Deck 10: Sole Proprietorships and Flow-Through Entities

Question 1

_____ 10.Recourse debts can only be satisfied with the property used as collateral.

Answer 1

False

Question 2

_____ 1.A sole proprietorship must use the cash method of accounting.

Answer 2

False

Question 3

_____ 13.A person satisfies material participation requirements only through current activity.

Answer 3

False

Question 4

_____ 8.The entity concept of a partnership views the partnership as separate from the partners and permits certain transactions between the partner and the partnership.

Question 5

_____ 11.The basis limitation rules are applied after the at-risk and passive loss limitation rules.

Question 6

_____ 15.A loss is never recognized on a nonliquidating distribution from a partnership.

Question 7

_____ 3.The limited liability partnership form of business offers partners protection from partnership debts.

Question 8

_____ 12.All partnerships are passive activities.

Question 9

_____ 9.Once established at entry,a partner's basis account does not change.

Question 10

_____ 17.An S corporation shareholder can only deduct losses of the S corporation if he or she has positive stock basis.

Question 11

_____ 7.A limited liability company that has only one member must be taxed as a sole proprietorship.

Question 12

_____ 6.Limited liability companies are generally taxed as partnerships unless the company elects to be taxed as a corporation.

Question 13

_____ 19.S corporations never pay any income taxes.

Question 14

_____ 14.Active participation requires a higher level of activity than material participation.

Question 15

_____ 18.The AAA of the S corporation is a corporate level account.

Question 16

_____ 2.A limited partnership must have a general partner.

Question 17

_____ 16.Only 50 percent or more of the shareholders of an S corporation must consent to the S election.

Question 18

_____ 20.There are special rules for an S corporation that must be followed when the corporation decides to liquidate.

Question 19

_____ 5.Partners pay taxes on their share of all the partnership net income annually.

Question 20

_____ 4.The owners of a limited liability company are called members.

Question 21

Simpco,an S corporation,has gross operating revenue of $450,000,cost of sales of $150,000,salaries and FICA taxes for employees of $40,000,a $25,000 Section 179 expense deduction,$10,000 of other depreciation,interest income of $2,000,a $4,000 capital loss,and a $500 charitable contribution deduction.What are the corporation's net income and its separately stated items?

Question 22

The LBJ Partnership has a March 31 year-end.It has three equal partners,L with a June 30 year-end,B with a January 31 year-end,and J with a December 31 year-end.What are the year-end dates for the tax returns of the partners that will include their shares of the partnership's income as of March 31,2013?

Question 23

A and B are equal shareholders in AB,a calendar-year S corporation.On June 30,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?

Question 24

The Walden Partnership has two 20 percent general partners and six 10 percent limited partners.During the current year,the partnership paid off $50,000 of notes payable,purchased machinery for $100,000 on a nonrecourse note,borrowed $20,000 for working capital,and had $80,000 income from operations.

A)If the general partners each had a basis of $30,000 in the partnership interests at the beginning of the year,what is each general partner's year-end basis?
B)If one of the limited partners had a $10,000 basis at the beginning of the year,what is his year-end basis?

Question 25

For 2013,compare the income and FICA or self-employment tax burdens of a couple in the 33 percent marginal income tax bracket who jointly own a business with $120,000 of operating income if the business is a partnership or an S corporation.The husband and wife each take $50,000 out of the business as salary.

Question 26

Refer to the information in the preceding problem.Simpson is a 20 percent partner in Simpco Partnership.He has a $60,000 basis in his partnership interest at the end of the year after all income/loss items have been passed through to him.What was his beginning-of-the-year basis in his partnership interest?

Question 27

The Clio Corporation,an S corporation,makes a nonliquidating distribution of $10,000 cash and property (fair market value = $10,000;basis = $7,000)to James,a 50 percent shareholder.What are the effects of these distributions on Clio and James's incomes,Clio's AAA account,and James's basis in his stock?

Question 28

Candi purchased a 10 percent limited partnership interest in rental property for $30,000.The partnership has a $1,300,000 mortgage that is secured by the building.During the current year,the partnership reports a total loss of $200,000 from the rental building.What is Candi's deductible loss and the amount of her loss carryover if her only other income/loss items are $50,000 in salary,an $8,000 capital loss on some stock,and $5,000 of bond interest income?

Question 29

ABC Partnership has two assets: inventory (fair market value = $20,000;basis = $25,000)and land (fair market value = $100,000;basis = $50,000)when Janine sells her 40 percent interest in ABC with a $30,000 basis for $48,000.What is the amount and type of Janine's gain or loss on the sale of her partnership interest?

Question 30

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 2013.
B)Determine Wilhelmina's total of self-employment and income taxes if her marginal tax rate is 25 percent.

Question 31

Simpco Partnership has gross operating revenue of $450,000,cost of sales of $150,000,salaries to employees of $40,000,a $25,000 Section 179 expense deduction,$10,000 of other depreciation,interest income of $2,000,a $4,000 capital loss,and a $500 charitable contribution deduction.What are the partnership's bottom line net income and its separately stated items?