Exam 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations

XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false?

Which of the following statements regarding limited liability companies is false?

A partner's distributive share of partnership nondeductible losses does not decrease his or her tax basis in the partnership interest.

Bernard and Leon formed a general partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Bernard's tax basis in his partnership interest?

On January 1 of this year, Conrad Nelson contributed $15,000 cash in exchange for 50 shares of stock in Sterling Inc., an S corporation. Sterling employs Conrad as its director of marketing. Conrad's current year salary was $70,000 and his pro rata share of Sterling's ordinary business income was $16,800. During the year, Conrad received a $9,000 cash distribution with respect to his Sterling stock. Compute Conrad's basis in his Sterling stock at year end.

The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year.

Gavin owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following: ordinary buslness lncome \6 0,000 Share of partnership debt, beginning of year 10,000 Share of partnership debt, end of year 15,000 Calculate Gavin's tax basis in his partnership interest at the end of the year?

Jose is married filing a joint return. In 2020, he earned $160,000 of profit from his sole proprietorship, which operates a service business. The business paid no W-2 wages in 2020 and owns no tangible business property.Compute Jose's allowable QBI deduction if his joint return reflects taxable income of $300,000 before the deduction.Compute Jose's allowable QBI deduction if his joint return reflects taxable income of $340,000 before the deduction.

Which of the following statements regarding the basis limitation on deduction of partnership losses is false?

A partner's tax basis in his or her partnership interest is decreased by partnership distributions.

Orange Partnership is a calendar year partnership with the following current year information: $\begin{array}{llr} \text { Operating loss } &\$(120,000)\\ \text { Liabilities: } &\\ \text { Note payable, City Bank } &20,000\\ \text {Note payable, Jack Crow } &20,000\end{array}$ On January 1, John James bought 50% general interest in Orange Partnership for $30,000. How much of the operating loss may John deduct on his Form 1040? Assume the excess business loss limitation does not apply.

In 2020, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?

During the current year, Margie earned wage income of $300,000. If Margie is single, which of the following statements regarding her Medicare tax liability is true?

Many owners choose to operate their business as a pass-through entity, rather than as a C corporation, to avoid paying an entity level tax on business income.

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Sales revenue \5 00,000 Interest income 6,000 Long-term capital gain 10,000 Cost of goods sold (250,000) Salary and wages (75,000) other operating expenses (55,000) Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year.

If a business is formed as an S corporation, its income may be subject to double taxation.

Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest?

Which of the following statements regarding S corporations is true?

A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest.

Carter's share of a partnership's operating loss is $17,200. His tax basis in his partnership interest before any adjustment for this loss is $26,000. If Carter has no excess business loss, he may deduct the full partnership loss on his individual tax return.