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

On January 1, Leon purchased a 10% stock interest in an S corporation for $30,000. He also loaned the S corporation $5,000 in exchange for a written promissory note. The S corporation generated a $330,000 operating loss for the year. Leon deducted his 10% share of the loss, reducing his tax basis in his stock to zero, and his tax basis in the note to $2,000. The following year, the S corporation repaid the note before Leon restored his basis in the note. What are the consequences of the loan repayment to Leon?

The allocations made to a partner are reported on Schedule K-1 and are referred to as his or her distributive share of partnership items.

Hay, Straw and Clover formed the HSC Partnership, agreeing to share profits and losses equally. Clover will manage the business for which he will receive a guaranteed payment of $30,000 per year. Cash receipts and disbursements for the year were as follows Net income from operations (before guaranteed payment) \9 0,000 Guaranteed payment to Clover 30,000 What is Clover's share of the partnership's ordinary income and guaranteed payment?

Ted is a 20 percent general partner in Bevo. 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 Ted's share of partnership ordinary income and separately stated items.If Ted's adjusted basis in his Bevo interest was $30,000 at the beginning of the year, compute his adjusted basis at the end of the year. Assume that Bevo's debt did not change during the year.How would your basis computation change if Bevo's debt at the end of the year as $50,000 less than its debt at the beginning of the year?

In 2020, William Wallace's sole proprietorship, Western Wear Apparel, generated $162,426 Schedule C net profit ($150,000 net earnings from self-employment). In addition, William recognized a $25,000 Section 1231 gain on a sale of land formerly used by the business as a parking lot. The business checking account earned $250 interest income. William qualifies for the QBI deduction without regard to the wageor taxable income limitations.Which of these income items are subject to self-employment tax?Compute William's 2020 self-employment tax, assuming he has no other earned income.Compute William's 2020 QBI deduction.Compute the total increase in William's 2020 taxable income attributable to his business.

Aaron James has a qualifying home office. The office is 500 square feet and the entire house is 2,500 square feet. Use the following information to determine his allowable home office deduction: Net income from self-employment before home office \1 50,000 deduction Expenses from home (100\%) Home mortgage interest 12,000 Property taxes 4,000 Homeowner's insurance 2,500 Utilities 2,200 Depreciation on office portion of home 1,100

John's share of partnership loss was $60,000. He had only enough tax basis to deduct $34,000 of the loss. He may deduct the remaining loss against other income in the following year, regardless of what happens in the partnership.

All general partners have unlimited personal liability for the debts of the entity.

Gabriel operates his business as a sole proprietorship. This year the business incurred an operating loss. The loss can be used to offset other business income he earned during the year.

The earnings of a C corporation are taxed only at the shareholder level.

A partnership deducts guaranteed payments paid to its partners in computing ordinary income, and partners report guaranteed payments received as ordinary income.

Cactus Company is a calendar year S corporation with the following current year information: $\begin{array}{lr}\text {Operating loss }&\$(120,000)\\\text { Liabilities: }\\\text { Notes payable, City Bank}&20,000\\\text {Notes payable, Jake Crow }&20,000\\\end{array}$ On January 1, John James bought 50% of Cactus Company stock 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.

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 Mr. Chips' tax basis in its partnership interest?

Although a limited liability company with more than one member is generally considered to be a partnership, it can elect to be treated as a corporation for federal tax purposes.

Sole proprietors may deduct on their individual income tax returns an amount equal to 100% of self-employment tax paid.

Which of the following amounts are not subject to self-employment tax?

Funky Chicken is a calendar year general partnership 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. How much of the operating loss may Cross deduct currently? Assume the excess business loss limitation does not apply.

At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash (including relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest.

Janice earned $175,000 of qualified business income this year from her sole proprietorship and has taxable income, before any QBI deduction, of $150,000. Assuming the W-2 wage limitation does not apply, Janice is permitted a QBI deduction of

A corporate shareholder usually cannot be held personally liable for the debts arising from the corporate business.