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Exam 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations

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Question 41

Multiple Choice

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Orange, Inc. is a calendar year partnership with the following current year information: 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?

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

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Question 42

Multiple Choice

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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

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Question 43

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

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.

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

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

Which of the following statements regarding sole proprietorships is false?

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. Carter may deduct the full loss on his individual tax return.

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

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?

Which of the following statements regarding S corporations is true?

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

Which of the following statements regarding limited liability companies is true?

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

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?

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

Corporations cannot be shareholders in an S corporation.