Exam 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations

Orange, Inc. is a calendar year partnership with the following current year information: Operating loss \ (120,000) Liabilities: Note payable, City Bank 20,000 Note payable, Jake Crow 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?

Which of the following statements concerning partnerships is false?

A shareholder in an S corporation includes in tax basis his or her share of the corporation's liabilities.

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

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 \ 500,000 Interest income Long-term capital gain Cost of goods sold () Salary and wages () Other operating expenses (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 are required by law to withhold federal income tax from the compensation paid to their employees.

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

Which of the following amounts are not subject to self-employment tax?

Armond earned $10,000 of profit from a sole proprietorship in 2016. If he also has $120,000 of salary income, how much self-employment tax will he owe?

Partners receiving guaranteed payments are not required to pay self-employment tax on such payments.

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?

Carter's share of a partnership's operating loss is $17,200. His tax basis in his partnership interest before any adjustment for this loss is $26,000. Carter may deduct the full loss on his individual tax return.

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

At the beginning of 2016, Quentin purchased a 25 percent general partner interest in Maxim Partnership for $30,000. Quentin's 2016 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, 2017, 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 2016 return? b. Compute Quentin's recognized gain on sale of his Maxim interest.

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

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

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

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:

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.

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