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

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:

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: 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.

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.

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

Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following: Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How much of the ordinary loss may he deduct on his Form 1040?

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: 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.

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

If a partner's share of partnership losses exceeds basis, the excess is not deductible in the current year and cannot be carried forward for deduction in the future.

A partnership is an unincorporated business activity owned by at least two taxpayers.

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?

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?

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

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income?

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

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

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:

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.

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

In 2015, William Wallace's sole proprietorship, Western Wear Apparel, generated $140,769 Schedule C net profit ($130,000 net earnings from self-employment). In addition, William recognized a $25,000 Section 1231 gain on a sale of land formerly used by the business as a parking lot. The business checking account earned $250 interest income. a. Which of these income items are subject to self-employment tax? b. Compute Williams' 2015 self-employment tax, assuming he has no other earned income. c. Compute the total increase in William's 2015 taxable income attributable to his business.

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