Question 1

The partnership of Truman and Hanover realized the following items of income during the year ended December 31, 2014: Both the partners are on a calendar year basis. What is the total income which should be reported as ordinary income from business activities of the partnership for 2014?

Accepted Answer

The answer of The partnership of Truman and Hanover realized...

Question 2

Barry owns a 50 percent interest in B&B Interests, a partnership. His brother, Benny, owns a 35 percent interest in that same partnership, and the remaining 15 percent is owned by an unrelated individual. During 2014, Barry sells a rental property with a basis of $60,000 to B&B Interests for $100,000. The partnership intends to hold the rental as inventory for resale. What is the amount and nature of Barry's gain or loss on this transaction?

Accepted Answer

Since Barry sold the rental property to the partnership of which he is a partner, the transaction is considered as a related-party transaction. Therefore, the transaction will be treated as a sale to a controlled entity, and the gain or loss recognized will be treated as ordinary income or loss, not as a capital gain or loss. Barry's basis in the rental property was $60,000, and the sale price to the partnership was $100,000, resulting in a gain of $40,000, which will be treated as ordinary income.

Question 3

Owen owns 60 percent of the Big Time partnership. He sells to the partnership a machine for $70,000 that has a $45,000 basis. What would the taxable income be for Owen and what is the partnership's basis in the machine?

Accepted Answer

The partnership's basis in the machine would be the cost of $70,000. 
For Owen, the gain on the sale would be $25,000 ($70,000 - $45,000). Since he owns 60% of the partnership, his share of the gain would be $15,000. This would be included in his taxable income. Therefore, the taxable income for Owen would be $25,000 ($10,000 of partnership income plus $15,000 from the sale of the machine).

Question 4

Phil and Bill each own a 50 percent interest in P&B Interests. P&B Interests has ordinary income for the year of $35,000 before guaranteed payments to Phil. If Phil receives guaranteed payments of $25,000 during the tax year, what is the total income or loss that should be reported by Bill from the partnership for this tax year?

Accepted Answer

The partnership's ordinary income is $35,000. After Phil's guaranteed payment of $25,000, the remaining income is $10,000. Bill's share is 50% of this, which is $5,000.

Question 5

Which of the following items must be reported separately from ordinary income or loss on a partnership return?

Accepted Answer

Capital losses must be reported separately on Form 1065 of the partnership return. This is because partners may be able to offset their share of the partnership's capital losses against other capital gains they have realized during the year or carried over from previous years.

Question 6

Which of the following is a disadvantage of an LLC?

Accepted Answer

One disadvantage of an LLC is that the states are not uniform in their treatment of limited liability companies. This can create confusion and uncertainty, particularly in regards to taxes and other regulatory requirements.

Question 7

The partnership of Felix and Oscar had the following items of income during the tax year ended December 31, 2014: What is the total ordinary income from business activities passed through by the partnership for the 2014 tax year?

Accepted Answer

The answer of The partnership of Felix and Oscar had...

Question 8

Wallace and Pedersen have equal interests in the capital and profits of the partnership of Wallace and Pedersen, but are otherwise unrelated. On August 1, 2014, Wallace sold 100 shares of Kalmia Mining Corporation to the partnership for its fair market value of $7,000. Wallace had bought the stock in 2000 at a cost of $10,000. What is Wallace's deductible loss for 2014 as a result of the sale of this stock?

Accepted Answer

Wallace sold the stock for $7,000, which is less than his cost basis of $10,000, resulting in a loss. Since the stock was held for more than one year, this is a long-term capital loss. However, since the sale was to a partnership where Wallace has an equal interest, this is considered a related party transaction and the loss is disallowed as a deduction. Therefore, Wallace's deductible loss for 2014 is $0.

Question 9

Which of the following is true about an LLC (Limited Liability Company)?

Accepted Answer

An LLC's limited liability is similar to a corporation's. While an LLC can choose to be taxed like a corporation, partnership, or sole proprietorship, it is not always treated as a corporation for tax purposes. An LLC can have just one member, so it is not required to have at least two members.

Question 10

Which one of the following is not true about partnerships and their income-reporting process?

Accepted Answer

Partnerships are pass-through entities, which means that the partnership itself does not pay income tax. Instead, the partners report their share of the partnership's income or loss on their personal tax returns and pay taxes on that amount.

Question 11

For tax purposes, in computing the ordinary income of a partnership, a deduction is allowed for:

Accepted Answer

The deduction for payments to partners for services provided to the partnership is allowed as long as the payment amount is reasonable and determined without regard to the income of the partnership. This deduction reduces the amount of taxable income for the partnership. The other options listed (B, C, D) are not deductible for ordinary income tax purposes for a partnership.

Question 12

Under which of the following circumstances would a partnership terminate and close its tax year?

Accepted Answer

The answer of Under which of the following circumstances would...

Question 13

Nash and Ford are partners who share profits and losses equally. For the year ended December 31, 2014, the partnership had book income of $80,000 which included the following deductions: What amount should be reported as ordinary income on the partnership return for 2014?

Accepted Answer

The $80,000 book income includes deductions of $5,000 charitable contributions and $15,000 long-term capital loss. Therefore, the partnership's ordinary income is $80,000 + $15,000 = $95,000. As Nash and Ford share profits and losses equally, each partner's share of ordinary income would be $47,500.

Question 14

Barbara receives a current distribution consisting of $2,000 cash plus other property with an adjusted basis to the partnership of $2,300 and a fair market value on the date of the distribution of $7,000. Barbara has a 10 percent interest in the partnership and her basis in her partnership interest, immediately prior to the distribution, is $5,000. What is Barbara's basis in the non-cash property received in the current distribution?

Accepted Answer

The answer of Barbara receives a current distribution consisting of...

Question 15

Jordan files his income tax return on a calendar-year basis. He is the principal partner of a partnership reporting on a June 30 fiscal year end basis. Jordan's share of the partnership's ordinary income was $24,000 for the fiscal year ended June 30, 2014, and $72,000 for the fiscal year ended June 30, 2015. How much should Jordan report on his 2014 individual income tax return as his share of taxable income from the partnership?

Accepted Answer

Jordan's individual income tax return is based on a calendar-year basis, therefore he needs to report his share of the partnership's income for the portion of the partnership's fiscal year that falls within his calendar year. In this case, his share of the partnership's income for the fiscal year ended June 30, 2014 should be reported on Jordan's 2014 income tax return, which is $24,000.

Question 16

Salix Associates is a partnership with an October 31 year-end. For the fiscal year ended October 31, 2014, Salix Associates reported ordinary income of $100,000, after deducting guaranteed payments. Max, a calendar year taxpayer, is a 30 percent partner in the partnership and received $2,000 monthly as a guaranteed payment for the calendar year 2013, and $2,100 monthly for the calendar year 2014. What is the total income from the partnership that Max should report on his 2014 individual income tax return?

Accepted Answer

The answer of Salix Associates is a partnership with an...

Question 17

Jim's basis in his partnership is $200,000. His share of the 2014 income is $60,000. The partnership gave him a $75,000 distribution in 2014. What is his new basis in the partnership and what is his taxable income?

Accepted Answer

Jim's new basis would be his original basis ($200,000) plus his share of the income ($60,000) minus the distribution he received ($75,000). 
Therefore, his new basis is $185,000. 
His taxable income is just his share of the income, which is $60,000.

Question 18

Which of the following liabilities would be considered nonrecourse?

Accepted Answer

Nonrecourse liabilities are those where the lender's only recourse in case of default is to take back the collateral that was used to secure the loan. In case of option A, the taxpayer is personally liable, so it is not a nonrecourse liability. In option B, credit card debt is unsecured and therefore not a nonrecourse liability. Option C is a nonrecourse liability because the bank can take the real estate if the taxpayer stops making payments on the loan.

Question 19

Kitty is a 60 percent partner of Tabby Associates. Kitty sells a building to the partnership for $75,000. If the building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this transaction?

Accepted Answer

The answer of Kitty is a 60 percent partner of...

Question 20

At the beginning of the year, Joe's basis in his partnership interest was $5,000. During the year, Joe contributed $10,000 in cash to the partnership and signed a bank loan to be personally liable for the partnership's debt of $25,000. For the current year, the partnership allocated a loss of $60,000 to Joe. In the following year, Joe's portion of the partnership income is $30,000. Which of the following is accurate?

Accepted Answer

The answer of At the beginning of the year, Joe's...

Quiz 10: Partnership Taxation