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

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?

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

John's share of partnership loss was $60,000. He had only enough tax basis to deduct $34,000 of the loss. He may deduct the remaining loss against other income in the following year, regardless of what happens in the partnership.

Bernard and Leon formed a partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Bernard's tax basis in his partnership interest?

A corporate shareholder usually cannot be held personally liable for the debts arising from the corporate business.

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

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 concerning partnerships is false?

Matthew earned $150,000 in wages during 2013. FICA taxes withheld by his employer would have been $11,475.

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

At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash. Compute Paulina's gain or loss on the sale of her partnership interest.

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

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?

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:

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

Gabriel operates his business as a sole proprietorship. This year the business incurred an operating loss. The loss can be used to offset other income he earned during the year.

Mr. Dilly has expenses relating to a qualifying home office of $14,320. The taxable income generated by the business before any deduction of home office expenses was $13,700. His allowable home office deduction is $14,320.

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

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.

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.