Exam 10: Sole Proprietorships

Haddie's Hats is a regular corporation. The business must file an income tax return each year to report its taxable income or loss and pay any related taxes.

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?

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 Section 199A deduction.

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:

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 $\quad$$\quad$$\quad$$\quad$ $ 41,000 Short-term capital loss $\quad$$\quad$$\quad$$\quad$$\quad$ 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?

Bevo Partnership had the following financial activity for the year: Gross receipts from sales $\quad$$\quad$$\quad$$\quad$ $ 860,000 Cost of goods sold $\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$ (390,000 ) Operating expenses $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (180,000 ) Business meals and entertainment $\quad$$\quad$ (20,000 ) Section 1231 gain on equipment sale $\quad$$\quad$ 5,000 Distribution to partners $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (75,000 ) Compute Bevo's ordinary business income for the year and indicate which items must be separately stated.

On January 1, 2018, 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 2018 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?

A limited liability company is always taxed as a partnership, regardless of the number of its members.

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 Section 199A deduction.

A partner's distributive share of partnership nondeductible losses does not decrease his or her tax basis in the partnership interest.

Which of the following statements regarding S corporations is true?

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 initial basis in his/her partnership interest.

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.

Funky Chicken is a calendar year general partnership with the following current year information: Operating loss $\quad$$\quad$$\quad$$\quad$ $ (300,000 ) Liabilities: Note payable, Big Bank $\quad$$\quad$ 30,000 Note payable, June Cross $\quad$$\quad$ 20,000 On January 1 June Cross bought 60% of Funky Chicken for $45,000. How much of the operating loss may Cross deduct currently? Assume the excess business loss limitation does not apply.

XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false?

Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following: Ordinary business loss $\quad$$\quad$$\quad$$\quad$ $ (20,000 ) Short-term capital gain $\quad$$\quad$$\quad$$\quad$$\quad$ 2,100 Dividend income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 1,600 Cash distribution $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 5,800 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.

Armond earned $10,000 of profit from a sole proprietorship in 2018. If he also has $140,000 of salary income, how much self-employment tax will he owe?

Corporations cannot be shareholders in an S corporation.

Mutt and Jeff are general partners in M&J Partnership and share profits and losses equally. Partnership operations for the current tax year were: Ordinary business income $\quad$$\quad$$\quad$ $ 100,000 Long-term capital gain $\quad$$\quad$$\quad$$\quad$$\quad$ 10,000 Total distributions to partners $\quad$$\quad$$\quad$ 60,000 Mutt's tax basis in his partnership interest at the beginning of the current year was $12,000. What is his basis at the beginning of next year?

Businesses are required by law to withhold federal income tax from the compensation paid to their employees.