Exam 10: Sole Proprietorships

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?

In 2018, William Wallace's sole proprietorship, Western Wear Apparel, generated $140,769 Schedule C net profit ($130,000 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 Section 199A deduction without regard to the wage limitation. a. Which of these income items are subject to self-employment tax? b. Compute Williams' 2018 self-employment tax, assuming he has no other earned income. c. Compute the total increase in William's 2018 taxable income attributable to his business.

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

Funky Chicken is a calendar year S corporation with the following current year information: Operating loss $\quad$$\quad$$\quad$$\quad$$\quad$ $ (300,000 ) Liabilities: Note payable, Big Bank $\quad$$\quad$$\quad$ 30,000 Note payable, June Cross $\quad$$\quad$ 20,000 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.

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.

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 business income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 60,000 Share of partnership debt, beginning of year $\quad$ 10,000 Share of partnership debt, end of year $\quad$$\quad$$\quad$ 15,000 Calculate Gavin's tax basis in his partnership interest at the end of the year?

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.

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 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $500,000 Interest income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$ 6,000 Long-term capital gain $\quad$$\quad$$\quad$$\quad$$\quad$ 10,000 Cost of goods sold $\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$ (250,000 ) Salary and wages $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (75,000 ) Other operating expenses $\quad$$\quad$$\quad$ $\quad$ (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?

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

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

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

A limited liability company that has only one member is generally treated as a disregarded entity for federal tax purposes.

Cactus Company is a calendar year S corporation with the following current year information: Operating loss $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ (120,000 ) Liabilities: Notes payable, City Bank $\quad$$\quad$$\quad$ 20,000 Notes payable, Jake Crow $\quad$$\quad$$\quad$ 20,000 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.

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 deduction $\quad$ $150,000 Expenses from home $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (100%) Home mortgage interest $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 12,000 Property taxes $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 4,000 Homeowner's insurance $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 2,500 Utilities $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 2,200 Depreciation on office portion of home $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 1,100

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

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?

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?

During 2018, Elena generated $24,500 of earnings on Schedule C. If Elena had no other earned income, how much self-employment tax will she owe on her Schedule C net profit?

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.

The shareholders of an S corporation must pay self-employment tax on their share of the corporation's ordinary income.