Question 1

Which of the following statements about partnerships is false?

Accepted Answer

A)  A partnership is a legal entity that may enter into valid contracts. 
B)  Partnerships are unincorporated entities. 
C)  Only individuals may be partners in a partnership. 
D)  Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax. 
A)  A partnership is a legal entity that may enter into valid contracts. 
B)  Partnerships are unincorporated entities. 
C)  Only individuals may be partners in a partnership. 
D)  Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax.

Question 2

Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments.

Accepted Answer

A) True 
 B)False

Question 3

Jackie contributed $60,000 in cash to a partnership for a 50% interest. This year, the partnership earned $200,000 ordinary business income, made a $20,000 contribution to the United Way, and distributed $25,000 cash to Jackie. Her tax basis in the partnership at year end is:

Accepted Answer

A)  $110,000 
B)  $85,000 
C)  $125,000 
D)  $215,000 
A)  $110,000 
B)  $85,000 
C)  $125,000 
D)  $215,000

Question 4

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income?

Accepted Answer

A)  $3,300 net capital gain; $12,000 deductible net Section 1231 loss 
B)  $4,500 net capital gain; $12,000 deductible net Section 1231 loss 
C)  $4,500 net capital gain; $15,000 deductible net Section 1231 loss 
D)  $3,300 net capital gain; -0- deductible net Section 1231 loss 
A)  $3,300 net capital gain; $12,000 deductible net Section 1231 loss 
B)  $4,500 net capital gain; $12,000 deductible net Section 1231 loss 
C)  $4,500 net capital gain; $15,000 deductible net Section 1231 loss 
D)  $3,300 net capital gain; -0- deductible net Section 1231 loss

Question 5

Kelly operates a sole proprietorship with qualified business income of $920,000. Her business paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis of $410,000. Compute Kelly's allowable QBI deduction before the taxable income limitation.

Accepted Answer

A)  $184,000 
B)  $125,000 
C)  $72,750 
D)  $0 
A)  $184,000 
B)  $125,000 
C)  $72,750 
D)  $0

Question 6

During 2020, Scott Howell received a salary of $145,000. The social security base amount for 2020 was $137,700. How much payroll tax should have been withheld from Scott's salary for 2020?

Accepted Answer

A)  $0 
B)  $11,092 
C)  $10,534 
D)  $10,639 
A)  $0 
B)  $11,092 
C)  $10,534 
D)  $10,639

Question 7

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. Which of the following statements accurately describes the tax consequences of these withdrawals?

Accepted Answer

A)  The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments. 
B)  The withdrawals are considered taxable dividends to Loretta. 
C)  There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would increase taxable income for both Loretta and the S corporation. 
D)  There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would reduce the S corporation's ordinary income, but would not change Loretta's taxable income. 
A)  The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments. 
B)  The withdrawals are considered taxable dividends to Loretta. 
C)  There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would increase taxable income for both Loretta and the S corporation. 
D)  There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would reduce the S corporation's ordinary income, but would not change Loretta's taxable income.

Question 8

At the beginning of 2020, Quentin purchased a 25 percent general partner interest in Maxim Partnership for $30,000. Quentin's 2020 Schedule K-1 reported that his share of Maxim's debt at year-end was $20,000 and his share of ordinary loss was $42,000. On January 1, 2021, Quentin sold his interest to another partner for $5,000 cash.
How much of his share of Maxim's loss can Quentin deduct on his 2020 return? Assume that the excess business loss limitation does not apply.Compute Quentin's recognized gain on sale of his Maxim interest.

Accepted Answer

a. Quentin can deduct the full amount of

Question 9

A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis.

Accepted Answer

A) True 
 B)False

Question 10

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?

Accepted Answer

A)  $50,000 ordinary income 
B)  $50,000 ordinary business income and $22,000 guaranteed payment 
C)  $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain 
D)  All income reported on a general partner's Schedule K-1 are subject to self-employment tax 
A)  $50,000 ordinary income 
B)  $50,000 ordinary business income and $22,000 guaranteed payment 
C)  $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain 
D)  All income reported on a general partner's Schedule K-1 are subject to self-employment tax

Question 11

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: $\begin{array}{llr}
  \text {  Sales revenue} &\$500,000\
 \text {Interest income  } &6,000\
 \text { Long-term capital gain } &10,000\
 \text {Cost of goods sold  } &(250,000)\
 \text {Salary and wages  } &(75,000)\
 \text { other operating expenses } &(55,000)\
\end{array}$
 Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated.

Accepted Answer

A)  Ordinary income, $126,000; long-term capital gain is separately stated. 
B)  Ordinary income, $120,000; interest income and long-term capital gain are separately stated. 
C)  Ordinary income, $136,000; nothing is separately stated. 
D)  Ordinary income, $195,000; interest income, long-term capital gain, and salary costs are separately stated. 
A)  Ordinary income, $126,000; long-term capital gain is separately stated. 
B)  Ordinary income, $120,000; interest income and long-term capital gain are separately stated. 
C)  Ordinary income, $136,000; nothing is separately stated. 
D)  Ordinary income, $195,000; interest income, long-term capital gain, and salary costs are separately stated.

Question 12

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders:

Accepted Answer

A)  Grant and Amy must each be allocated $50,000 of the operating loss. 
B)  If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant. 
C)  Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss. 
D)  The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation. 
A)  Grant and Amy must each be allocated $50,000 of the operating loss. 
B)  If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant. 
C)  Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss. 
D)  The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.

Question 13

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?

Accepted Answer

A)  Martha must pay income tax on $141,200 and self-employment tax on $48,000. 
B)  Martha must pay income tax on $141,200 and self-employment tax on $93,200. 
C)  Martha must pay both income tax and self-employment tax on $141,200. 
D)  Martha must pay income tax on $48,000 and self-employment tax on $93,200. 
A)  Martha must pay income tax on $141,200 and self-employment tax on $48,000. 
B)  Martha must pay income tax on $141,200 and self-employment tax on $93,200. 
C)  Martha must pay both income tax and self-employment tax on $141,200. 
D)  Martha must pay income tax on $48,000 and self-employment tax on $93,200.

Question 14

Which of the following statements regarding a sole proprietorship is false?

Accepted Answer

A)  A sole proprietorship is an unincorporated business operated by one individual. 
B)  Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's individual income tax return. 
C)  Sole proprietors are entitled to deduct 50 percent of self-employment tax paid. 
D)  None of these statements are false. 
A)  A sole proprietorship is an unincorporated business operated by one individual. 
B)  Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's individual income tax return. 
C)  Sole proprietors are entitled to deduct 50 percent of self-employment tax paid. 
D)  None of these statements are false.

Question 15

George and Martha formed a partnership by each contributing $5,000 cash. The partnership then borrowed another $60,000 to finance its operations. If George and Martha are both general partners, compute each partner's basis in his/her partnership interest.

Accepted Answer

A)  $5,000 
B)  $65,000 
C)  $35,000 
D)  $0 
A)  $5,000 
B)  $65,000 
C)  $35,000 
D)  $0

Question 16

Ms. Jack operates a service business as a sole proprietorship. Her taxable income for the current year will be less than $100,000. Ms. Jack is not eligible for the QBI deduction.

Accepted Answer

A) True 
 B)False

Question 17

Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.

Accepted Answer

A) True 
 B)False

Which of the following statements about partnerships is false?

Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments.

Jackie contributed $60,000 in cash to a partnership for a 50% interest. This year, the partnership earned $200,000 ordinary business income, made a $20,000 contribution to the United Way, and distributed $25,000 cash to Jackie. Her tax basis in the partnership at year end is:

Kelly operates a sole proprietorship with qualified business income of $920,000. Her business paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis of $410,000. Compute Kelly's allowable QBI deduction before the taxable income limitation.

During 2020, Scott Howell received a salary of $145,000. The social security base amount for 2020 was $137,700. How much payroll tax should have been withheld from Scott's salary for 2020?

A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis.

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders:

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?

Which of the following statements regarding a sole proprietorship is false?

George and Martha formed a partnership by each contributing $5,000 cash. The partnership then borrowed another $60,000 to finance its operations. If George and Martha are both general partners, compute each partner's basis in his/her partnership interest.

Ms. Jack operates a service business as a sole proprietorship. Her taxable income for the current year will be less than $100,000. Ms. Jack is not eligible for the QBI deduction.

Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

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

Which of the following statements about partnerships is false?

Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments.

Jackie contributed $60,000 in cash to a partnership for a 50% interest. This year, the partnership earned $200,000 ordinary business income, made a $20,000 contribution to the United Way, and distributed $25,000 cash to Jackie. Her tax basis in the partnership at year end is:

Kelly operates a sole proprietorship with qualified business income of $920,000. Her business paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis of $410,000. Compute Kelly's allowable QBI deduction before the taxable income limitation.

During 2020, Scott Howell received a salary of $145,000. The social security base amount for 2020 was $137,700. How much payroll tax should have been withheld from Scott's salary for 2020?

A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis.

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders:

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?

Which of the following statements regarding a sole proprietorship is false?

George and Martha formed a partnership by each contributing $5,000 cash. The partnership then borrowed another $60,000 to finance its operations. If George and Martha are both general partners, compute each partner's basis in his/her partnership interest.

Ms. Jack operates a service business as a sole proprietorship. Her taxable income for the current year will be less than $100,000. Ms. Jack is not eligible for the QBI deduction.

Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters