Question 1

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.Assuming Jason's QBI deduction is not limited, what is the net amount taxable to Jason's this year as a result of his interest in JLK Partnership?

Accepted Answer

Jason's distributive share of partnership income is $3,000 (20% x $15,000). After considering the cash distribution of $2,000, Jason's net amount taxable is $1,000 ($3,000 - $2,000).

Question 2

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

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 3

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

Accepted Answer

Sole proprietorships do not file a separate business tax return for income from operations. Instead, the income or loss from a sole proprietorship is reported on the individual owner's personal income tax return, typically using Schedule C of Form 1040.

Question 4

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?

Accepted Answer

Jason's basis is increased by his share of partnership income ($15,000 x 20% = $3,000) and decreased by the cash distribution ($2,000). Therefore, his year-end basis is $20,000 + $3,000 - $2,000 = $21,000.

Question 5

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

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 6

Elena owns 25% of a partnership that reported net income of $100,000 for the year.Elena's basis in her partnership interest is $20,000 at the beginning of the year.During the year $5,000 was distributed to Elena from the partnership.How much should Elena include in her gross income for the year?

Accepted Answer

Elena should include her share of the partnership's net income in her gross income, which is 25% of $100,000, equaling $25,000. Distributions do not affect gross income as they are considered a return of capital up to the basis in the partnership interest.

Question 7

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 Terri's deductible loss (included in her gross income) as a result of her 50 percent interest in TT?

Accepted Answer

Terri's deductible loss is limited to her basis in the partnership. Her initial basis is $75,000. The partnership loss allocated to her is $20,000 (50% of $40,000). The cash distribution reduces her basis by $4,000, leaving her with a basis of $71,000. Since her basis is sufficient to cover the $20,000 loss, she can deduct the full $20,000.

Question 8

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 gross income for the year?

Accepted Answer

As a sole proprietor, Deazia must include the entire net income of the business in her gross income for tax purposes, which is $44,000, regardless of the amount she withdrew for personal use.

Question 9

Harold has a 50% interest in a general partnership that has a $14,000 loss for the year.He materially participates in the partnership, his basis in the partnership is $10,000 at the beginning of the year.He also has salary from other employment of $46,000.What is Harold's basis in the partnership at the end of the year?

Accepted Answer

Harold's initial basis in the partnership is $10,000. Since he has a 50% interest in the partnership, his share of the loss is 50% of $14,000, which is $7,000. Subtracting this loss from his initial basis, $10,000 - $7,000 = $3,000, gives his basis at the end of the year.

Question 10

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

Accepted Answer

S corporations are "pass-through" entities for tax purposes, meaning the income is passed through to the shareholders and taxed at their individual tax rates, rather than the corporation being taxed directly on its operating income.

Question 11

Ted owns 20% of Genco (a C corporation) that had taxable income of $100,000 and paid a total of $50,000 in dividends to its shareholders.Ted also owns 10% of Subco (an S corporation) that had $100,000 of taxable income and distributed a total of $60,000 to its shareholders.How much must Ted include in his gross income as a result of being a shareholder in these two corporations?

Accepted Answer

The answer of Ted owns 20% of Genco (a C...

Question 12

Jordan is the sole proprietor of Adams Company that reported $70,000 of income and $13,000 of expenses 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 gross income for the year?

Accepted Answer

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

Question 13

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

Accepted Answer

Sole proprietorship does not limit the liability of the owner, meaning the owner is fully responsible for all debts and obligations of the business.

Question 14

Elena owns 25% of a partnership that reported net income of $100,000 for the year.Elena's basis in her partnership interest is $20,000 at the beginning of the year.During the year $5,000 was distributed to Elena from the partnership.Assuming Elena's QBI deduction is not limited, how much in the net amount Elena is taxed on this year as a result of her interest in this partnership?

Accepted Answer

The answer of Elena owns 25% of a partnership that...

Question 15

Elena owns 25% of a partnership that reported net income of $100,000 for the year.Elena's basis in her partnership interest is $20,000 at the beginning of the year.During the year $5,000 was distributed to Elena from the partnership.What is Elena's basis at the end of the year?

Accepted Answer

Elena's basis at the end of the year is calculated by starting with her initial basis ($20,000), adding her share of the partnership's net income (25% of $100,000 = $25,000), and then subtracting any distributions she received ($5,000). Therefore, her ending basis is $20,000 + $25,000 - $5,000 = $40,000.

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 included in Jason's gross income as a result of his interest in JLK Partnership?

Accepted Answer

The answer of Jason purchased a 20 percent interest in...

Question 17

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?

Accepted Answer

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

Question 18

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 gross income for the year?

Accepted Answer

Sophia should include 20% of the partnership's net income in her gross income, which is $130,000 * 20% = $26,000. The distribution of $18,000 is not relevant for calculating her share of the partnership's income.

Question 19

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's earnings and profits.How much income from the corporation should Elena include in her gross income for the year?

Accepted Answer

Elena should include $8,000 in her gross income for the year, which is the amount actually distributed to her from the corporation's earnings and profits. The percentage of ownership or the corporation's total net income does not directly affect the amount she must include in her gross income; only the distributions she actually receives are taxable to her as dividend income.

Question 20

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?

Accepted Answer

Crystal can deduct losses up to her basis in the partnership. Initially, her basis is $8,000. After the first year's loss, her basis is reduced by 30% of $15,000, which is $4,500, leaving her with a basis of $3,500. In the second year, she can deduct up to her remaining basis of $3,500.

Quiz 1: Introduction to Taxation