Question 1

Which of the following statements regarding the home office deduction is true?

Accepted Answer

A)  In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers. 
B)  A home office deduction is not allowed for using the home office for administrative or management activities only. 
C)  The home office deduction is limited to the taxable income of the business before the deduction. 
D)  A depreciation deduction is not allowed for a home office. 
A)  In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers. 
B)  A home office deduction is not allowed for using the home office for administrative or management activities only. 
C)  The home office deduction is limited to the taxable income of the business before the deduction. 
D)  A depreciation deduction is not allowed for a home office.

Question 2

The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year.

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

A)  $500,000 
B)  $850,000 
C)  $650,000 
D)  $300,000 
A)  $500,000 
B)  $850,000 
C)  $650,000 
D)  $300,000

Question 4

Refer to the facts in the preceding problem. Ted is a 20 percent general partner in Bevo.
Bevo Partnership had the following financial activity for the year:
 $$\begin{array} { l c } 
\text { Gross receipts from sales } & \$ 860,000 \
\text { Cost of goods sold } & ( 390,000 ) \
\text { Operating expenses } & ( \mathbf { 1 8 0 , 0 0 0 } ) \
\text { Business meals and entertainment } & ( 20,000 ) \
\text { Section 1231 gain on equipment sale } & \mathbf { 5 , 0 0 0 } \
\text { Distribution to partners } & ( \mathbf { 7 5 , 0 0 0 } )
\end{array}$$ 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?

Accepted Answer

a. Ted's share of: partnership ordinary

Question 5

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 not change taxable income for Loretta and reduce taxable income of the S corporation. 
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 not change taxable income for Loretta and reduce taxable income of the S corporation.

Question 6

Max is a 10% limited partner in LMN partnership. His adjusted basis in his partnership interest was $50,000 at the beginning of the current year. During the year, the partnership earned $100,000 of ordinary income, incurred a $5,000 capital loss, and paid $1,000 of nondeductible expenses. Max received a distribution of $2,000 from the partnership. Calculate Max's ending adjusted basis in his partnership interest.

Accepted Answer

A)  $142,000 
B)  $57,400 
C)  $57,500 
D)  $59,200 
A)  $142,000 
B)  $57,400 
C)  $57,500 
D)  $59,200

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

A limited liability company with more than one member is generally considered a partnership for federal tax purposes.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements about S corporations is true?

Accepted Answer

A)  An S corporation has unlimited liability. 
B)  An S corporation is a flow-through entity for federal income tax purposes. 
C)  S corporations can only have 75 shareholders. 
D)  S corporations can have several classes of stock. 
A)  An S corporation has unlimited liability. 
B)  An S corporation is a flow-through entity for federal income tax purposes. 
C)  S corporations can only have 75 shareholders. 
D)  S corporations can have several classes of stock.

Question 14

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

Accepted Answer

A)  The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, is computed in the same manner as a partner's basis in a partnership interest. 
B)  A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder. 
C)  If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that obligation is considered ordinary income. 
D)  All of the above statements are false. 
A)  The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, is computed in the same manner as a partner's basis in a partnership interest. 
B)  A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder. 
C)  If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that obligation is considered ordinary income. 
D)  All of the above statements are false.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 Mr. Chips' tax basis in its partnership interest?

Accepted Answer

A)  $500,000 
B)  $1,200,000 
C)  $850,000 
D)  $650,000 
A)  $500,000 
B)  $1,200,000 
C)  $850,000 
D)  $650,000

Question 18

Mutt and Jeff are general partners in M&J Partnership and share profits and losses equally. Partnership operations for the current tax year were: $$\begin{array} { l l } 
\text { Ordinary business income } & \$ 100,000 \
\text { Long-term capital gain } & 10,000 \
\text { Total distributions to partners } & 60,000
\end{array}$$ 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?

Accepted Answer

A)  $25,000 
B)  $37,000 
C)  $13,000 
D)  $27,000 
A)  $25,000 
B)  $37,000 
C)  $13,000 
D)  $27,000

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

A)  $3,000 capital gain 
B)  $3,000 ordinary income 
C)  $2,000 capital gain 
D)  $2,000 ordinary income 
A)  $3,000 capital gain 
B)  $3,000 ordinary income 
C)  $2,000 capital gain 
D)  $2,000 ordinary income

Which of the following statements regarding the home office deduction is true?

The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year.

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

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.

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

Which of the following statements about partnerships is false?

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

A limited liability company with more than one member is generally considered a partnership for federal tax purposes.

Which of the following statements about S corporations is true?

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

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

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

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 Mr. Chips' tax basis in its partnership interest?

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

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 regarding the home office deduction is true?

The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year.

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

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.

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

Which of the following statements about partnerships is false?

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

A limited liability company with more than one member is generally considered a partnership for federal tax purposes.

Which of the following statements about S corporations is true?

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

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

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

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 Mr. Chips' tax basis in its partnership interest?

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

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