Question 1

Although nontaxable income and nondeductible expenditures are not included in the computation of taxable income,they do affect the shareholder's basis in their S corporation stock.

Accepted Answer

Nontaxable income and nondeductible expenditures are used in calculating the shareholder's basis in their S corporation stock. This is because the basis calculation takes into account a shareholder's contributions to the S corporation, their share of the S corporation's income or loss, and any distributions made to them. These factors can be affected by nontaxable income and nondeductible expenditures.

Question 2

A sole proprietor may deduct investment interest and investment expense without limitations if investments are made in the name of the business.

Accepted Answer

A sole proprietor is not a separate legal entity from the owner, therefore investment interest and expenses are considered personal and subject to certain limitations on deductibility on the owner's personal tax return.

Question 3

Withdrawals of cash by a partner are taxable.

Accepted Answer

Withdrawals of cash by a partner from their partnership account are not taxable. However, if the partner receives a distribution of profits from the partnership, that distribution may be taxable.

Question 4

A partner's basis is increased by the amount of deductible loss that flows through from the partnership.

Accepted Answer

A partner's basis is decreased by the amount of deductible loss that flows through from the partnership, as losses reduce the partner's investment in the partnership.

Question 5

Since Wisher,Inc.owns 80% of Patriot,Inc.(a U.S.corporation)the dividend received deduction rate is 100%.

Accepted Answer

According to the U.S. tax law, if a corporation owns 80% or more of another corporation, then it is eligible for a 100% dividend received deduction on dividends received from the subsidiary corporation. Therefore, since Wisher, Inc. owns 80% of Patriot, Inc., it is eligible for a 100% dividend received deduction rate.

Question 6

With the exception of personal service and closely-held corporations,regular corporations are not subject to the passive activity rules.

Accepted Answer

The answer of With the exception of personal service and...

Question 7

Match the term with the entity to which it applies.
-Dividends-received deduction
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.

Accepted Answer

The dividends-received deduction is a tax deduction available to corporations that own stock in other corporations and receive dividends from those stocks. It does not apply to sole proprietorships or partnerships, and S corporations have limitations on their ability to take this deduction.

Question 8

Match the term with the entity to which it applies.
-Not a separate entity
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.

Accepted Answer

A sole proprietorship is not a separate entity from its owner. The business and the owner are considered as one in the same, and the owner is personally liable for all the business's debts and liabilities.

Question 9

Corporations that sell depreciable real property are not subject to depreciation recapture rules

Accepted Answer

Corporations that sell depreciable real property are subject to depreciation recapture rules. Depreciation recapture rules apply to the sale of any asset that has been depreciated for tax purposes, including real property. When real property is sold, any accumulated depreciation must be recaptured as ordinary income and is subject to taxation at a higher rate than capital gains.

Question 10

When a partnership distributes property that has a fair market value greater than its basis,the partnership must recognize the income as if it sold the property.

Accepted Answer

The answer of When a partnership distributes property that has...

Question 11

Sales of property between a partner who owns more than 50% of a partnership's interest and the partnership are subject to the related party rules.

Accepted Answer

Sales of property between a partner who owns more than 50% of a partnership's interest and the partnership are considered related party transactions and are subject to special tax rules under the Internal Revenue Code. These rules are meant to prevent abusive tax avoidance by parties with control over both sides of the transaction.

Question 12

Match the term with the entity to which it applies.
-Double taxation
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.

Accepted Answer

Double taxation applies to corporations. It is the taxation of both the business entity and the shareholders on the same income.

Question 13

The amount of the dividend on a nonliquidating corporate distribution of property is the fair falue of the property.

Accepted Answer

According to the Internal Revenue Code Section 301, the amount of the dividend on a nonliquidating corporate distribution of property is equal to the fair market value of the property at the time of distribution. Therefore, option A is correct.

Question 14

A corporation may reduce trade or business income by a charitable contributions made by the corporation,but the deduction is limited to 10% of taxable income,as adjusted..

Accepted Answer

This is true according to the Internal Revenue Service's (IRS) regulations on charitable contributions for corporations. The deduction for charitable contributions is limited to 10% of the corporation's taxable income as adjusted by certain factors.

Question 15

If a sole proprietorship has a net operating loss for the current period,the loss can only be used to offset other business income in the current year.Any current loss can be carried back three years and forward five years and used to offset business income in those years.

Accepted Answer

For sole proprietorships, a net operating loss can be used to offset both business and non-business income. It can also be carried back to the two preceding years to generate a refund and carried forward up to 20 years to offset future income, not just limited to three years back and five years forward.

Question 16

Match the term with the entity to which it applies.
-Separate entity that never pays income taxes
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.

Accepted Answer

Partnerships are considered "pass-through" entities for tax purposes, meaning the entity itself does not pay income taxes. Instead, profits and losses are passed through to the individual partners, who then report this income on their personal tax returns.

Question 17

Match the term with the entity to which it applies.
-Losses flow-through limited to basis plus the amount of any direct loans
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.

Accepted Answer

This rule applies to S Corporations, which are pass-through entities that are taxed similarly to partnerships, but with some limitations. In an S Corporation, losses can only be deducted up to the shareholder's basis in the company, plus any direct loans they have made to it.

Question 18

When a corporation pays a dividend,it is nontaxable if it is in excess of earnings and profits.

Accepted Answer

The answer of When a corporation pays a dividend,it is...

Question 19

Match the term with the entity to which it applies.
-Owner basis adjusted for liabilities
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.

Accepted Answer

The term "owner basis adjusted for liabilities" applies to a partnership. In a partnership, each partner's basis in the partnership is adjusted by their share of the partnership's liabilities. This concept is crucial for understanding how much of the partnership's debt and income each partner is responsible for on their taxes.

Question 20

When a partner receives a cash distribution from a partnership,the distribution is never taxable even if the amount of cash received is greater than the partner's basis in the partnership.

Accepted Answer

If the amount of cash received by a partner is greater than their basis in the partnership, the excess is considered a taxable gain and reported as such on their tax return.

Quiz 14: Choice of Business Entity - Operations and Distributions