Deck 19: Taxation of Business Forms and Their Owners

Question 1

A disadvantage of the partnership form is that general partners have unlimited liability for partnership debts.

Answer 1

True

Question 2

A partner may recognize a loss on the sale of equipment to a partnership in which he has a 40 percent interest.

Answer 2

True

Question 3

Reasonable compensation paid to owners (other than proprietors) qualifies as self-employment income.

Answer 3

False

Question 4

B, a sole proprietorship, has the following information for the taxable year: Net ordinary income before the
item below is considered $\quad\$ 30,000$
Compensation to $\mathrm { B }$ , the proprietor $\quad 10,000$ B's self-employment income is

A)$40,000
B)$30,000
C)$20,000
D)$0

Question 5

Charitable contributions made by a proprietorship, partnership, or S corporation are not deductible business expenses.

Question 6

Capital gains of a partnership and an S corporation flow through to owners to be reported by them on their own tax returns.

Question 7

The business is a partnership and T is a 50 percent owner.T is single and has no other tax information. Income from services $\quad$$\$ 100,000$
Net capital loss $\quad$ 2,200
Guaranteed compensation paid to $\mathrm { T } \quad 10,000$
Life insurance premium for $\mathrm { T }$ ,
payable to T's children $\quad$ 300
Other operating expenses $\quad 54,000$ Ignoring self-employment taxes, T's A.G.I, is

A)$21,900
B)$24,400
C)$26,750
D)$27,050

Question 8

A partnership has a $7,000 basis for proprietorship land it has just received in exchange for a 20 percent capital interest.The land had a $7,000 market value and $8,200 basis to the proprietorship.

Question 9

An accrual basis partnership may deduct interest owed on a note as of the end of its taxable year, even though it is not paid until May of the next year.The note is held by a cash basis taxpayer who owns 60 percent of the business.

Question 10

Owners have includible income when appreciated property is contributed to a business that is

A)A proprietorship
B)AC corporation in exchange for 90 percent of its stock
C)An S corporation in exchange for 60 percent of its stock
D)A partnership in exchange for a 40 percent capital interest

Question 11

L operates a proprietorship.During the year, she transferred the following assets from personal to business use: $$\begin{array}{l}\text { Asset}&\text { Cost}&\text { Market Value }\\\text { Car } & \$ 18,000 & \$ 12,000 \\\text { Land } & \$ 40,000 & \$ 50,000\end{array}$$ The proprietorship's combined or total basis in these assets is

A)$52,000
B)$58,000
C)$62,000
D)$68,000

Question 12

Dividend income earned by a proprietorship, partnership, S corporation, or C corporation is reported by the owners on their personal tax returns as dividend income.

Question 13

Generally, a newly formed business expecting losses in its first few years will provide greater tax benefits if organized as a proprietorship, partnership, or S corporation rather than as a C corporation.

Question 14

A disadvantage of the C corporation is that the full amount of dividends received by it are subject to triple taxation.For example, a $4,000 dividend received is taxed first to the paying corporation when the income was earned, second to the receiving corporation, and third to the shareholders of the receiving corporation when distributed to them.

Question 15

Individuals and C corporations may reduce income by 100 percent of net capital losses but not to exceed $3,000 per year.

Question 16

The business is a C corporation and T is a 50 percent owner.T is single and has no other tax information. Income from services $\quad$$\$ 100,000$
Net capital loss $\quad$ 2,200
Guaranteed compensation paid to $\mathrm { T } \quad 10,000$
Life insurance premium for $\mathrm { T }$ ,
payable to T's children $\quad$ 300
Other operating expenses $\quad 54,000$ The C corporation's taxable income is

A)$35,700
B)$33,500
C)$28,500
D)$26,900

Question 17

R is an employee/owner of a C corporation.Q is an employee/owner of an S corporation.Both R and Q's salaries are deductible by the corporations they work for.

Question 18

The business is an S corporation and T is a 50 percent owner.T is single and has no other tax information. Income from services $\quad$$\$ 100,000$
Net capital loss $\quad$ 2,200
Guaranteed compensation paid to $\mathrm { T } \quad 10,000$
Life insurance premium for $\mathrm { T }$ ,
payable to T's children $\quad$ 300
Other operating expenses $\quad 54,000$ Ignoring self-employment taxes, T's A.G.I, is

A)$21,900
B)$24,400
C)$26,750
D)$27,050

Question 19

Reasonable compensation paid to owners (other than sole proprietors) is deductible by the business.

Question 20

The business is a proprietorship owned by T.T is single and has no other tax information. Income from services $\quad$$\$ 100,000$
Net capital loss $\quad$ 2,200
Guaranteed compensation paid to $\mathrm { T } \quad 10,000$
Life insurance premium for $\mathrm { T }$ ,
payable to T's children $\quad$ 300
Other operating expenses $\quad 54,000$ Ignoring self-employment taxes, T's A.G.I, is

A)$33,500
B)$33,800
C)$36,000
D)$43,800

Question 21

A corporation's records show the following: $$\begin{array} { l r r r c r } 2009 & 2010 & 2011 & 2012 & 2013 \\\text { Net operating gain (loss) } & \$ 6,000 & \$ 16,000 & \$ 42,000 & \$ 27,000 & ( \$ 65,000 )\end{array}$$ Assume the corporation has never had dividend income and its only NOL occurred in 2012.Using the NOL carryback provisions of the Code, on what portion of income in 2012 will tax not be refunded?

A)$0
B)$4,000
C)$20,000
D)$27,000
E)None of the above

Question 22

Fringe benefits for a 15 percent owner/employee generally are deductible by the employer but are excludable income for the employee when the employer is a

A)Proprietorship, partnership, or S or C corporation
B)Partnership or S or C corporation
C)S or C corporation
D)C corporation

Question 23

R, a C corporation, has the following information: $\begin{array}{lrr}&2012&2013\\\text { Taxable income before charitable deductions } & \$ 30,000 & \$ 10,000 \\\text { Charitable contributions } & 0 & 3,000\end{array}$ Assume R did not have dividend income, NOL, or capital loss carrybacks in either year.R's taxable incomes for 2012 and for 2013, respectively, are

A)$30,000; $9,000
B)$29,000; $8,000
C)$28,000; $7,000
D)$27,000; $7,000

Question 24

Ms.G obtained a 40 percent interest in business H on January 1 of the current year for $90,000.At the end of the year, H had the following information: If H is a C corporation, G's A.G.I, at the end of the year is

A)$4,400.
B)$5,600.
C)$5,600
D)$4,400

Question 25

T, a C corporation, receives a dividend of $100 from a 15 percent owned U.S.corporation and has a dividend-received deduction of

A)$80
B)$70
C)$0
D)$100

Question 26

T purchased a 60 percent interest in partnership Z for $100,000 on January 2 of the current year.During the year, the partnership had ordinary income of $50,000, tax-exempt income of $30,000, and made a cash distribution to owners of $6,000.T's basis in his partnership interest at the end of the year is

A)$100,000
B)$144,400
C)$120,000
D)$194,000

Question 27

A business has the following information: Net ordinary income before the
items below are considered $\quad$$\$ 65,000$
Guaranteed compensation to $Z ( \quad18,000 )$
Rental income $\quad$ 20,000
Rental expenses $\quad$$( 27,000 )$
Net income $\quad \$ 40,000$ If Z performs services for the business, which of the following statements is false?

A)Z's self-employment income is $65,000 if the business is a proprietorship.
B)Z's self-employment income is $36,800 if Z is a 40 percent shareholder of an S corporation.
C)Z's self-employment income is $18,000 if Z is a limited partner who receives 40 percent of the profits and losses.
D)Z has no self-employment income if Z is a 40 percent shareholder of a C corporation.

Question 28

Ms.G obtained a 40 percent interest in business H on January 1 of the current year for $90,000.At the end of the year, H had the following information: If H is a partnership or an S corporation, what is G's A.G.I., assuming she has no other income or deductions for the year?

A)$4,400
B)$31,200
C)$32,000
D)$47,600

Question 29

In comparing the various business organizational forms discussed in Chapter 19, which of the following statements is false?

A)Only the C corporation is a taxable entity.
B)The original character of business revenues and expenses flows through to the owners for all organizational forms except the C corporation.
C)Only corporate shareholders have limited liability.
D)All owners except proprietors may enter into taxable transactions with their businesses.

Question 30

A corporation's records show the following: $$\begin{array} { l r r r c r } 2009 & 2010 & 2011 & 2012 & 2013 \\\text { Net operating gain (loss) } & \$ 6,000 & \$ 16,000 & \$ 32,000 & \$ 27,000 & ( \$ 65,000 )\end{array}$$ The corporate marginal tax rates in 2014 (or later years, if applicable) are expected to exceed those in the past.If the corporation wishes to maximize its tax savings with the current year's $65,000 NOL, on what portion of income in 2012 will tax not be refunded?

A)$0
B)$4,000
C)$16,000
D)$27,000