Chapter i 17
If a partner contributes depreciable property to a partnership in exchange for a partnership interest, the depreciation recapture potential of the contributed assets does not carry over to the partnership.
FALSE
If a partner contributes inventory to the partnership in exchange for a partnership interest, the holding period for the partnership interest begins on the date the inventory was acquired by the transferor partner.
FALSE
If partners having a majority interest in the partnership do not have the same tax year, the partnership uses the same tax year as all of its principal partners. Principal partners are those with 10% or greater interest in the partnership.
FALSE
Ron, a single taxpayer, receives $750,000 of taxable income from the family trust fund. In addition, he has a 50% interest in a partnership in which he is a material participant. The partnership incurs a $600,000 loss, 50% of which is allocated to Ron. Ron's basis in his partnership interest before adjustment for the loss is $800,000. Ron will be able to deduct his full $300,000 share of the partnership loss.
FALSE
S corporations are a common form for small businesses because they offer more flexibility than partnerships in terms of ownership structure and allocation of income.
FALSE
Tess buys Harry's partnership interest in Oval Partnership. Oval holds several highly appreciated assets, and this appreciation is reflected in the price Tess paid for the partnership interest. Tess can make a Sec. 754 election to increase the basis of her share of partnership assets.
FALSE
The basis of a partner's interest in a partnership is adjusted to reflect each partner's share of income and deduction items only if a distribution is made to the partners.
FALSE
The basis of a partnership interest is equal to the sum of money contributed plus the FMV of the property transferred to the partnership.
FALSE
The deduction limitation on net business interest expense is applied at the partner, not the partnership, level.
FALSE
The expenses associated with promoting and marketing partnership interests can be currently deducted if $5,000 or less. Expenses in excess of $5,000 are amortized over 180 months.
FALSE
To receive S corporation treatment, a qualifying shareholder must be an individual, partnership, estate, qualifying trust, or certain kinds of tax-exempt organizations.
FALSE
A contribution of services to a partnership will result in recognition of compensation to the contributing partner equal to the fair market value of the services as well as an increase in partnership basis to the extent of the income recognized.
TRUE
A nonliquidating distribution of cash or property from the partnership to a partner is generally treated as a tax-free return of capital to the extent of a partner's basis.
TRUE
A partnership is generally required to use the tax year of one or more partners who own more than a 50% interest in partnership profits and capital.
TRUE
A partnership may elect to use a fiscal year if the business recognizes 25% or more of its annual gross receipts in the last two months of the fiscal year for three consecutive 12-month periods.
TRUE
A partnership's liabilities have increased by year-end. As a result, partners' bases in their partnership interests will increase.
TRUE
Although a partner's distributive share of income, deductions, losses, and credits is generally determined by partnership agreement, special allocation provisions restrict the partners' freedom to shift some tax benefits among partners.
TRUE
Gains on sales or exchanges between a partner and the partnership are treated as ordinary income if the partner owns more than a 50% interest in the capital or profits and the asset that is exchanged is not a capital asset in the transferee's hands.
TRUE
If a partner contributes property to a partnership, and that property is subject to a liability, the noncontributing partners increase the basis of their partnership interests by their share of the partnership liabilities that were transferred to the partnership.
TRUE
In a limited partnership, the limited partners are liable for partnership debts only to the extent of their investment in the partnership plus any amount they commit to contribute to the partnership if called upon.
TRUE
Losses are disallowed on sales or exchanges between a partner and the partnership if the partner owns directly or indirectly more than a 50% interest in the capital or profits.
TRUE
Ordinary losses and separately stated deduction and loss items that exceed a partner's basis carry over indefinitely until the partner has a positive partnership basis.
TRUE
Pass-through entities are taxed at only one level—the ownership level.
TRUE
The excess business loss limitations apply at the partner, not partnership, level.
TRUE
The income of a single member LLC is taxed to its owner under the sole proprietorship rules if no election to be taxed as a corporation is made.
TRUE
The limitation on the deductibility of business interest expense does not apply to taxpayers whose average gross receipts for the three preceding years is less than $25 million.
TRUE
The partnership's assumption of a liability from a partner is treated as a cash distribution to the partner whose liability is assumed, which decreases his basis in the partnership.
TRUE
The primary purpose of a partnership tax return is to determine the income, deduction, loss and credit items of the partnership and thus the amounts that should be reported by the individual partners.
TRUE
The qualified business deduction is calculated and applied at the partner, not the partnership, level.
TRUE
The transfer of property to a partnership in exchange for a partnership interest will generally be a nontaxable event.
TRUE
Under the "check-the-box" Treasury Regulations, an LLC with more than one member is treated as a partnership unless the LLC affirmatively elects to be classified as a corporation.
TRUE
When a partnership interest is sold, ordinary income may result if a partnership has unrealized receivables or inventory items.
TRUE
When capital or Sec. 1231 assets are transferred to a partnership in exchange for a partnership interest qualifying under Sec. 721, the holding period for the partnership interest includes the holding period of the contributed property.
TRUE
When property is contributed to a partnership, the partnership's basis in the property is the same as that of the transferor partner even if gain is recognized on the transfer.
TRUE
Ariel receives from her partnership a nonliquidating distribution of $9,000 cash plus a parcel of land. The partnership had purchased the land five years ago for $20,000, but it is worth $28,000 at the time of the distribution. Ariel's predistribution basis is $17,000. How much income will Ariel recognize due to the distribution, and what is her basis in the land? A) Income recognized Basis in land $0 $20,000 B) Income recognized Basis in land $0 $8,000 C) Income recognized Basis in land $12,000 $20,000 D) Income recognized Basis in land $20,000 28,000
Answer: B
Edith contributes land having $100,000 FMV and a $85,000 adjusted basis, which is subject to a $66,000 mortgage in exchange for a one-third interest in the EHK Partnership. The partnership owes no other liabilities. After the contribution, Kate, Edith, and Helen share profits and losses equally and each has a one-third interest in the partnership capital. Assume that Kate has a basis in her partnership interest of $50,000 before Edith's contribution to the partnership. The effect of Edith's contribution on partner Kate's basis is to A) decrease Kate's basis to $28,000. B) increase Kate's basis to $72,000. C) increase Kate's basis to $77,000. D) No effect on Kate's basis.
Answer: B
Emma contributes property having a $24,000 FMV and a $15,000 adjusted basis and also renders legal services valued at $22,000 in exchange for a 30% interest in the capital and profits of the ABC partnership. The tax results to Emma will be A) no income is recognized and a partnership basis of $37,000. B) ordinary income of $22,000 and a partnership basis of $37,000. C) ordinary income of $22,000 and a partnership basis of $46,000. D) no income is recognized and a partnership basis of $46,000.
Answer: B
George transferred land having a $170,000 FMV and a $60,000 adjusted basis, which is subject to a $150,000 mortgage in exchange for a one-third interest in the GEF Partnership. The partnership owes no other liabilities. George, Elena, and Franz share profits and losses equally and each has a one-third interest in partnership capital. The basis to the partnership of the land transferred by George is A) $20,000. B) $60,000. C) $110,000. D) $170,000.
Answer: B
Atiqa receives a nonliquidating distribution of land from her partnership. The partnership purchased the land five years ago for $20,000. At the time of the distribution, it is worth $28,000. Prior to the distribution, Atiqa's basis in her partnership interest is $37,000. Due to the distribution, Atiqa and the partnership will recognize income of A) Atiqa Partnership $28,000 $8,000 B) Atiqa Partnership $8,000 $0 C) Atiqa Partnership $0 $0 D) Atiqa Partnership $0 $8,000
Answer: C
David and Joycelyn form an equal partnership in the current year. No special allocation is provided for in the partnership agreement. During the year David contributes land having a $90,000 basis and a $100,000 FMV in exchange for the initial partnership interest. In addition, the partnership earns $50,000 of ordinary income while partnership liabilities increase from zero to $30,000 by the end of the tax year. The partnership earns $20,000 of tax-exempt interest during the year. David's basis at the end of the current year is A) $115,000. B) $125,000. C) $130,000. D) $140,000.
Answer: D
A liquidating distribution is treated as a sale or exchange of a partnership interest.
TRUE
New business owners expecting losses in the early years will generally prefer the partnership (or LLC) form of business over the C and S corporation forms.
Answer: TRUE
James and Sharon form an equal partnership in the current year. No special allocation is provided for in the partnership agreement. During the year James contributes land having a $80,000 basis and a $100,000 FMV in exchange for the initial partnership interest. In addition, the partnership earns $100,000 of ordinary income while partnership liabilities increase from zero to $60,000 by the end of the tax year. Also, the partnership earns $10,000 of tax-exempt interest during the year and makes charitable contributions of $6,000. James withdraws $30,000 from the partnership. What is James's basis at the end of the current year?
Answer: Contribution of building $ 80,000 Plus: Share of partnership liabilities (0.50 × $60,000) 30,000 Share of ordinary income (0.50 × $100,000) 50,000 Share of tax-exempt interest (0.50 × $10,000) 5,000 Minus: Withdrawals by James (30,000) Share of charitable contributions (0.50 × $6,000) ( 3,000) James's basis at end of the current year $132,000
Charlie Company is a partnership with two owners, Charlie and Robert. Each owner has a $20,000 original basis in the entity having contributed cash to the partnership at its formation. In the first year of operations, the partnership reported $50,000 of income which is allocated to each partner equally. The partnership has no liabilities. If Charlie sells his partnership interest to Jody for $55,000, what is the amount of gain or loss on the transaction?
Answer: Original investment $20,000 Share of income assigned to Charlie 25,000 Partnership Basis $45,000 Amount realized from sale of the interest 55,000 Gain on sale of partnership interest $10,000
At the beginning of this year, Thomas and Claire were equal partners in a partnership that uses the calendar year as its tax year. On August 1, this year, Randy and Mike each contributed $50,000 cash for a 1/4 interest in the partnership. The interests of both Thomas and Claire drop to one-fourth. The partnership reports a $30,000 ordinary loss for the current tax year ending December 31. (Use the elective proration method with a monthly convention.) What is the amount of loss allocated to each partner?
Answer: Partner Loss Allocation Thomas 1/2 × $30,000 × 7/12 $ 8,750 1/4 × $30,000 × 5/12 3,125 $11,875 Claire Same allocation as Thomas 11,875 Randy 1/4 × $30,000 × 5/12 3,125 Mike Same as Randy 3,125 Total $30,000
Longhorn Partnership reports the following items at the end of the current year: Sales $200,000 Cost of goods sold 100,000 Employees salaries 30,000 Advertising expense 5,000 Rent expense 10,000 Shipping expense 3,000 Insurance expense 2,000 Long-term capital gain 25,000 Depreciation expense 8,000 Section 179 expense 20,000 Charitable contributions 10,000 What is the partnership's ordinary income? Which items are separately stated?
Answer: Sales $200,000 Less: Cost of goods sold $100,000 Employees salaries 30,000 Advertising expense 5,000 Rent expense 10,000 Shipping expense 3,000 Insurance expense 2,000 Depreciation expense 8,000 158,000 Partnership Ordinary Income $ 42,000 Separately stated items: Long-term capital gain 25,000 Section 179 expense 20,000 Charitable contributions 10,000
Hal transferred land having a $160,000 FMV and a $75,000 adjusted basis which is subject to a $150,000 mortgage in exchange for a one-third interest in the HEF Partnership. Hal acquired the land ten years ago. The partnership owes no other liabilities. Hal, Ellen, and Felix share profits and losses equally and each has a one-third interest in partnership capital. Hal's basis in the one-third partnership interest is A) $0. B) ($25,000). C) $75,000. D) $85,000.
Answer: A
MN Partnership has two equal partners, Mark and Nadia. In the current year, the MN earns $140,000 of ordinary business income and a $30,000 long-term capital gain. Nadia is single. In addition to the partnership items, she reports $40,000 of dividend income and a long-term capital loss of $13,000 from her personal investment accounts. Nadia does not itemize her deductions. Calculate Nadia's 2018 taxable income.
Answer: Share of partnership ordinary business income $70,000 Dividend income 40,000 Share of partnership long-term capital gain $15,000 Less: Long-term capital loss (13,000) Net capital gain 2,000 Adjusted gross income $112,000 Less: Standard deduction -12,000 QBI deduction -14,000 Taxable income $86,000 Combined QBI is $14,000 ($70,000 × 20%). Excess taxable income without regard to the net capital gain is $98,000 ($70,000 + $40,000 - $12,000). The QBI deduction is the lesser of $14,000 or $19,600 ($98,000 × 20%).
Elise contributes property having a $60,000 FMV and a $25,000 adjusted basis and also renders accounting services valued at $30,000 in exchange for an 80% interest in the capital and profits of the EEE partnership. Evan contributes a building with a $90,000 FMV, an adjusted basis of $55,000, and subject to a mortgage of $70,000 for a 20% interest in the capital and profits of the EEE partnership. The partnership assumes the mortgage. a. What is each partner's respective basis in the partnership? b. What are the income tax consequences of the contributions? c. What is the partnership's basis in the assets transferred in by Elise and Evan?
Answer: a. Elise Evan Adjusted basis of property contributed $25,000 $55,000 FMV of services provided to the p'ship 30,000 Share of mortgage assumed: $70,000 × .80 = 56,000 $70,000 × .20 = 14,000 Less: Decrease in Evan's liabilities (70,000) Tentative basis in partnership interest $111,000 $(1,000) Plus: Gain recognized by Evan 1,000 Basis in partnership interest $111,000 $ 0 b. Elise recognizes income of $30,000, the fair market value of the services provided. Evan recognizes a $1,000 gain due to excess debt relief. c. The partnership takes a carryover basis in the assets: Assets from Elise—$25,000. Assets from Evan—$55,000.
Marlena contributes property having a $30,000 FMV and a $27,000 adjusted basis and also renders accounting services valued at $15,000 in exchange for a 30% interest in the capital and profits of the BBB partnership. LeBron contributes a building with a $100,000 FMV, an adjusted basis of $88,000, and subject to a mortgage of $80,000 for a 40% interest in the capital and profits of the BBB partnership. The partnership assumes the mortgage. Ty contributes cash of $60,000 for a 30% interest in the capital and profits of the BBB partnership. a. What is each partner's respective basis in the partnership? b. What are the current income tax consequences to each partner? c. What is the partnership's basis in the assets transferred in by the partners?
Answer: a. Marlena LeBron Ty Adjusted basis of property contributed $27,000 $88,000 $60,000 FMV of services provided to the p'ship 15,000 Share of mortgage assumed: $80,000 × .30 = 24,000 $80,000 × .40 = 32,000 $80,000 × .30 = 24,000 Less: Decrease in LeBron's liabilities (80,000) ______ Basis in partnership interest $66,000 $40,000 $84,000 b. Marlena recognized $15,000 income—the fair market value of the services provided. There are no consequences to the other partners. c. The partnership will have a carryover basis in the assets contributed by the partners: Assets contributed by Marlena—$27,000. Assets contributed by LeBron—$88,000.
Oliver receives a nonliquidating distribution of land having a $25,000 adjusted basis and a $32,000 FMV from the OK Partnership. At the time of the distribution, Oliver's basis in his partnership interest is $30,000. a. What is the amount of recognized gain or loss on the distribution? b. What is Oliver's basis in his partnership interest following the distribution? c. What is Oliver's basis in the land?
Answer: a. No gain or loss is recognized on the distribution. b. Oliver's basis in his partnership interest is $5,000 ($30,000 - $25,000) following the distribution. c. His basis in the land is $25,000.
Iris and Jeong file a joint return. Iris is an executive with a corporation, earning a $800,000 salary. Jeong is a 50% partner in JK Partnership. He works full-time in the partnership. Jeong's basis in his partnership interest at the beginning of the year is $1 million. In the current year, the partnership reports an ordinary loss of $1.2 million, half of which is allocated to Jeong. There were no separately stated items, no distributions made and no changes in liabilities. Iris and Jeong earned $100,000 of dividend income from their investment portfolio. They do not itemize deductions. a. Determine 2018 taxable income for Iris and Jeong. b. Discuss the treatment of any income or loss items not recognized in 2018.
Answer: a. Taxable income: Salary $800,000 Share of partnership loss* -500,000 Dividend income 100,000 Adjusted gross income $400,000 Standard deduction -24,000 Taxable income $376,000 * Jeong has satisfied the basis limitation and the passive loss limitation, but the excess business loss limitation will limit his $600,000 realized loss to $500,000. b. The excess $100,000 of ordinary partnership loss will carry over as a net operating loss subject to the 80% of taxable income limitation on NOLs in the carryover year.
Torrie and Laura form a partnership in which they are equal partners. Torrie contributes $100,000 cash. Laura contributes $40,000 cash and a painting worth $60,000. Laura purchased the painting three years ago for $45,000. In two years the partnership sells the painting for $80,000. a. What is the partnership's basis in the painting? b. When the painting is sold, how much gain is allocated to each partner?
Answer: a. The partnership's basis in the painting is the carryover basis of $45,000. b. The total gain to be recognized is $35,000 ($80,000 sales price - $45,000 basis). The first $15,000 of gain must be specially allocated to Laura (pre-contribution appreciation). The $20,000 gain balance is divided equally between the partners. Laura will recognize $25,000 of gain, and Torrie will recognize $10,000 of gain.
XZ Partnership has two equal partners. Assume no taxpayer qualifies for the small business exception. XY earns $16 million of non-interest ordinary income and incurs $6 million of interest expense. a. How much interest expense can the partnership deduct in determining the partnership's ordinary income? b. What is each partner's share of the partnership's ordinary income? c. If the interest expense is not fully deducted this year, how is the excess treated?
Answer: a. The partnership's interest expense deduction is limited to $4.8 million ($16 million × 30%). b. The partnership's ordinary income is $11.2 million ($16 million - $4.8 million interest expense). Each partner will report $5.6 million of ordinary income. c. Excess interest is $1.2 million in total. Each partner's share of the excess interest expense ($600,000) carries over at the partner level to offset that partner's excess taxable income from this partnership in a subsequent year. The excess interest reduces the partners' bases in the current year, not the carryover year when it is applied.
For each of the following independent cases below, indicate whether the entity will be taxed as an S corporation or a C corporation for the respective period. a. Richards Corporation, uses the calendar year as its tax year. It files an S election on March 31, 2018. If no reasonable cause is shown, how will Richards Corporation be treated for tax purposes in 2018? b. Shareholders owning more than 50% of the stock of Harper Corporation, a qualifying calendar-year S corporation, consent to a voluntary revocation statement filed by the corporation on March 12, 2018. How will Harper Corporation be treated for tax purposes in 2018? c. Shareholders owning more than 50% of the stock of Hazelwood Corporation, a qualifying calendar-year S corporation, consent to a voluntary revocation statement filed by the corporation on March 12, 2018. The prospective termination date is July 1, 2018. How will Hazelwood Corporation be treated for tax purposes in 2018? d. One of the shareholders of Omni Corporation, a calendar-year S corporation, sells his stock to a Canadian individual on July 8, 2018.
Answer: a. To file as an S corporation in 2018, the election had to be filed anytime in 2017 or during the period that starts on January 1, 2018, and ends on March 15, 2018. Since the election was filed after that period, Richards remains a C corporation in 2018 and becomes an S corporation in 2019. b. Because the corporation filed the revocation on or before March 15 with more than 50% consent, it is taxed as a C corporation for all of 2018. c. Hazelwood will file a short-period return for the period January 1 through June 30, 2018 as an S corporation and will file a short-period return for the period July 1 through December 31, 2018, as a C corporation. d. The S corporation terminates on July 7. The corporation files a short-period S corporation tax return for the period January 1 through July 7, 2018, and files a C corporation tax return for the period from July 8 through December 31, 2018.
Shelley owns a 25% interest in a qualifying S corporation. Shelley's basis in the stock was $15,000 at the beginning of the year. Shelley made no capital contributions and received no distributions during the year. Shelley loaned the S corporation $20,000 this year. The S corporation incurred a $160,000 ordinary loss this year. a. What are the amounts of Shelley's deduction and carryover of the unused loss for the year? b. What is the amount of Shelley's basis in the stock at the end of year one? c. If the S Corporation earned net income of $200,000 in year two, what is the amount of Shelley's stock basis at the end of year two?
Answer: a. and b. Basis in stock at the beginning of year one $15,000 Minus: Ordinary loss applied against stock basis ( 15,000) Basis in stock after ordinary loss absorption $ 0 Basis in loan $20,000 Minus: Ordinary loss applied against loan basis ( 20,000) Basis in loan after ordinary loss absorption $ 0 Share of ordinary loss $40,000 Minus: Deduction year one ($15,000 + $20,000 = $35,000) ( 35,000) Carryover of ordinary loss to year two $ 5,000 c. Basis in stock on January 1, year two $ 0 Plus: Ordinary income [$200,000 × 0.25] 50,000 Basis in stock after ordinary income $50,000 Minus: Loss carryover ( 5,000) Minus: restoration of loan basis ( 20,000) Basis in stock on December 31, year two $ 25,000
Mark receives a nonliquidating distribution of $10,000 cash and a parcel of land having an adjusted basis of $18,000 and a fair market value of $25,000. a. Mark's basis in his partnership interest prior to the distribution is $50,000. (1) How much income will the partnership recognize due to the distribution? (2) How much income will Mark recognize due to the distribution? (3) What is Mark's basis in his partnership interest after the distribution? (4) What is Mark's basis in the land? b. Assume Mark's basis in his partnership interest is instead $22,000 and redetermine the responses to questions (1) through (4).
Answer: (1a and b) The partnership does not recognize gain or loss on property distributions. (2a and b) Mark will not recognize any income. The cash distribution does not exceed his basis. (3) and (4) a. b. Pre-distribution partnership basis $50,000 $22,000 Cash distribution -10,000 -10,000 $40,000 $12,000 Land at its adjusted basis, or if less -18,000 Remaining partnership basis -12,000 Post-distribution partnership basis (3) $22,000 $ 0 Basis in land (4) $18,000 $12,000
A shareholder sells his S corporation stock and realizes a $500,000 gain. The stock had been held five years. Which of the following statements most completely describes the character of the gain? A) A long-term capital gain taxed at the 15%/20% capital gains rate. If the corporation owns collectibles, gain attributable to those assets will be taxed at the 28% long-term capital gain rate. B) Ordinary income to the extent of the shareholder's share of the business's unrealized receivables and appreciation on inventory, with the balance taxed at the 15%/20% capital gain rate. C) The portion of the gain attributable to unrecaptured Sec. 1250 gain taxed at 25%, with the balance taxed at the 15%/20% capital gain rate. D) Both B and C apply to the gain from the sale of S corporation stock.
Answer: A
Bryan Corporation, an S corporation since its organization, is owned entirely by Mr. Bryan. The corporation uses a calendar year as its taxable year. Mr. Bryan paid $120,000 for his Bryan stock when the corporation was formed on January 1 of this year. For this year, Bryan Corporation reported the following results: Ordinary Income $65,000 Dividend Income 20,000 Short-term capital loss ( 2,000) Distributions of $40,000 were made during the year. What is the basis of Mr. Bryan's stock on December 31? A) $163,000 B) $165,000 C) $203,000 D) $205,000
Answer: A
Duo Partnership reports the following items for the year: Sales $750,000 Wage expense 300,000 Rent expense 50,000 Charitable contributions 10,000 Short-term capital gain 20,000 Sec. 179 expense 100,000 In addition to reporting separately stated items on the Form 1065, Duo will report ordinary income of A) $400,000. B) $300,000. C) $420,000. D) $310,000.
Answer: A
Evie, a single taxpayer, is a 50% partner in a partnership. The partnership reports $100,000 of ordinary business income and no separately stated items. Evie also has $30,000 of taxable interest income and takes a $12,000 standard deduction. Evie will be allowed a qualified business income deduction of A) $10,000. B) $20,000. C) $13,600. D) $50,000.
Answer: A
An S corporation distributes land to its shareholders. The land has a $60,000 basis and a $90,000 FMV. The basis of the land to the shareholder is A) $0. B) $30,000. C) $60,000. D) $90,000.
Answer: D
Passive activity loss limitations apply to S corporation shareholders in the same manner as partners.
Answer: TRUE
Hunter contributes property having a $75,000 FMV and a $65,000 adjusted basis which is subject to a $36,000 mortgage in exchange for a one-fourth interest in the ABC Partnership. The partnership owes no other debts, but does assume this mortgage. Profits and losses are shared equally and each partner has a one-fourth interest in partnership capital. Hunter's basis in the partnership is A) $38,000. B) $48,000. C) $74,000. D) $84,000.
Answer: A
In 2018, Phuong transferred land having a $150,000 FMV and a $120,000 adjusted basis, which is subject to a $110,000 mortgage in exchange for a one-third interest in the DSF Partnership. Phuong had purchased the land in 2013, but the mortgage was not received until 2014. The partnership owes no other liabilities. Phuong, Austin, and Alison share profits and losses equally and each has a one-third interest in partnership capital. The partnership's holding period for the land transferred by partner Phuong commences in A) 2013. B) 2014. C) 2018. D) The holding period is the same number of years that the partnership has been in existence.
Answer: A
In the syndication of a partnership, brokerage and registration fees, printing fees, and legal fees of the underwriter total $50,000. With respect to these fees, the partnership must A) capitalize the fees, which are not amortizable. B) deduct $5,000 of the expenses in the accounting period incurred and permanently capitalize the remainder. C) capitalize and amortize the fees over a period of not less than 60 months. D) deduct $5,000 of the expenses in the accounting period incurred and amortize the remaining amount over 180 months.
Answer: A
Joey and Bob each have a 50% interest in a Partnership. Both Joey and the partnership file returns on a calendar-year basis. Partnership Q had a $12,000 loss in 2017. Joey's adjusted basis in his partnership interest on January 1, 2017, was $5,000. In 2018, the partnership had a profit of $10,000. Assuming there were no other adjustments to Joey's basis in the partnership, what amount of partnership income (loss) should Joey show on his 2017 and 2018 individual income tax returns? A) 2017 2018 ($5,000) $4,000 B) 2017 2018 ($5,000) $5,000 C) 2017 2018 ($6,000) $4,000 D) 2017 2018 ($6,000) $5,000
Answer: A
John contributes land having $110,000 FMV and a $90,000 adjusted basis which is subject to a $60,000 mortgage in exchange for a one-third interest in the AJK Partnership. The partnership owes no other liabilities. After the contribution, Abby, John, and Kent share profits and losses equally and each has a one-third interest in the partnership capital. John's basis in the partnership interest is A) $50,000. B) $90,000. C) $110,000. D) $150,000.
Answer: A
Lance transferred land having a $180,000 FMV and a $105,000 adjusted basis, which is subject to a $150,000 mortgage in exchange for a one-third interest in the Trois Partnership. Lance acquired the land in 2010. The partnership owes no other liabilities. Lance, Rhonda, and Zach share profits and losses equally and each has a one-third interest in partnership capital. The tax effect to Lance is A) no gain or loss recognized. B) recognized gain of $45,000 on the transfer. C) recognized gain of $75,000 on the transfer. D) recognized loss of $45,000 on the transfer.
Answer: A
Many professional service partnerships have adopted the LLP form primarily because it A) limits legal liability. B) limits the number of members. C) allows for the transfer of partners' interests. D) assures the continuity of life.
Answer: A
On April 5, 2018, Joan contributes business equipment (she had purchased on October 24, 2015) having a $45,000 FMV and a $40,000 adjusted basis to the EJK Partnership in exchange for a 25% interest in the capital and profits. The basis of the property and the date the holding period begins for the partnership is A) Basis Holding Period Begins $40,000 October 24, 2015 B) Basis Holding Period Begins $40,000 April 5, 2018 C) Basis Holding Period Begins $45,000 October 24, 2015 D) Basis Holding Period Begins $45,000 April 5, 2018
Answer: A
Patrick acquired a 50% interest in a partnership by contributing property that had an adjusted basis of $8,000 and a fair market value of $29,000. The property was subject to a liability of $22,000, which the partnership assumed for legitimate business purposes. Which of the following statements is correct? A) Patrick will be required to recognize a $3,000 gain due to the negative basis rules and will have a basis in his partnership interest of zero. B) Patrick will not be required to recognize a gain on his return and will have a basis in his partnership interest of negative $3,000. C) Patrick will be required to recognize a $21,000 gain due to the negative basis rules and will have a basis in his partnership interest of zero. D) Patrick will be required to recognize a $14,000 gain due to the negative basis rules and will have a basis in his partnership interest of zero.
Answer: A
Sandy and Larry each have a 50% interest in SL Partnership. The partnership and the individuals file on a calendar-year basis. In 2017, SL Partnership had a $30,000 ordinary loss. Sandy's adjusted basis in her partnership interest on January 1, 2017, was $12,000. In 2018, SL Partnership had ordinary income of $20,000. Assuming there were no other adjustments to Sandy's basis in the partnership, what amount of partnership income (loss) would Sandy show on her 2017 and 2018 individual income tax returns? A) 2017 2018 ($12,000) $7,000 B) 2017 2018 ($12,000) $10,000 C) 2017 2018 ($15,000) $7,000 D) 2017 2018 ($15,000) $10,000
Answer: A
Tony is the 100% shareholder of a corporation established five years ago. It has always been an S corporation. After adjustment for this year's corporate income, but before taking distributions into account, Tony has a $50,000 stock basis. The corporation pays Tony a $40,000 cash distribution. As a result of this distribution, Tony will have an ending stock basis and recognized income of A) Income recognized Stock basis $0 $10,000 B) Income recognized Stock basis $40,000 $50,000 C) Income recognized Stock basis $0 $40,000 D) Income recognized Stock basis $40,000 $10,000
Answer: A
Which of the following characteristics can disqualify a corporation from S corporation status? A) A corporation has nonresident aliens as shareholders. B) One of the corporation's shareholders is an estate. C) A corporation has 101 shareholders including a husband and wife. D) A corporation has voting and nonvoting stock, but both types of stock confer identical rights to distribution and liquidation proceeds.
Answer: A
Gain is recognized by an S corporation when it distributes appreciated property to its shareholders.
Answer: TRUE
Members of a single family may be counted as one shareholder for S corporation purposes.
Answer: TRUE
Which of the following statements is correct, assuming that an extension is not requested? A) A partnership must file Form 1065 no later than the 15th day of the third month after the close of the partnership's tax year. B) A partnership must file Form 1120 no later than the 15th day of the fourth month after the close of the partnership's tax year. C) A partnership must file Form 1065 no later than the 15th day of the fourth month after the close of the partnership's tax year. D) Partnerships must file Schedule K-1 to show how income is allocated to partners no later than the 15th day after the close of the partnership's tax year.
Answer: A
Which of the following will be separately stated by a partnership reporting its operations for the year to the IRS? A) interest income B) Sec. 1245 depreciation recapture C) bad debt expense D) None of the items will be separately stated.
Answer: A
Explain the difference between expenses of organizing a partnership and expenses of syndicating a partnership.
Answer: A maximum of $5,000 of costs of organizing the partnership can be deducted in the year in which the partnership begins business. The deduction is limited to the lesser of (1) the costs of organizational expenses or (2) $5,000, reduced by the amount by which such organizational expenses exceed $50,000. Any organizational expenses in excess of the first year deduction can be deducted ratably over the 180 month period beginning with the month in which the partnership begins business. Organization expenses include legal and accounting fees incident to the organization of the partnership and filing fees. Syndication expenses are expenses incurred to promote and market partnership interests. These expenses must be capitalized by the partnership and are not amortizable. Syndication fees include brokerage and registration fees, legal fees of the underwriter and issuer, and printing costs associated with the prospectus.
A business distributes land to one of its owners. The business purchased the land a few years ago for $15,000, but it is now worth $35,000. Compare the treatment of this distribution when made by a partnership as opposed to an S corporation. Consider the impact on the business and the partner/shareholder and the determination of basis in the property.
Answer: A partnership normally distributes non-cash property at the partnership basis number ($15,000 in this case), and the partnership does not recognize any gain or loss. This adjusted basis of the property reduces the partner's basis in his partnership interest, and the partner does not recognize any gain. The partner takes a carryover basis in the distributed property. If the partnership's basis in the property is greater than the partner's basis in his partnership interest, the property basis is reduced to absorb the remaining basis in the partnership interest. An S corporation will recognize gain (but not loss) on the distribution of appreciated property. This gain will pass-through to the shareholders. The property is distributed at its FMV which will also reduce the shareholder's basis in his stock. The shareholder's basis in the property will be its FMV.
Marisa has a 75% interest in the MM Partnership. She sells the partnership a building used in her business for $150,000. Her adjusted basis of the building was $120,000. Marisa had used straight-line depreciation. The partnership will use the building for its offices. What are the tax consequences to Marisa of this transaction?
Answer: Amount realized $150,000 less $120,000 adjusted basis = $30,000. Had Marisa sold the building to an outsider, she would have realized/recognized a $30,000 Sec. 1231 gain. However, since she sold the building to a partnership in which she owned more than 50%, she must recognize ordinary income of $30,000 which will be taxed at her marginal tax rate.
All of the following statements are true regarding nonliquidating distributions of a partnership except A) if money is distributed in excess of the partnership interest, the partner receiving the distribution has capital gain. B) in no circumstances will the partner or the partnership recognize gain or loss from a nonliquidating distribution. C) in no circumstances may the partner's basis in the partnership interest be reduced below zero as a result of a nonliquidating distribution. D) if, after money distributions reduce the partnership basis, the adjusted basis of distributed property does not exceed the partner's basis in the partnership interest, the basis of the distributed property carries over to the partner.
Answer: B
Empire Corporation has operated as a C corporation for its first three years of existence because one of its shareholders disqualified it from electing S corporation status. That shareholder is now gone, and the remaining shareholders have elected S corporation status effective for the current year. Empire Corporation has one highly appreciated asset that it hopes to sell in the near future. How many years must elapse before the sale in order to avoid the built-in gains tax? A) 3 years B) 5 years C) 7 years D) 10 years
Answer: B
Ezinne transfers land with an adjusted basis of $50,000 and a FMV of $95,000 to a new business in exchange for a 50% ownership interest. The land is subject to a $60,000 mortgage which the business will assume. The business has no other liabilities outstanding. Indicate the amount of gain recognized by Ezinne due to this exchange if the building is transferred to (1) a corporation and (2) a partnership. Assume Sec. 351 is satisfied in the case of the corporation and Sec. 721 is satisfied in the case of the partnership. A) Corporation Partnership $0 $0 B) Corporation Partnership $10,000 $0 C) Corporation Partnership $10,000 $10,000 D) Corporation Partnership $0 $10,000
Answer: B
JK Partnership earns $30 million of non-interest ordinary income. The partnership incurs $12 million of interest expense. Jen and Kai are each 50% partners, sharing all partnership items equally. Assume no taxpayer qualifies for the small business exception. The partnership's ordinary income, after taking interest expense into account, will be A) $18 million. B) $21 million. C) $24 million. D) $30 million.
Answer: B
On January 1 of this year (assume not a leap year), Anne bought 50% of a calendar-year S corporation. Anne purchased the remaining 50% on July 1 (day 181 of the year). Anne's adjusted basis in the stock is $277,000 before any basis adjustments are taken into account. For this year, the corporation had a net operating loss of $365,000. What is the amount of the corporation's loss that Anne can deduct on her current individual income tax return? A) $0 B) $274,500 C) $273,500 D) $365,000
Answer: B
On July 1, Alexandra contributes business equipment (which she had purchased two years ago) having a $45,000 FMV and a $40,000 adjusted basis to the AX Partnership in exchange for a 25% interest in the capital and profits. The basis of Alexandra's partnership interest is A) $5,000. B) $40,000. C) $45,000. D) None of the above.
Answer: B
On July 1, Joseph, a 10% owner, sells his interest in ABC Partnership to Andy, an outsider, for $165,000 cash and the release from $20,000 of partnership liabilities. Joseph's partnership interest at the beginning of the year was $120,000. The partnership earned income through June 30 of $100,000. Joseph's share of partnership liabilities increased by $5,000 from January 1 to June 30. What are the tax consequences to Joseph on the sale of his partnership interest (assume the partnership does not hold any inventory or unrealized receivables)? A) $45,000 capital gain B) $50,000 capital gain C) $55,000 capital gain D) $65,000 capital gain
Answer: B
Priya is a partner in a partnership. The partnership has incurred a loss for the year. Priya's ability to recognize the loss will be tested in the following order: A) (1) basis limitations, (2) excess business loss limitations, (3) passive loss limitations. B) (1) basis limitations, (2) passive loss limitations, (3) excess business loss limitations. C) (1) passive loss limitations, (2) basis limitations, (3) excess business loss limitations. D) (1) excess business loss limitations, (2) basis limitations, (3) passive loss limitations.
Answer: B
Raina owns 100% of Tribo Inc., an S corporation. She started the business this year with a $100,000 capital contribution. In addition, the business borrowed $50,000 from the bank which she had to guarantee. Tribo incurred a first year operating loss of $170,000. Raina will deduct an ordinary loss this year of A) $170,000. B) $100,000. C) $150,000. D) $0.
Answer: B
Sari transferred an office building with a $500,000 FMV and a $300,000 adjusted basis to the Oak Partnership in exchange for a one-quarter ownership interest. Sari had acquired the building three years earlier and had used it in her sole proprietorship. Sari's holding period for her partnership interest A) will begin the day after she acquires the partnership interest. B) will include the holding period of the transferred building. C) will depend on the election she files. D) None of the above
Answer: B
Stephanie owns a 25% interest in a qualifying S corporation. Stephanie's basis in the stock was $40,000 at the end of the year after adjustments are made for capital contributions and distributions (but not operating results). Stephanie also loaned the S corporation $10,000 this year. The S corporation incurred a $240,000 ordinary loss this year. Assume that next year the S corporation's ordinary income is $160,000. Stephanie's basis in her stock at the end of next year is A) $10,000. B) $20,000. C) $30,000. D) $40,000.
Answer: B
Which of the following statements regarding voluntary revocation of the S election is incorrect? A) In order for the revocation to be effective retroactively to the first day of the tax year, the revocation must be filed by March 15 of the affected year. B) All of the shareholders must consent to the revocation. C) The corporation cannot reelect S corporation status for five years. D) The revocation can provide a specified effective date to occur mid-year, requiring two tax returns to be filed for the year.
Answer: B
Discuss the concept of partnership guaranteed payments.
Answer: Because a partner does not qualify as an employee of the partnership for tax purposes, the partnership agreement may provide for fixed salary-type payments that are not based on partnership income. Such payments are deductible by the partnership as guaranteed payments to arrive at the partnership ordinary income. These payments are included in the partner's income. Guaranteed payments can also be made in lieu of interest payments on the amount of the partner's capital investment. These payments are generally deductible by the partnership to arrive at the partnership ordinary income and are includible in the partner's income.
A partnership's interest expense deduction is limited by the 30% of adjusted taxable income limitation. The excess interest expense A) is carried over by the partnership and applied against future partnership taxable income. B) is carried over by the partner as a net operating loss. C) is allocated to the partners to be used in the partner's succeeding tax years when excess limits are allocated. D) is lost.
Answer: C
A taxpayer has various businesses which operate in different legal and tax forms. The qualified business income deduction will apply to the business income earned from all of the following businesses except A) the partnership. B) the sole proprietorship. C) the C corporation. D) the S corporation.
Answer: C
All of the following statements are true with regard to the formation of a partnership except A) the partnership's basis in the transferred property carries over from the transferor partners. B) with regard to capital assets and 1231 assets, the partnership's holding period for the transferred property includes the contributing partner's holding period. C) the nonrecognition rules apply to both property and services contributed to a partnership. D) a transfer of property in exchange for a partnership interest causes nonrecognition of gain or loss treatment.
Answer: C
All the following are types of pass-through entities except A) LLP. B) LLC. C) C corporations. D) S corporations.
Answer: C
At the beginning of this year, Edmond and Samuel were equal partners in a partnership that uses the calendar year as its tax year. On October 1, this year, Joan contributed $48,000 cash for a one-third interest in the partnership. The interests of both Edmond and Samuel drop to one-third. The partnership reports a $36,000 ordinary loss for the current tax year ending December 31. The loss allocation to Samuel is (assume the elective proration method with a monthly convention) A) $12,000. B) $13,500. C) $16,500. D) $18,000.
Answer: C
Brittany receives a nonliquidating distribution of $48,000 cash from her partnership. Brittany's basis in her partnership interest prior to the distribution is $25,000. What are the tax consequences of the distribution? A) $48,000 ordinary income; $25,000 partnership basis B) $48,000 nontaxable return of capital, ($23,000) partnership basis C) $25,000 nontaxable return of capital, capital gain of $23,000, $0 partnership basis D) $25,000 nontaxable return of capital, ordinary income of $23,000, $0 partnership basis
Answer: C
Cal and Ann are a married couple filing a joint return. Ann earns a $700,000 salary as a bank executive. The couple has $150,000 of interest and dividend income. Cal is a 50% partner and material participant in CD Partnership. CD has incurred a $1.5 million ordinary loss this year, and Cal's share is $750,000. Cal's basis is large enough to absorb the loss. With respect to the partnership loss, the couple will deduct A) $750,000. B) $700,000. C) $500,000. D) $250,000.
Answer: C
Dori and Matt will be equal owners of a new business and will be making cash contributions to start up the business. They expect substantial losses in the early years so the business will take out a loan from the bank which Dori and Matt will have to guarantee. For tax purposes, the preferred business form for these early years will be A) a C corporation. B) an S corporation. C) an LLC, taxed as a partnership. D) either an S corporation or an LLC (partnership). The owners will be indifferent between these two forms.
Answer: C
Jamahl has a 65% interest in a partnership. Jamahl sells land to the JK partnership for $70,000. Prior to the sale, the land had a FMV of $70,000 and an adjusted basis of $90,000 to Jamahl. Two years later, the partnership sells the land for $123,000. Due to the sale, the partnership will recognize A) a gain of $13,000. B) a loss of $53,000. C) a gain of $33,000. D) a loss of $20,000.
Answer: C
Lars has a basis in his partnership interest in XXL of $100,000. He sells the partnership interest in XXL for $160,000. XXL is a cash-basis partnership which has accounts receivable with a $30,000 fair market value and a zero adjusted basis. Lars's share of these receivables is $10,000. What is the amount and character of the gain that Lars recognizes on the sale of his partnership interest? A) $50,000 capital gain B) $60,000 capital gain C) $10,000 ordinary income and $50,000 capital gain D) $10,000 ordinary income and $60,000 capital gain
Answer: C
Martha transferred property with a FMV of $60,000 (adjusted basis $30,000), which is subject to a $40,000 mortgage in exchange for a one-third interest in a partnership. The partnership has no other liabilities. The partners of MNO own the partnership equally. The partnership's basis in the property contributed is A) $0. B) $40,000. C) $30,000. D) $60,000.
Answer: C
Mia is a 50% partner in a partnership with a beginning of the year adjusted basis in her partnership interest of $50,000. For the current year, no distributions are made to partners, and there is no change in partnership liabilities. The partnership incurred a $140,000 ordinary loss for the year. How does Mia treat her loss in excess of basis? A) She will recognize $3,000 this year and carry forward the balance. B) She will first carry back the excess loss for two years and then carry forward the balance up to 20 years. C) She will carry over the excess loss indefinitely until a subsequent year when she again has a positive basis in her partnership interest. D) She will first carry back the excess loss three years and then carry forward the balance up to five years.
Answer: C
Richard has a 50% interest in a partnership, and he materially participates in the partnership's business. Richard's adjusted basis in the partnership was $60,000 at the beginning of the year, including his share of partnership liabilities. There were no distributions to Richard during the year. During the current year, the partnership borrowed $160,000 from a local bank to purchase equipment needed in the business. All of the partners are personally liable for all partnership debts. The partnership incurred a $320,000 loss this year. What amount can Richard claim as a loss from the partnership on his individual tax return this year? A) $60,000 B) $80,000 C) $140,000 D) $160,000
Answer: C
Stephanie owns a 25% interest in a qualifying S corporation. Stephanie's basis in the stock was $40,000 at the beginning of the year. Stephanie made no capital contributions and received no distributions during the year. Stephanie loaned the S corporation $10,000 this year. The S corporation incurred a $240,000 ordinary loss this year. Stephanie's deduction and carryover of the unused loss are A) Deductible Loss Carryover Loss $30,000 $30,000 B) Deductible Loss Carryover Loss $40,000 $20,000 C) Deductible Loss Carryover Loss $50,000 $10,000 D) Deductible Loss Carryover Loss $60,000 $0
Answer: C
Trixt Inc., an S corporation, reports the following for the current year: Service revenue $800,000 Dividend income 30,000 Wages paid to shareholder-employees -450,000 Charitable contributions -20,000 Administrative expense -130,000 Sec. 1231 loss -40,000 Net income $190,000 On its tax return, in addition to separately stated items, Trixt will report ordinary income of A) $210,000. B) $660,000. C) $220,000. D) $250,000.
Answer: C
Which of the following assets may cause a partner to recognize ordinary income rather than capital gain on the sale of a partnership interest? A) land B) marketable securities C) inventory D) buildings which have been placed in service after 1986
Answer: C
Which of the following statements regarding the Sec. 754 adjustment is incorrect? A) Sec. 754 permits a basis adjustment to partnership assets upon the sale of a partnership interest. B) Sec. 754 permits a basis adjustment to partnership assets upon certain distributions. C) The Sec. 754 election is made annually by the partnership. D) The Sec. 754 election is intended to prevent inequities that may occur when the bases of partnership assets are not adjusted.
Answer: C
A new corporation is formed on January 2, 2018. In order to have the S election effective as of the first day of the first tax year, the Form 2553 must be filed no later than A) the original due date for the 2018 tax return. B) the properly extended due date for the 2018 tax return. C) January 2, 2018. D) March 15, 2018.
Answer: D
All of the following are requirements to qualify as an S corporation with the exception of A) the corporation must be a domestic corporation. B) the corporation may issue only one class of stock (disregarding voting rights). C) the corporation may not have more than 100 shareholders. D) the corporation shareholders may consist of only individuals, estates, trusts, and partnerships.
Answer: D
All of the following are separately stated items that pass through from the partnership to the partners except A) 1231 gains or losses. B) charitable contributions. C) capital gains and losses. D) 1245 and 1250 recapture.
Answer: D
All of the following could file partnership tax returns except A) general partnership. B) limited liability partnership. C) limited liability company. D) single member limited liability company.
Answer: D
All of the following would reduce the basis of a shareholder's stock in an S corporation, except A) a shareholder's pro rata share of nontaxable distributions by the S corporation to its shareholders. B) a shareholder's share of all loss and deduction items of the S corporation that are separately stated and passed through to the shareholder. C) a shareholder's pro rata share of any nondeductible expenses of the S corporation. D) a shareholder's pro rata share of loan repayments made by the S corporation.
Answer: D
An S corporation distributes land with a basis of $60,000 and a FMV of $90,000 to its shareholder. The tax results of the distribution will be A) no gain to the corporation or to the shareholder. B) $30,000 of gain recognized by the S corporation and no pass-through to the shareholder. C) no gain recognized by the corporation but $30,000 of gain recognized by the shareholder. D) $30,000 of gain recognized by the S corporation which is passed through to the shareholder.
Answer: D
Atiqa receives a nonliquidating distribution of land from her partnership. The partnership purchased the land five years ago for $20,000. At the time of the distribution, it is worth $28,000. Prior to the distribution, Atiqa's basis in her partnership interest is $37,000. Atiqa's basis in the distributed land and her post-distribution basis in her partnership interest are A) Land Partnership Interest $28,000 $9,000 B) Land Partnership Interest $28,000 $17,000 C) Land Partnership Interest $20,000 $9,000 D) Land Partnership Interest $20,000 $17,000
Answer: D
Ben is a 30% partner in a partnership. The partnership guarantees Ben payments of $25,000 for the year. If the partnership has ordinary income of $15,000 before adjustment for the guaranteed payment, Ben must report A) ordinary income of $22,000. B) an ordinary loss of $3,000. C) ordinary income of $25,000 and a partnership income of $4,500. D) ordinary income of $25,000 and a partnership loss of $3,000.
Answer: D
Chen contributes a building worth $160,000 (adjusted basis $180,000) and $40,000 in services to a partnership for a partnership interest. Chen's basis in the partnership interest is A) $160,000. B) $180,000. C) $200,000. D) $220,000.
Answer: D
Clark and Lois formed an equal partnership three years ago. Clark contributed cash of $160,000 while Lois contributed land with a $90,000 adjusted basis and a $160,000 FMV. Three years later the land is sold for $210,000. The tax results to Clark and Lois are A) $25,000 of gain to both Clark and Lois. B) $60,000 of gain to both Clark and Lois. C) $25,000 of gain to Clark and $70,000 gain to Lois. D) $25,000 of gain to Clark and $95,000 gain to Lois.
Answer: D
Jamahl has a 65% interest in a partnership. Jamahl sells land to the partnership for $70,000. Prior to the sale, the land had a FMV of $70,000 and an adjusted basis of $90,000 to Jamahl. Due to the sale, Jamahl will recognize A) a gain of $20,000. B) a loss of $20,000. C) $0, but he will have a carryover loss of $20,000. D) $0, and he will not have any carryover loss.
Answer: D
Joy is a material participant in a partnership. Her basis in her partnership interest is $150,000. Due to a major expansion, the partnership will generate a significant loss this year, and Joy's share is expected to be $200,000. The partners expect the partnership to report a large profit next year. Joy is in the top tax bracket this year, and she expects to be in a lower tax bracket next year. Due to her higher marginal tax rate this year, Joy would like to deduct her full share of the partnership loss this year. What strategies can she employ before year-end to assure full deduction of this year's loss? A) As a material participant, Joy will be entitled to deduct her full share of the partnership loss this year. B) Joy can make a loan to the partnership before year-end. C) Joy can contribute capital to the partnership before year-end. D) Either Response B or Response C will allow Joy to deduct her full share of the loss.
Answer: D
Kuda exchanges property with a FMV of $630,000 and an adjusted basis of $450,000 in exchange for a one-third interest in a partnership. The property is subject to a mortgage with a principal balance of $300,000 which the partnership assumes. As a result of Kuda joining the partnership, Alejandro, a pre-existing partner, now has a one-third interest in the partnership. Alejandro will adjust his basis to A) increase it by $150,000. B) increase it by $210,000. C) decrease by $100,000. D) increase it by $100,000.
Answer: D
Limited liability of partners or members is an advantage of all the following with the exception of A) LLP. B) LLC. C) limited partnerships. D) general partnerships.
Answer: D
Rowan and Sanjay are equal partners in a partnership, which uses the calendar year as its tax year. On September 1, this year, Hailley contributed $60,000 cash for a one-third interest in the partnership. The partnership reports $72,000 of ordinary income for the tax year ending on December 31 of this year. The income allocation to Hailley is (assume the elective proration method with a monthly convention) A) $24,000. B) $12,000. C) $0. D) $8,000.
Answer: D
S corporation shareholders who own more than 2% of the outstanding stock are eligible for which of the following tax-free benefits? A) group term life insurance exclusion under Sec. 79 for premiums paid for up to $50,000 coverage B) exclusion for cafeteria plan benefits C) exclusion from income for premiums paid for accident and health and medical reimbursement plans D) None of the above.
Answer: D
S corporations and their shareholders are subject to the rules regarding A) the qualified business income deduction. B) the limitation on net business interest. C) the limitation on excess business losses. D) all of the above.
Answer: D
Scott provides accounting services worth $40,000 to the ABC Partnership in exchange for a 20% interest in the capital and profits of the partnership. The tax result to Scott is A) a partnership interest with a zero basis and no gain or loss. B) a partnership interest with a zero basis and $40,000 of ordinary income. C) a partnership interest with a $40,000 basis and $40,000 capital gain. D) a partnership interest with a $40,000 basis and $40,000 ordinary income.
Answer: D
The partnership will make all of the elections affecting the computation of partnership income listed below except A) the depreciation methods. B) the optional basis adjustments under Sec. 754. C) the amortization method for organizational expenditures. D) the election of deduction or credit for foreign income taxes.
Answer: D
Tonya is the 100% shareholder of a corporation established five years ago. It has always been an S corporation. After adjustment for this year's corporate income, but before taking distributions into account, Tonya has a $50,000 stock basis. The corporation pays Tonya a $60,000 cash distribution. As a result of this distribution, Tonya will have an ending stock basis and recognized income of A) Income recognized Stock basis $0 $0 B) Income recognized Stock basis $60,000 $50,000 C) Income recognized Stock basis $10,000 $50,000 D) Income recognized Stock basis $10,000 $0
Answer: D
Worthy Corporation elected to be taxed as an S corporation on January 1, of last year, effective last year. It had previously been a C corporation. On the effective date of the S election, Worthy had land with a $70,000 basis and a $210,000 FMV. No net unrealized losses exist on the date of the S corporation election. The land is sold this year for $250,000. The tax result of the sale by Worthy is A) no gain or loss recognized. B) a gain of $180,000, none of which is subject to the built-in gains tax. C) a gain of $180,000, all of which is subject to the built-in gains tax. D) a gain of $140,000 subject to the built-in gains tax and passes though to shareholders, plus a $40,000 gain subject to the regular S corporation pass-through rules.
Answer: D
DAD Partnership has one corporate partner, Domino Corporation, with a fiscal year-end of June 30. Domino has a 30% interest in DAD. The other partners are individuals with a calendar year for tax purposes, none of whom has a 5% or more interest in DAD Partnership. What are DAD Partnership's choices with respect to selecting a tax year?
Answer: DAD must use a calendar year for tax purposes (the tax year of the individual partners who in aggregate own a majority interest).
A shareholder's deduction for ordinary losses and separately stated items cannot exceed his basis for the S corporation stock plus the debt basis for the shareholder loans made to the corporation and corporate-level liabilities personally guaranteed by the shareholder.
Answer: FALSE
An S corporation recognizes gain or loss if it distributes property other than money to its shareholders.
Answer: FALSE
As a corporation, the S corporation can elect a fiscal year of its choosing.
Answer: FALSE
Assuming extensions are not filed, tax returns for calendar-year S corporations and partnerships are both due on April 15.
Answer: FALSE
S status can be elected if shareholders holding the majority of the stock consent to the S corporation election on the date of the S corporation election.
Answer: FALSE
Separately stated items are allocated to the S corporation shareholders based on the number of shares of stock owned on the last day of the S corporation's taxable year.
Answer: FALSE
Voluntary revocation of an S corporation election is permitted only if consent is obtained from all shareholders.
Answer: FALSE
When an S corporation shareholder sells her stock, she must first recognize ordinary gain to the extent of her share of the unrealized receivables and appreciation on inventory held by the S corporation, with the balance of the gain treated as capital gain.
Answer: FALSE
Discuss whether a C corporation, a partnership, or an S corporation form of organization would be preferred if net operating losses are anticipated in the initial years of operation.
Answer: If a C corporation is selected, NOLs do not benefit the shareholders and may be of no benefit if sufficient profits are not available in future years to offset the NOL carryovers. If the S corporation form is selected, the S corporation's ability to pass through NOLs is limited to the shareholder's basis in the stock and any shareholder loans. If a partnership form is selected, the losses pass through to the partners up to the amount of their basis for the partnership interest. The basis of a partner's interest includes his share of the liabilities of the partnership. Thus, the partnership's liabilities may permit greater losses to be passed through to the partners. The partners' and S corporation's shareholders' abilities to deduct the losses could be further limited by the excess business loss limitations.
Discuss how the partnership form of organization or the S corporation form may be used to shift income.
Answer: If a partnership interest or S corporation stock is given to a child, the child's share of the income from the S corporation or the partnership (i.e., for amounts in excess of $2,100, assuming no other unearned income) will be taxed to the child at the estate and trust income income tax rates. However, with an S corporation or a partnership, family members may be employed in the organization and income may be shifted to lower tax bracket family members through payment of salaries. This income would be considered earned income and would escape the kiddie tax rule mentioned above.
What is the effect of a change in a partner's interest in the partnership during the year?
Answer: If there is a change in any partner's interest in the partnership during the year, e.g., due to entry of a new partner or due to the sale of a partnership interest, all of the partners are required to determine their distributive share of the partnership income, deductions, losses, and credits according to their varying interests in the partnership during the year.
Minna is a 50% owner of a calendar-year S corporation. During the current year, the S corporation had ordinary income of $400,000, short-term capital gain of $150,000 and a charitable contribution of $30,000. What does Minna report for the year from the S corporation?
Answer: Minna has $200,000 ordinary income, $75,000 short-term capital gain and a charitable contribution of $15,000. Depending on the remaining components of her taxable income, Minna may also be eligible for a qualified business income deduction.
What are special allocations of partnership items and when are they permitted?
Answer: Special allocations exist when items of gain, loss, income, deduction and credit are allocated in a different manner than the partners' profit and loss ratios. In order to be respected, special allocations must have a substantial economic effect. Depreciation deductions and the amount of recognized gain or loss must be allocated to take into account the difference between the partnership's basis for the contributed property and the property's FMV at the time of the contribution.
A shareholder's basis for the S corporation stock is adjusted for ordinary income or loss and separately stated items that flow through to the shareholders as well as for additional capital contributions by shareholders and distributions to shareholders.
Answer: TRUE
An S corporation can have both voting and nonvoting common stock as long as the shares of stock have identical rights to share in the profits and assets of the corporation.
Answer: TRUE
Eva is the sole shareholder of an S corporation. Eva gifts half of her S corporation stock to Adam, her newborn son. The S corporation is a highly profitable manufacturing company. The pass-through of the ordinary income to Adam can be subject to tax at his parents' marginal rate.
Answer: TRUE
Realto LLC is a tax partnership which has four equal partners. The LLC holds highly appreciated real estate in midtown Manhattan. Trina is about to purchase a 20% ownership interest in the LLC. To minimize her future tax burden as a partner, she should negotiate a Sec. 754 election with the current partners.
Answer: TRUE
The corporate built-in gains tax does not apply to a corporation that has always been taxed as an S corporation.
Answer: TRUE
Discuss whether a C corporation or a pass-through entity form of organization would be preferred if taxable income is anticipated to be earned by the business.
Answer: Taxable income earned by the C corporation will be taxed at 21%. When dividends are paid, they will then be taxed to the shareholders at rates up to 23.8%. If the business is treated as either a partnership or an S corporation, there is no entity-level tax, but the full income is taxed to the owners at their ordinary rates which could be as high as 37%. The effective tax rate paid by the partner or S corporation shareholder could be lower if the pass-through income is eligible for the qualified business income deduction.
Payton and Eli form the EP Partnership to provide marketing services. They will be equal partners. Payton is contributing property with a fair market value of $350,000 and a basis of $300,000. Eli is contributing property with a fair market value of $200,000 and a $175,000 basis. He will also provide services to the partnership valued at $150,000. Discuss the issues raised by this arrangement and the likely tax treatment of these issues.
Answer: The formation of the partnership and transfers of appreciated property raise the following issues: -Will either partner recognize income due to the exchange? -Does Eli recognize any income due to providing services? -What basis will each partner have in his partnership interest? -What basis will the partnership have in the contributed property? -When does the partnership's holding periods in the transferred assets start? Payton will not recognize any gain or loss on the contribution of property to the partnership. He will have a basis of $300,000 in his partnership interest. Eli will recognize ordinary income due to the contribution of services of $150,000, but he does not recognize any gain on the property exchange. His beginning basis in his partnership interest is $325,000 ($175,000 + $150,000). The partnership takes a carryover basis in the contributed assets. It will have a basis of $300,000 in the property contributed by Payton and $175,000 basis in the property which Eli contributed. The holding periods for the property carryover to the partnership.
What is the primary purpose of Form 1065, Partnership Tax Return?
Answer: The primary purpose of the partnership tax return is to provide information regarding the measurement and reporting of income, deductions, losses, and credit items that pass through to the individual partners. Other items such as capital gains and losses and Sec. 1231 gains and losses are segregated and passed through to individual partners without losing their identity.
Etta transfers property with an adjusted basis of $60,000 in exchange for a 50% partnership interest. The property is subject to a $70,000 mortgage which the partnership will assume. The partnership has no other liabilities. Etta will recognize a $10,000 gain on the exchange due to the negative basis limitation.
FALSE
Guaranteed payments are not deductible by the partnership in arriving at partnership ordinary income but are included in the receiving partner's income.
FALSE
A partner in a partnership will deduct her qualified business income deduction as a deduction for AGI.
FALSE
A partnership sells an asset for a gain. The asset had been transferred to the partnership two years ago by Partner J in exchange for a partnership interest. The asset was worth substantially more than its cost as of the transfer date. The partnership gain will be allocated to all of the partners in accordance with their profit and loss sharing ratios.
FALSE
A partnership sells equipment and recognizes depreciation recapture under Sec. 1245. In reporting its results for the year, the partnership will separately state the Sec. 1245 depreciation recapture.
FALSE
All costs of organizing a partnership can be deducted in the year in which the partnership begins business.
FALSE
An LLC that elects to be taxed like a partnership is also classified as a partnership for legal purposes.
FALSE
An S corporation may not have more than 75 shareholders.
FALSE
Because a partnership is a pass-through entity rather than a taxable entity, partnerships need not file tax returns.
FALSE
Why are some partnership items separately stated?
If a partnership item is subject to a separate calculation or limit on an individual's tax return, it must be separately stated. For example, long- and short-term capital gains and losses are separately stated since these items must be combined with the partner's other capital gains and losses in order to determine the overall net capital gain or loss. Charitable contributions are subject to AGI limitations on a partner's return. The components of calculating net investment interest income and expense are separately stated so as to allow each partner to calculate his or her individual limitation.
Hildi and Frank have decided to form an interior design partnership. Since Hildi will spend twice as much time as Frank in the business, Hildi would like the partnership agreement to provide for a fixed minimum monthly income. Hildi and Frank expect the partnership to show a loss in the first year of operations. Discuss the issues raised by this arrangement and the likely tax treatment of these issues.
The required minimum payments to Hildi are guaranteed payments, which are deductible by the partnership. The second issue is the treatment of the guaranteed payments to Hildi (they are taxable to Hildi and subject to self-employment tax). Hildi and Frank should also consider that since the guaranteed payments are deductible, they will increase the size of the operating loss. The partners can take the loss on their individual tax returns only to the extent of their respective partnership bases. Therefore, some of the losses may not be currently deductible and will not be deductible until a basis increase (loans, operating income, additional investment).