Question 1

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

Accepted Answer

A)  Partnership tax basis is increased annually by cash distributions from the partnership. 
B)  Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses. 
C)  Partnership tax basis is reduced by the partner's share of nontaxable partnership income. 
D)  Partnership tax basis becomes negative if allocable losses exceed basis.

Question 2

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?

Accepted Answer

A)  $50,000 ordinary income 
B)  $50,000 ordinary business income and $22,000 guaranteed payment 
C)  $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain 
D)  All income reported on a general partner's Schedule K-1 are subject to self-employment tax

Question 3

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?

Accepted Answer

A)  None of the items are subject to SE tax because Debbie is a limited partner. 
B)  $19,000 ordinary business income 
C)  $19,000 ordinary business income and $2,000 long-term capital gain 
D)  All income reported on a partner's Schedule K-1 are subject to self-employment tax.

Question 4

Which of the following statements concerning partnerships is false?

Accepted Answer

A)  A properly-drafted partnership agreement is crucial. 
B)  A general partner's basis in a partnership includes his share of partnership debt. 
C)  Limited partnerships must have at least one general partner. 
D)  A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Adam and Barbara formed a partnership to construct an apartment building. Adam contributed $500,000 cash and Barbara contributed land ($500,000 FMV and $250,000 basis) in exchange for a 50 percent interest in AB Partnership. Immediately after its formation, the partnership borrowed $600,000 from a local bank to begin construction. Compute each partner's initial basis in their partnership interest, assuming that: 
a. Adam and Barbara are both general partners.
b. Adam is a limited partner and Barbara is a general partner.

Accepted Answer

The answer of Adam and Barbara formed a partnership to...

Question 7

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 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$500,000
Interest income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$  6,000
Long-term capital gain $\quad$$\quad$$\quad$$\quad$$\quad$ 10,000
Cost of goods sold $\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$(250,000 )
Salary and wages $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$(75,000 )
Other operating expenses $\quad$$\quad$$\quad$ $\quad$ (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.

Accepted Answer

A)  Ordinary income, $126,000; long-term capital gain is separately stated. 
B)  Ordinary income, $120,000; interest income and long-term capital gain are separately stated. 
C)  Ordinary income, $136,000; nothing is separately stated. 
D)  Ordinary income, $195,000; interest income, long-term capital gain, and salary costs are separately stated.

Question 8

Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A)  Every member of an LLC has limited liability for the LLC's debts. 
B)  An LLC with only one member is generally treated as a corporation for income tax purposes. 
C)  An LLC with more than one member is generally treated as a partnership for income tax purposes. 
D)  State laws do not limit the number of members or the type of entity that can be a member in an LLC.

Question 10

Matthew earned $150,000 in wages during 2018. FICA taxes withheld by his employer would have been $11,475.

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

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

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

In 2018, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?

Accepted Answer

A)  Mike does not owe any self-employment tax because his salary exceeded the 2018 base amount ($128,400) for federal employment tax. 
B)  Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 earnings from his small business. 
C)  Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business. 
D)  Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business.

Question 14

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:

Accepted Answer

A)  $110,000 
B)  $85,000 
C)  $125,000 
D)  $215,000

Question 15

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 $\quad$$\quad$$\quad$$\quad$ $ 500,000
Interest income $\quad$$\quad$$\quad$$\quad$$\quad$  6,000
Long-term capital gain $\quad$$\quad$  10,000
Cost of goods sold $\quad$$\quad$$\quad$(250,000 )
Salary and wages$\quad$$\quad$$\quad$ (75,000 )
Other operating expenses$\quad$(55,000 )
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.

Accepted Answer

A)  $93,000 
B)  $118,000 
C)  $50,000 
D)  $85,000

Question 16

Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.

Accepted Answer

A) True 
 B)False

Question 17

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:
Revenue from legal practice $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$160,500
Expenses from legal practice $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$157,000
Expenses from home $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$(100%)
Home mortgage interest $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$10,000
Property taxes $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 3,300
Homeowner's insurance $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$2,000
Utilities $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 1,200
Cost to convert patio into a sunroom $\quad$$\quad$$\quad$$\quad$5,000
Depreciation on office portion of home $\quad$$\quad$$\quad$ 800

Accepted Answer

A)  $3,300 home office deduction. 
B)  $16,500 home office deduction. 
C)  $3,500 home office deduction. 
D)  $4,100 home office deduction.

Question 18

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.

Exam 10: Sole Proprietorships

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

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?

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?

Which of the following statements concerning partnerships is false?

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

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 regarding limited liability companies is false?

Matthew earned $150,000 in wages during 2018. FICA taxes withheld by his employer would have been $11,475.

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.

In 2018, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?

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:

Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.

Which of the following statements about partnerships is false?