Exam 10: Sole Proprietorships

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

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

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.

Ted is a 20 percent general partner in Bevo. Bevo Partnership had the following financial activity for the year: Gross receipts from sales $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 860,000 Cost of goods sold $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (390,000 ) Operating expenses $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (180,000 ) Business meals and entertainment $\quad$$\quad$$\quad$$\quad$$\quad$ (20,000 ) Section 1231 gain on equipment sale $\quad$$\quad$$\quad$$\quad$$\quad$ 5,000 Distribution to partners $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (75,000 ) a. Compute Ted's share of partnership ordinary income and separately stated items. b. 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. c. 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?

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) $ 90,000 Guaranteed payment to Clover 30,000 What is Clover's share of the partnership's ordinary income and guaranteed payment?

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?

At the beginning of 2018, Quentin purchased a 25 percent general partner interest in Maxim Partnership for $30,000. Quentin's 2018 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, 2019, Quentin sold his interest to another partner for $5,000 cash. a. How much of his share of Maxim's loss can Quentin deduct on his 2018 return? Assume that the excess business loss limitation does not apply. b. Compute Quentin's recognized gain on sale of his Maxim interest.

Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on:

Alice is a partner in Axel Partnership. Her share of the partnership's current ordinary business income was $100,000. She received a $60,000 cash distribution from the partnership on December 1. Alice qualifies for the Section 199A deduction, without regard to the wage limitation. Assuming that Alice's marginal tax rate is 37%, calculate her after-tax cash flow from the partnership this year.

A partnership is an unincorporated business activity owned by at least two taxpayers.

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

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

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

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

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

Sue's 2018 net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year?

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.

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

Tax savings achieved by operating a business through a pass-through entity, rather than as a C corporation, is an example of entity variable tax planning.

Orange, Inc. is a calendar year partnership with the following current year information: Operating loss $\quad$$\quad$$\quad$$\quad$$\quad$ $ (120,000 ) Liabilities: Note payable, City Bank $\quad$$\quad$ 20,000 Note payable, Jack Crow $\quad$$\quad$ 20,000 On January 1, John James bought 50% general interest in Orange, Inc. 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.