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

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.

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?

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?

Limited partners are prohibited by state law from becoming actively involved in the day-to-day operations of the partnership.

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?

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

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, 2013, 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 2013 ordinary business loss was $34,100, and she received no cash distributions during the year. Which of the following statements is accurate?

On January 1, 2013, Conrad Nelson contributed $15,000 cash in exchange for 50 shares of stock in Sterling Inc., an S corporation. Sterling employs Conrad as its director of marketing. Conrad's 2013 salary was $70,000 and his pro rata share of Sterling's 2013 ordinary business income was $16,800. During the year, Conrad received a $9,000 cash distribution with respect to his Sterling stock. Compute Conrad's basis in his Sterling stock on January 1, 2014.

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

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?

During 2013, Scott Howell received a salary of $125,000. The social security base amount for 2013 was $113,700. How much payroll tax should have been withheld from Scott's salary for 2013?

During 2013, Elena generated $24,500 of earnings on ScheduleC. If Elena had no other earned income, how much self-employment tax will she owe on her Schedule C net profit?

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

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?

A partner's tax basis in his or her partnership interest is decreased by partnership distributions.

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.

Which of the following statements about partnerships is false?

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:

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