Exam 11: Sole Proprietorships and Flow-Through Entities

Ray, Ronnie and Joe are partners in a limited partnership. Ray and Ronnie, the limited partners, each own 45 percent of the partnership and Joe, the general partner, owns the other 10 percent. The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt. What effect do the debts have on Ray's basis?

Klinger's AGI is $130,000 before the loss of $29,000 from a rental complex he owns and in which he actively participates. What is his AGI after this loss?

The owners of a limited liability company are called members.

Which of the following is not an acceptable partnership tax year?

Other Objective Questions Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions. -Formation of the entity is generally a tax-free event.

Jonathan's basis in his S corporation stock is $4,000 at the end of the year before the corporation reports his $1,500 share of income and distributes $2,500 cash to him. What is his basis at the beginning of the following tax year?

How are income and loss apportioned to S corporation shareholders for taxation?

The Walden Partnership has two 20 percent general partners and six 10 percent limited partners. During the current year, the partnership paid off $50,000 of notes payable, purchased machinery for $100,000 on a nonrecourse note, borrowed $20,000 for working capital, and had $80,000 income from operations. If the general partners each had a basis of $30,000 in their partnership interests at the beginning of the year, what is each general partner's year-end basis?

Jose, who is single, is allocated $510,000 of income and $788,000 of deductions from KYX General Partnership resulting in a $278,000 loss allocated to him for 2018. Jose's basis in the partnership is $300,000. How much of this loss must Jose carry forward to 2019?

Greg and Samantha plan to establish a business in which they will both materially participate. They are both in the 32% marginal tax bracket. Although they expect the business to be very successful in the long-run, they project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is very important for the owners. Which form of business entity should they select considering both tax and nontax factors?

Sue is a 50 percent working partner in a partnership. She is guaranteed an annual salary of $60,000. Jim, the other 50 percent partner, is to receive the first $10,000 of partnership profits before the balance is divided equally between them. During the year, the partnership's accounting results were $40,000 of income before any partner allocations. What amount of income will Sue be taxed on?

Which of the following is not a characteristic of a partnership?

Jose, who is single, is allocated $510,000 of income and $788,000 of deductions from KYX General Partnership resulting in a $278,000 loss allocated to him for 2018. Jose's basis in the partnership is $300,000. How much of this loss can Jose deduct in 2018?

If a shareholder does not have sufficient stock basis to deduct his or her share of an S corporation's losses and deductible items, what are the tax consequences?

S corporations never pay any income taxes.

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

When may a partner recognize gain on a nonliquidating distribution from the partnership?

A and B are equal shareholders in AB, a calendar-year S corporation. On June 30 (181 days into the year), A sells one-half of her stock to C. The corporation reports $30,000 of income for the year. How much of this income is allocated to A, B, and C?

Other Objective Questions Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions. -Operating income taxed to entity.

Other Objective Questions Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions. -Distributions from entity are generally tax-free. (Assume the S corporation shareholder has stock basis and partner has partnership or debt basis.)