Deck 10: Sole Proprietorships and Flow-Through Entities

Question 1

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?

Answer 1

$450,000 - $150,000 - $40,000 - $10,000 depreciation = $250,000 bottom line net income
Separately stated items: $25,000 Section 179 deduction; $4,000 long-term capital loss; $2,000 interest income; $500 charitable contribution

Question 2

Willy is involved in a number of businesses as a consultant. Below are the businesses and the hours of activity that Willy spent in each. Identify any activities that are passive and explain why the income or loss from the other activities are not passive income or loss.

Answer 2

C: The only passive activity
B: Willy participates for more than 500 hours
A, D, E: Participation in each exceeds 100 hours and the total exceeds 500 hours.
F: Willy's activity constitutes all the activities.

Question 3

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?

Answer 3

$450,000 - $150,000 - $40,000 - $10,000 depreciation = $250,000 S corporation net income
Separately stated items: $25,000 Section 179; $4,000 long-term capital loss; $2,000 interest income; $500 charitable contribution

Question 4

For 2011, compare the income and FICA or self-employment tax burdens of a couple in the 35 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 5

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Must be formed under state law.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 6

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Owners pay self-employment taxes on income from entity.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 7

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. 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.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 8

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Distributions from entity are generally tax-free.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 9

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Owner's salary is subject to FICA taxes.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 10

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Loss recognized on entity liquidation.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 11

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Operating income taxed to entity.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 12

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Owner may deduct losses if there is basis because of loans to the entity by the owner.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 13

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. A characteristic can apply to more than one entity; write a brief explanation if a characteristic may only apply under certain conditions.

-Owners may participate in all tax-free employee fringe benefits.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 14

Indicate by a C if the characteristic applies to a regular corporation, an S if it applies to an S corporation, and a P if it applies to a partnership. 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.

A)applies to a regular corporation(C)
B)applies to an S corporation(S)
C)applies to a partnership(P)

Question 15

Sam has $80,000 of net income from his sole proprietorship in 2011. What is his deduction for AGI for self-employment taxes?

A) $9,826
B) $6,120
C) $5,652
D) $4,913
E) None of the above.

Question 16

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.

-Refer to the information in the preceding problem. What effect do the debts have on Ray's basis?

A) Increase of $22,500
B) Increase of $25,000
C) Increase of $45,000
D) Increase of $67,500

Question 17

Bill has a $15,000 passive loss, a $12,000 passive gain, $20,000 of active income, and a $14,000 active loss. What is Bill's current year net taxable income or loss?

A) $20,000 income
B) $6,000 income
C) $3,000 income
D) 0

Question 18

Calvin sells his 40 percent interest in a partnership with a $70,000 basis for $75,000. The partnership has two assets, inventory valued at $100,000 with a $50,000 basis and investments valued at $87,500 that have a basis of $125,000. How will Calvin report the sale of the partnership interest?

A) $5,000 capital loss
B) $20,000 ordinary income
C) $20,000 ordinary income; $15,000 capital loss
D) $5,000 capital gain

Question 19

What is Alexander's net gain or loss on the liquidation of his 100 percent interest in an S corporation if the corporation distributes the following three assets to him in exchange for his stock:
$$\begin{array} { l l l } \underline { \text { Asset } } & \underline { \text { FMV } } & \text { Adj. Basis } \\\text { Inventory } & \$ 20,000 & \$ 13,000 \\\text { Machines } & \$ 50,000 & \$ 60,000 \\\text { Building } & \$ 100,000 & \$ 75,000\end{array}$$
Prior to any distributions, Alexander's basis in his S corporation interest was $160,000.

A) ($12,000)
B) ($22,000)
C) $10,000
D) $22,000
E) None of the above

Question 20

Which of the following is not a characteristic of a C corporation?

A) Must be formed under state law
B) Distributions of entity income are tax-free
C) Loss is recognized on entity liquidation
D) Owners' salaries are subject to FICA taxes.

Question 21

Greg and Samantha plan to establish a business in which they will both materially participate. They are both in the 35% 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?

A) General partnership
B) C corporation
C) S corporation
D) It makes no difference; any of the above should satisfy Greg and Samantha.