Deck 10: Sole Proprietorships

Question 1

All general partners have unlimited personal liability for the debts of the entity.

Answer 1

True

Question 2

The allocations made to a partner are reported on Schedule K-1 and are referred to as his or her distributive share of partnership items.

Answer 2

True

Question 3

Partners receiving guaranteed payments are not required to pay self-employment tax on such payments.

Answer 3

False

Question 4

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.

Question 5

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

Question 6

A corporate shareholder usually cannot be held personally liable for the debts arising from the corporate business.

Question 7

The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year.

Question 8

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.

Question 9

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

Question 10

Haddie's Hats is a regular corporation. The business must file an income tax return each year to report its taxable income or loss and pay any related taxes.

Question 11

A guaranteed payment may be designed to compensate a partner for personal services rendered to the partnership.

Question 12

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

Question 13

A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest.

Question 14

Mr Dilly has expenses relating to a qualifying home office of $14,320. The taxable income generated by the business before any deduction of home office expenses was $13,700. His allowable home office deduction is $14,320.

Question 15

Partners may deduct on their individual income tax returns an amount equal to 100% of self-employment tax paid.

Question 16

Businesses are required by law to withhold federal income tax from the compensation paid to their employees.

Question 17

A partnership deducts guaranteed payments paid to its partners in computing ordinary income, and partners report guaranteed payments received as ordinary income.

Question 18

Jack operates a service business as a sole proprietorship. Her taxable income for the current year will be less than $100,000. Ms. Jack is not eligible for the Section 199A deduction.

Question 19

A partnership is an unincorporated business activity owned by at least two taxpayers.

Question 20

Gabriel operates his business as a sole proprietorship. This year the business incurred an operating loss. The loss can be used to offset other business income he earned during the year.

Question 21

A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis.

Question 22

A limited liability company is always taxed as a partnership, regardless of the number of its members.

Question 23

Tax savings achieved by operating a business through a pass-through entity, rather than as a C corporation, is an example of entity variable tax planning.

Question 24

Corporations cannot be shareholders in an S corporation.

Question 25

A limited liability company that has only one member is generally treated as a disregarded entity for federal tax purposes.

Question 26

A major advantage of an S corporation is the ability to specially allocate losses to specific members of the company.

Question 27

Which of the following statements regarding sole proprietorships is false?

A) A sole proprietorship has no legal identity separate from that of its owner.
B) Sole proprietorships are the most common form of business entity in the U.S.
C) The cash flow generated by a sole proprietorship belongs to the owner.
D) The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.

Question 28

If a business is formed as an S corporation, its income may be subject to double taxation.

Question 29

If a partner's share of partnership losses exceeds basis, the excess is not deductible in the current year and cannot be carried forward for deduction in the future.

Question 30

A limited liability company with more than one member is generally considered a partnership for federal tax purposes.

Question 31

The shareholders of an S corporation must pay self-employment tax on their share of the corporation's ordinary income.

Question 32

The earnings of a C corporation are taxed only at the shareholder level.

Question 33

A partner's tax basis in his or her partnership interest is decreased by partnership distributions.

Question 34

Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on:

A) Schedule C, Statement of Profit or Loss from Business
B) The first page of Form 1040 as other income
C) A separate tax return prepared for the business operation
D) Schedule E, Statement of Rent and Royalty Income

Question 35

John's share of partnership loss was $60,000. He had only enough tax basis to deduct $34,000 of the loss. He may deduct the remaining loss against other income in the following year, regardless of what happens in the partnership.

Question 36

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

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 37

A partner's distributive share of partnership nondeductible losses does not decrease his or her tax basis in the partnership interest.

Question 38

A shareholder in an S corporation includes in tax basis his or her share of the corporation's liabilities.

Question 39

Carter's share of a partnership's operating loss is $17,200. His tax basis in his partnership interest before any adjustment for this loss is $26,000. If Carter has no excess business loss, he may deduct the full partnership loss on his individual tax return.

Question 40

Aaron James has a qualifying home office. The office is 500 square feet and the entire house is 2,500 square feet. Use the following information to determine his allowable home office deduction:
Net income from self-employment before home office deduction $ 150,000
Expenses from home (100%)
Home mortgage interest 12,000
Property taxes 4,000
Homeowner's insurance 2,500
Utilities 2,200
Depreciation on office portion of home 1,100

A) $5,240
B) $4,140
C) $4,260
D) $21,800

Question 41

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

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 42

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?

A) Martha must pay income tax on $141,200 and self-employment tax on $48,000.
B) Martha must pay income tax on $141,200 and self-employment tax on $93,200.
C) Martha must pay both income tax and self-employment tax on $141,200.
D) Martha must pay income tax on $48,000 and self-employment tax on $93,200.

Question 43

Which of the following statements regarding the home office deduction is true?

A) In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers.
B) A home office deduction is not allowed for using the home office for administrative or management activities only.
C) The home office deduction is limited to the taxable income of the business before the deduction.
D) A depreciation deduction is not allowed for a home office.

Question 44

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?

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 45

During 2018, Elena generated $24,500 of earnings on Schedule C. If Elena had no other earned income, how much self-employment tax will she owe on her Schedule C net profit?

A) $3,749
B) $3,259
C) $3,009
D) $3,462

Question 46

Hay, Straw and Clover formed the HSC Partnership, agreeing to share profits and losses equally. Clover will manage the business for which he will receive a guaranteed payment of $30,000 per year. Cash receipts and disbursements for the year were as follows
Net income from operations (before guaranteed payment) $ 90,000
Guaranteed payment to Clover 30,000
What is Clover's share of the partnership's ordinary income and guaranteed payment?

A) Ordinary income, $30,000; Guaranteed payment, $10,000.
B) Ordinary income, $20,000; Guaranteed payment, $10,000.
C) Ordinary income, $30,000; Guaranteed payment, $30,000.
D) Ordinary income, $20,000; Guaranteed payment, $30,000.

Question 47

Sue's 2018 net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year?

A) $25,127
B) $30,000
C) $29,480
D) None of the above

Question 48

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income?

A) $3,300 net capital gain; $12,000 deductible net Section 1231 loss
B) $4,500 net capital gain; $12,000 deductible net Section 1231 loss
C) $4,500 net capital gain; $15,000 deductible net Section 1231 loss
D) $3,300 net capital gain; -0- deductible net Section 1231 loss

Question 49

During 2018, Scott Howell received a salary of $135,000. The social security base amount for 2018 was $128,400. How much payroll tax should have been withheld from Scott's salary for 2018?

A) $0
B) $10,328
C) $9,823
D) $9,919

Question 50

Which of the following statements about partnerships is false?

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.

Question 51

Armond earned $10,000 of profit from a sole proprietorship in 2018. If he also has $140,000 of salary income, how much self-employment tax will he owe?

A) $1,530
B) $1,413
C) $290
D) $268

Question 52

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?

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 53

During the current year, Margie earned wage income of $300,000. If Margie is single, which of the following statements regarding her Medicare tax liability is true?

A) Margie will owe both the regular 1.45 percent Medicare tax and the additional .9 percent Medicare tax on her entire wage income.
B) Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $200,000.
C) Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $250,000.
D) Margie's employer is required to withhold both the regular Medicare tax but does not withhold the additional .9 percent Medicare tax.

Question 54

Which of the following statements concerning partnerships is false?

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 55

Alice is a partner in Axel Partnership. Her share of the partnership's current ordinary business income was $100,000. She received a $60,000 cash distribution from the partnership on December 1. Alice qualifies for the Section 199A deduction, without regard to the wage limitation. Assuming that Alice's marginal tax rate is 37%, calculate her after-tax cash flow from the partnership this year.

A) $70,400
B) $30,400
C) $45,200
D) $29,600

Question 56

Which of the following amounts are not subject to self-employment tax?

A) General partner's share of partnership income
B) Limited partner's share of partnership income
C) Sole proprietor's income from business activity
D) Guaranteed payment to general partner

Question 57

Which of the following statements regarding a sole proprietorship is false?

A) A sole proprietorship is an unincorporated business operated by one individual.
B) Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's individual income tax return.
C) Sole proprietors are entitled to deduct 50 percent of self-employment tax paid.
D) None of the above statements are false.

Question 58

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?

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 59

Kelly operates a sole proprietorship with qualified business income of $920,000. Her business paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis of $410,000. Compute Kelly's allowable Section 199A deduction.

A) $184,000
B) $125,000
C) $72,750
D) $0

Question 60

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 $ 500,000
Interest income 6,000
Long-term capital gain 10,000
Cost of goods sold (250,000 )
Salary and wages (75,000 )
Other operating expenses (55,000 )
Waters distributed $25,000 to each of its shareholders during the year. If Mia has no other sources of income, what is her gross income for the year?

A) $63,000
B) $60,000
C) $68.000
D) $97,500

Question 61

Mutt and Jeff are general partners in M&J Partnership and share profits and losses equally. Partnership operations for the current tax year were:
Ordinary business income $ 100,000
Long-term capital gain 10,000
Total distributions to partners 60,000
-
Mutt's tax basis in his partnership interest at the beginning of the current year was $12,000. What is his basis at the beginning of next year?

A) $25,000
B) $37,000
C) $13,000
D) $27,000

Question 62

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 Mr Chips' tax basis in its partnership interest?

A) $500,000
B) $850,000
C) $650,000
D) $300,000

Question 63

Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax year showed the following:
Ordinary business income $ 41,000
Short-term capital loss 1,500
Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct because of the basis limitation. What is his tax basis in his partnership interest at the end of the current tax year?

A) $41,000
B) $32,500
C) $39,500
D) $34,000

Question 64

Which of the following statements regarding the basis limitation on deduction of partnership losses is false?

A) If a partner's share of partnership losses exceeds the partner's tax basis in the partnership interest, the excess is not deductible in the current year.
B) Partnership losses that are not deductible due to the basis limitation can be carried forward indefinitely.
C) Partners can increase tax basis in their partnership interest only by making additional capital contributions.
D) If a partnership becomes profitable in the future, the partner's share of such future income will create basis against which loss carryforwards can be deducted.

Question 65

Gavin owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following:
Ordinary business income $ 60,000
Share of partnership debt, beginning of year 10,000
Share of partnership debt, end of year 15,000
Calculate Gavin's tax basis in his partnership interest at the end of the year?

A) $85,000
B) $95,000
C) $75,000
D) $65,000

Question 66

Cramer Corporation and Mr Chips formed a general partnership. 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?

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

Question 67

George and Martha formed a partnership by each contributing $5,000 cash. The partnership then borrowed another $60,000 to finance its operations. If George and Martha are both general partners, compute each partner's initial basis in his/her partnership interest.

A) $5,000
B) $65,000
C) $35,000
D) $0

Question 68

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:

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

Question 69

Funky Chicken is a calendar year general partnership with the following current year information:
Operating loss $ (300,000 )
Liabilities:
Note payable, Big Bank 30,000
Note payable, June Cross 20,000
On January 1 June Cross bought 60% of Funky Chicken for $45,000. How much of the operating loss may Cross deduct currently? Assume the excess business loss limitation does not apply.

A) $57,000
B) $80,000
C) $65,000
D) $75,000

Question 70

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

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 71

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

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

Question 72

Which of the following statements about S corporations is true?

A) An S corporation has unlimited liability.
B) An S corporation is a flow-through entity for federal income tax purposes.
C) S corporations can only have 75 shareholders.
D) S corporations can have several classes of stock.

Question 73

At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash (including relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest.

A) $3,000 loss
B) $8,000 loss
C) $2,000 gain
D) $0 gain or loss

Question 74

Which of the following items would be separately stated instead of included in ordinary income when reported by a partnership?

A) Municipal bond interest income
B) Capital loss
C) Dividend income
D) All of the above items would be separately stated

Question 75

Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following:
Ordinary business loss $ (20,000 )
Short-term capital gain 2,100
Dividend income 1,600
Cash distribution 5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How much of the ordinary loss may he deduct on his Form 1040? Assume the excess business loss limitation does not apply.

A) $11,700
B) $14,000
C) $10,200
D) $13,300

Question 76

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?

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

Question 77

Bernard and Leon formed a partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Bernard's tax basis in his partnership interest?

A) $1,200,000
B) $600,000
C) $800,000
D) $1,400,000

Question 78

Orange, Inc. is a calendar year partnership with the following current year information:
Operating loss $ (120,000 )
Liabilities:
Note payable, City Bank 20,000
Note payable, Jack Crow 20,000
On January 1, John James bought 50% general interest in Orange, Inc. for $30,000. How much of the operating loss may John deduct on his Form 1040? Assume the excess business loss limitation does not apply.

A) $60,000
B) $30,000
C) $40,000
D) $50,000

Question 79

Max is a 10% limited partner in LMN partnership. His adjusted basis in his partnership interest was $50,000 at the beginning of the current year. During the year, the partnership earned $100,000 of ordinary income, incurred a $5,000 capital loss, and paid $1,000 of nondeductible expenses. Max received a distribution of $2,000 from the partnership. Calculate Max's ending adjusted basis in his partnership interest.

A) $142,000
B) $57,400
C) $57,500
D) $59,200

Question 80

Cramer Corporation and Mr Chips formed a general partnership. 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 Mr Chips' tax basis in its partnership interest?

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