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

A guaranteed payment may be designed to compensate a partner for personal services rendered to the partnership.

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

Mr. Dilly has expenses relating to a qualifying home office of $14,320. The taxable income generated by the business before any deduction of home office expenses was $13,700. His allowable home office deduction is $14,320.

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 has no other sources of income, what is her gross income for the year?

Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax year showed the following: Ordinary business income \4 1,000 short-term capital loss 1,500 Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct because of the basis limitation. What is his tax basis in his partnership interest at the end of the current tax year?

Funky Chicken is a calendar year S corporation with the following current year information: $\begin{array}{lr}\text {Operating loss }&\$(300,000)\\\text { Liabilities: }\\\text { Note payable, Big Bank}&30,000\\\text {Note payable, June Cross }&20,000\\\end{array}$ On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? Assume the excess business loss limitation does not apply.

Bevo Partnership had the following financial activity for the year: Gross recelpts from sales \8 60,000 Cost of goods sold (390,000) Operating expenses (180,000) Business meals (20,000) Section 1231 gain on equipment sale 5,000 Distribution to partners (75,000) Compute Bevo's ordinary business income for the year and indicate which items must be separately stated.

Cramer Corporation and Mr. Chips formed a general partnership. 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 Mr. Chips' tax basis in its partnership interest?

On January 1, 2020, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2020 ordinary business loss was $34,100, and she received no cash distributions during the year. Assume the excess business loss limitation does not apply. Which of the following statements is accurate?

Armond earned $10,000 of profit from a sole proprietorship in 2020. If he also has $140,000 of salary income, how much self-employment tax will he owe?

Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following: $\begin{array}{llr} \text { ordinary business Loss} &\$(20,000)\\ \text { short-term capital gain } &2,100\\ \text { Dividend income} &1,600\\ \text { Cash distrihution } &5,800\end{array}$ Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How much of the ordinary loss may he deduct on his Form 1040? Assume the excess business loss limitation does not apply.

If a partner's share of partnership losses exceeds basis, the excess is not deductible in the current year and cannot be carried forward for deduction in the future.

Rebecca has a qualifying home office. The room is 600 square feet and the entire house is 3,000 square feet. Use the following information to determine her allowable home office deduction: Revenue from legal practice \1 60,000 Expenses from legal practice 157,000 Expenses from home (100\%) Home mortgage interest 10,000 Property taxes 3,300 Homeowner's insurance 2,000 Utilities 1,200 Cost to convert patio into a sunroom 5,000 Depreciation on office portion of home 800

In contrast to a partnership, every member of an LLC has limited liability for the LLC's debts.

Max is a 10% limited partner in LMN partnership. His adjusted basis in his partnership interest was $50,000 at the beginning of the current year. During the year, the partnership earned $100,000 of ordinary income, incurred a $5,000 capital loss, and paid $1,000 of nondeductible expenses. Max received a distribution of $2,000 from the partnership. Calculate Max's ending adjusted basis in his partnership interest.

Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax?

In applying the basis limitation on the deduction of S corporation losses, which of the following statements is true?

Partners receiving guaranteed payments are not required to pay self-employment tax on such payments.

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization?

Cramer Corporation and Mr. Chips formed a general partnership. 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?