Exam 11: Sole Proprietorships and Flow-Through Entities

Partners pay taxes on their share of all the partnership net income annually.

A general partner in a limited partnership is not protected from the partnership's liabilities.

Dominguez Corporation, a calendar-year S corporation, has book income of $54,000 ($45,000 from operations and a $9,000 net long-term capital gain). During the year, Dominquez distributes $22,500 to its three equal shareholders, all of whom are calendar year taxpayers. What is the total amount of Dominguez's ordinary income and capital gains passed through to its shareholders at the end of the year?

For the 2018 tax year, King Corporation, a calendar-year S corporation, had an ordinary loss from operating activities of $160,000 and a long-term capital gain from the sale of investment property of $40,000. Jordan is a 40% shareholder in King Corporation and his basis in his stock at the beginning of 2018 was $50,000. On the last day of the 2018 tax year, King Corporation's outstanding debt incurred in 2017 remains $80,000, 25 percent of which ($20,000) is owed to Jordan. What is Jordan's basis in his S corporation stock and debt on January 1, 2019?

Once established at entry, a partner's basis account does not change.

Greg and Samantha plan to establish a business in which they will both materially participate. They are both in the 32% marginal tax bracket. Although they expect the business to be very successful in the long-run, they project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is very important for the owners. Which form of business entity should they select considering both tax and nontax factors?

Kevin and Jennifer are 60% and 40% shareholders, respectively, in an S corporation. If the corporation reports $10,000 of nonseparately stated income and $2,000 of capital gain, how much is allocated to Jennifer?

Wilhelmina operates a daycare center in her home as a sole proprietorship. She has gross revenues of $15,000 and the following expenses: Cost of food $1,200; allocated costs of using the home $900; allowable depreciation $500; reasonable salary for her 16 year old daughter for after-school help $3,000. a. Determine Wilhelmina's net income from the sole proprietorship in 2018. b. Determine Wilhelmina's total of self-employment and income taxes on this activity if her marginal tax rate is 24 percent.

A sole proprietorship must use the cash method of accounting.

Jose, who is single, is allocated $510,000 of income and $788,000 of deductions from KYX General Partnership resulting in a $278,000 loss allocated to him for 2018. Jose's basis in the partnership is $300,000. How much of this loss must Jose carry forward to 2019?

What is required for a taxpayer to actively participate in a rental property activity to qualify for a limited deduction of losses?

Kylie is single and has taxable income of $320,000 of which $130,000 is attributable to her consulting sole proprietorship. She paid W-2 wages to her employees of $75,000. If the threshold amount for 2018 is $157,500, what is Kylie's qualified business income deduction?

A and B are equal shareholders in AB, a calendar-year S corporation. On June 30 (181 days into the year), A sells one-half of her stock to C. The corporation reports $30,000 of income for the year. How much of this income is allocated to A, B, and C?

Other Objective Questions Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions. -Gain recognized by owners on liquidation of entity.

Jared owns 50% of an S corporation's stock. His basis in the stock was $50,000 on January 1, 2017. On February 1, 2017, the S corporation borrowed $30,000 from Jared, signing a formal note. The S corporation reported an ordinary loss of $150,000 at the end of 2017 and ordinary income of $20,000 at the end of 2018. What are Jared's bases in his stock and his note at the end of both 2017 and 2018?

If a shareholder does not have sufficient stock basis to deduct his or her share of an S corporation's losses and deductible items, what are the tax consequences?

When does a partner recognize gain on a distribution?

Other Objective Questions Indicate by a PRP if the characteristic applies to a sole proprietorship, an SC if it applies to an S corporation, and a PAR if it applies to a partnership, and N if it does not apply to any of the three businesses. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions. -Formation of the entity is generally a tax-free event.

Ray, Ronnie and Joe are partners in a limited partnership. Ray and Ronnie, the limited partners, each own 45 percent of the partnership and Joe, the general partner, owns the other 10 percent. The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt. What effect do the debts have on Ray's basis?

Which of the following may not be partners in a partnership?