate level and then again at the individual level when shareholders receive dividends or capital gains from the corporation. Flow-through entities pass the profits or losses through to the owners' individual tax returns, avoiding double taxation at the corporate and individual levels. Partnerships, S corporations, and limited liability companies are all considered flow-through entities.

Quiz 16: an Introduction to Taxation

Which of the following is not a taxpaying entity?

AB Partnership earns $500,000 in the current year. Partners A and B are equal partners who do not receive any distributions during the year. How much income does partner A report from the partnership?

Fireball Corporation is an S corporation. Leyla owns all of the stock. During the current year Fireball earned taxable income of $500,000 and paid a $300,000 distribution to Leyla. Which of the following statements is correct?

What is an important aspect of a limited liability partnership?

Limited liability companies may elect to be taxed as corporations.

In a limited liability partnership, a partner is not liable for his partner's acts of negligence or misconduct.

During the current tax year, Frank Corporation generated gross income of $1,900,000 and had ordinary and necessary deductions of $1,400,000. What is the amount of Frank Corporation's corporate income tax for the year?

Firefly Corporation is a C corporation. Freya owns all of the stock. During the current year Firefly earned taxable income of $500,000 and paid a $300,000 dividend to Freya. Which of the following statements is correct?

Organizing a corporation as an S Corporation results in a single level of taxation.

Limited liability company members (owners) are responsible for the liabilities of their limited liability company.

In an S corporation, shareholders

Which of the following is not an advantage of a limited liability company (LLC) ?

Flow-through entities do not have to file tax returns since they are not taxable entities.

All of the following statements are true except

All of the following are classified as flow-through entities for tax purposes except