Exam 10: Sole Proprietorships

Which of the following statements regarding a partner's tax basis in a partnership interest is true?

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?

Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax?

Which of the following statements concerning partnerships is false?

In contrast to a partnership, every member of an LLC has limited liability for the LLC's debts.

Adam and Barbara formed a partnership to construct an apartment building. Adam contributed $500,000 cash and Barbara contributed land ($500,000 FMV and $250,000 basis) in exchange for a 50 percent interest in AB Partnership. Immediately after its formation, the partnership borrowed $600,000 from a local bank to begin construction. Compute each partner's initial basis in their partnership interest, assuming that: a. Adam and Barbara are both general partners. b. Adam is a limited partner and Barbara is a general partner.

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. -Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated.

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

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

Matthew earned $150,000 in wages during 2018. FICA taxes withheld by his employer would have been $11,475.

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 Cramer's tax basis in its partnership interest?

On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable.

In 2018, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?

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:

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$$\quad$ $ 500,000 Interest income $\quad$$\quad$$\quad$$\quad$$\quad$ 6,000 Long-term capital gain $\quad$$\quad$ 10,000 Cost of goods sold $\quad$$\quad$$\quad$ (250,000 ) Salary and wages $\quad$$\quad$$\quad$ (75,000 ) Other operating expenses $\quad$ (55,000 ) Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year.

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.

Rebecca has a qualifying home office. The room is 600 square feet and the entire house is 3,000 square feet. Use the following information to determine her allowable home office deduction: Revenue from legal practice $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $160,500 Expenses from legal practice $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 157,000 Expenses from home $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (100%) Home mortgage interest $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 10,000 Property taxes $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 3,300 Homeowner's insurance $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 2,000 Utilities $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 1,200 Cost to convert patio into a sunroom $\quad$$\quad$$\quad$$\quad$ 5,000 Depreciation on office portion of home $\quad$$\quad$$\quad$ 800

Which of the following statements about partnerships is false?