Fed Tax 1: Chapter 10 LS

An LLC member actively involved in LLC management ______.

is protected from liability for LLC debts

S corporation shareholders ______.

must meet eligibility requirements to claim a QBI deduction related to S corporation activities

If a sole proprietorship incurs a loss for the tax year, ______. (Select all that apply.)

- and such loss exceeds the owner's other income, the excess can be carried forward as an NOL - such loss may be deductible against the owner's other income for the year

Adele and Becky are equal partners in AB Partnership, which borrowed $100,000 to fund its operations. If Adele is a general partner and Becky is a limited partner, which of the following statements regarding the affect of partnership debt on outside basis is correct? (Choose all that apply.)

Adele's basis increases by $100,000. Becky's basis neither increases or decreases.

Which of the following statements regarding LLC characteristics is true?

An LLC provides the liability protection of a limited partnership without the necessity of having a general partner.

The income of a sole proprietorship is reported on Schedule __________ of Form 1040.

C

For each of the following partner allocations, indicate whether the item increases, decreases, or has no effect on the partner's tax basis in their partnership interest.

Cash contribution = Increases basis in partnership interest Capital loss = Decreases basis partnership interest Guaranteed payment = Has no effect on basis in partnership interest

Which of the following is included in the initial tax basis of a partner's interest in their partnership interest? (Select all that apply.)

Cash paid for the investment Adjusted tax basis of property transferred in exchange for the interest

Which of the following information is reported on an employee's Form W-2? (Select all that apply.)

Employee income tax withheld Gross salary or wages paid Employee payroll tax withheld

True or false: A partner is taxed on their distributive share of partnership income only if they also receive a cash distribution at least equal to the share of income.

False

Which of the following statements regarding general and limited partners in partnerships is false?

In a limited partnership, no partner is personally liable for partnership debts.

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

Partnership losses that are nondeductible under the basis limitation are permanently disallowed.

Which of the following statements regarding tax withholding from partnership guaranteed payments is true?

Partnerships are not required to withhold payroll or income taxes from partnership guaranteed payments.

Which of the following is a qualified business for purposes of the QBI deduction?

Retail business operated by a sole proprietorship

Which of the following business entities are not subject to an entity-level federal income tax? (Select all that apply.)

S corporation Partnership LLC

Which of the following social programs are funded by federal and state employment taxes? (Select all that apply.)

Social Security Medicare Unemployment benefits

Which of the following are liable for federal and statement employment taxes? (Select all that apply.)

Sole proprietor with employees Individuals working as employees Sole proprietor with no employees

Under the check-the-box regulations, which of the following statements regarding a single-member LLC is false?

The default tax status of a single-member LLC is taxation as a corporation.

Which of the following statements regarding calculation of self-employment taxes is correct? (Select all that apply.)

The self-employment tax rates equal the combined employee and employer payroll tax rates. The Social Security tax portion of the self-employment tax is 12.4 percent of net earnings up to a threshold amount.

Which of the following accurately describes the taxation of S corporation items allocated to a shareholder? (Select all that apply.)

The shareholder's pro rata share of S corporation ordinary income will be taxed to the shareholder at his or her marginal tax rate. The shareholder's pro rata share of S corporation capital loss will be deductible against shareholder capital gains from other sources.

True or false: Limited partners are liable for partnership debts only to the extent of their capital contributions to the partnership.

True Reason: General partners have unlimited personal liability for partnership debts.

Which of the following are characteristics of a partnership? (Select all that apply.)

Unincorporated entity created by contract Must have two or more partners Partners can be individuals, corporations, or other partnerships

In which of the following partnership activities are limited partners generally permitted to be involved? (Select all that apply.)

Voting on partnership matters Working for the partnership

Employer withholding of income taxes from an employee's compensation is based on information provided by the employee to the employer on Form

W-4

If a partner acquires a partnership interest in exchange for property, the initial tax basis of the partnership interest equals the ______ _____ _____ of the transferred property.

adjusted tax basis

In allocating income and loss items among S corporation shareholders, ______.

all allocations are based on each shareholder's percentage ownership of S corporation stock

In defining the partners' share of partnership profits and losses, the partnership agreement ______.

allows partners to specify different sharing arrangements for special items of income, gain, deduction, or loss

If a taxpayer is involved in multiple businesses, the excess business loss limitation ______.

applies to aggregate deductions from the taxpayers businesses over income and gains plus a threshold amount

Partnership losses that are nondeductible in the current year due to the basis limitation ______.

can be carried forward and deducted in the future when basis is restored

The ordinary income tax on net profit from a sole proprietorship ______.

can only be computed after you combine it with all other income and deduction items of the sole proprietor

The self-employment tax on profit of a sole proprietorship is ______. (Select all that apply.)

computed on Schedule SE of Form 1040 paid in addition to federal income tax

A qualifying home office is a space used ______.

exclusively for business activities on a regular basis

The employee portion of payroll tax is owed ______.

in addition to the employer portion

A partner's basis in their partnership interest ______.

increases by the partner's share of partnership debt

The additional Medicare tax on employees ______.

is 0.9 percent of wages over a threshold amount

On an individual income tax return, the QBI deduction ______.

is a deduction from adjusted gross income, reducing final taxable income

A business organized as a sole proprietorship ______.

is owned by one individual or a married couple

Under the passthrough approach to taxation of partnership income, ______.

partners include their share of partnership income or loss in the calculation of their taxable income and tax liability

An S corporation shareholder's pro rata share of all S corporation items is ______.

reported to the shareholder on Schedule K-1

An unincorporated business owned by a single individual is referred to as a(n)

sole proprietorship

A partnership agreement ______. (Select all that apply.)

stipulates the percentage of profits and losses allocated to each partner defines the rights and obligations of the partners

The home office deduction is limited to _________ ________ of the business before considering the deduction.

taxable income

Under the check-the-box regulations, an LLC ______. (Select all that apply.)

with a single corporate member is treated as a division or branch of the corporation with more than one member is treated as a partnership

The employee portion of Federal payroll taxes is ______.

withheld from the employee's paycheck by the employer and remitted to the federal government

William's sole proprietorship earned $15,000 of revenue and incurred $11,000 of expenses before considering the home office deduction. If William uses 10 percent of his home as a home office and incurred qualifying home expenses of $42,000, his net profit (loss) for the year is ______.

$0 Reason: Home office expense deduction is limited to net profit.

For 2020, Anna, a single taxpayer, earned $400,000 of salary income. Her additional Medicare tax liability is ______.

$1,800 Reason: $400,000 - $200,000 threshold amount = $200,000 × .009 = $1,800.

Andrew received a Schedule K-1 from Zeta Partnership reflecting $40,000 share of ordinary income, $65,000 guaranteed payment, and $20,000 cash distribution. As a result of his ownership of Zeta, Andrew's taxable income will increase by what amount? Assume Andrew does not qualify for the Section 199A deduction.

$105,000 Reason: $40,000 OI + $65,000 GP. Cash distribution not included in taxable income.

Maxi Company paid $250,000 in salary to Adam in 2020. The employer payroll tax owed on Adam's salary is ______.

$12,162 Reason: $137,700 x 6.2% = $8,537. $250,000 x 1.45% = $3,625. $8,537 + $3,625 = $12,162.

Gary's sole proprietorship has qualified business income of $2 million, paid W-2 wages of $550,000, and owns depreciable property with an unadjusted basis of $300,000. Gary's QBI deduction is ______.

$275,000

Marcus uses 25 percent of his personal residence as a home office. Marcus rents his home at an annual rental cost of $15,000. If Marcus meets the requirements for a home office deduction, the deductible amount is ______.

$3,750 Reason: $15,000 rental cost × 25% home office use = $3,750 deduction

Gil is a partner in Delta Partnership. His Schedule K-1 from the partnership lists the following items: $40,000 ordinary income, $2,000 interest income, $10,000 cash distribution, and $(1,000) capital loss. What is the net impact of these items on Gil's taxable income?

$41,000 increase Reason: $40,000 OI + $2,000 interest income - $1,000 capital loss. Cash distribution does not affect taxable income.

Earl is a shareholder in Abbott Inc., an S corporation. His Schedule K-1 from the S corporation lists the following items: $50,000 ordinary income, $2,000 dividend income, $12,000 cash distribution, and $(3,000) capital loss. What is the net impact of these items on Earl's taxable income? Assume Earl does not qualify for the QBI deduction.

$49,000 Reason: $50,000 OI + $2,000 dividend income - $3,000 capital loss. The cash distribution does not affect taxable income.

Mark is a limited partner in Lambda Partnership. His Schedule K-1 this year reflects $35,000 share of ordinary income and $50,000 guaranteed payment. What amount of Mark's partnership earnings is subject to self-employment tax?

$50,000 Reason: Only the guaranteed payment is subject to self-employment tax. Since Mark is a limited partner, his share of ordinary income is not subject to self-employment tax. $85,000

Jamil has qualified business income of $300,000 and taxable income of $260,000, computed without regard to the QBI deduction or any net capital gain. Jamil's allowable QBI deduction is ______.

$52,000 Reason: Because taxable income is less than qualified business income, the QBI deduction is limited to 20% × $260,000 =$52,000.

At the beginning of the current year, Monica's tax basis in her Gamma Partnership interest was $50,000. Her Schedule K-1 from Gamma reports $20,000 ordinary income, $(5,000) capital loss, and $12,000 cash distribution. At the end of the year, Monica's tax basis in her partnership interest is ______.

$53,000 Reason: $50,000 beginning basis + $20,000 OI - $5,000 capital loss - $12,000 cash distribution = $53,000 ending basis.

A sole proprietor earns $100,000 of revenue, incurs $45,000 of deductible business expenses, and withdraws $30,000 of cash from the business checking account to pay personal expenses. The taxable profit reported on the sole proprietor's Form 1040 (before any allowable Section 199A deduction) is ______.

$55,000 Reason: $100,000 revenue - $45,000 business expenses = $55,000. Cash withdrawal is not included in taxable income.

At the beginning of the current year, Monique's tax basis in her stock of ABC Inc., an S corporation, was $50,000. Her Schedule K-1 from ABC reports $25,000 ordinary income, $(5,000) capital loss, and $10,000 cash distribution. In addition, Monique has earned a salary of $100,000 for services provided to ABC. At the end of the year, Monique's tax basis in her S corporation stock is ______.

$60,000 Reason: $50,000 beginning basis + $25,000 OI - $5,000 capital loss - $10,000 distribution = $60,000 ending basis. Salary does not affect basis.

Frank's sole proprietorship reports $100,000 of net profit on his 2020 Schedule C. If Frank has no other earned income, his self-employment tax liability on this profit is ______.

$7,065 Reason: $100,000 × 92.35% × 15.3% = $14,130.

Wesley is a general partner in Lambda Partnership. His Schedule K-1 this year reflects $35,000 share of ordinary income and $50,000 guaranteed payment. What amount of Wesley's partnership earnings is subject to self-employment tax?

$85,000 Reason: Both ordinary income and guaranteed payment are subject to self-employment tax.

The home office deduction ______. (Select all that apply.)

- includes depreciation on the portion of the home used as the home office - equals a portion of the expenses of maintaining, insuring, and repairing the home

Although a partnership is not a taxable entity, it is required to file an annual information return with the IRS, Form

1065

Straight Company paid David a gross salary of $100,000, and paid employer payroll taxes of $7,650 on his salary. Straight withheld $25,000 of income tax and $7,650 of employee payroll tax from David's salary. Straight's total tax deduction for David's compensation is $

107,650

S corporation ordinary income, to be allocated among the shareholders, is calculated and reported to the IRS on page 1 of Form

1120S

ABC Inc., an S corporation, has $100,000 ordinary income and $5,000 capital gain this year. If Allen owns 15 percent of ABC's stock, his share of ordinary income is $ ______ and his share of capital gain is $ ______.

15,000 750

In general, the QBI deduction equals ________ percent of qualified business income earned by sole proprietorships and passthrough entities.

20

Michael received a Schedule K-1 from Omega Partnership reflecting a $25,000 share of ordinary income and an $18,500 cash distribution. As a result of his ownership of Omega, Michael's taxable income will increase by $ - Assume Michael does not qualify for any QBI deduction.

25,000

Denise earns salary income of $150,000 during 2020. In addition, she has net earnings from self-employment of $10,000. Denise must pay _______ of self-employment tax for 2020.

268

Giga Company paid $50,000 in salary to Mary in 2020. The employer payroll tax owed on Mary's salary is $

3,825

A married couple filing a joint return can take a 20 percent QBI deduction for a service business if their 2020 taxable income is not more than $

326,600

When a sole proprietor owes self-employment tax, ______.

50 percent of such tax is deductible in computing taxable income

Which of the following statements regarding the 2020 QBI deduction is true?

A married couple with taxable income less than $326,600 is eligible for the QBI deduction even if their business pays no W-2 wages.

Which of the following are legal characteristics of an LLC? (Select all that apply.)

Every member has limited liability for LLC debts. LLC members may be individuals, corporations, partnerships, or other LLCs.

Which of the following statements regarding employer payroll tax responsibilities is false?

Employers are only responsible for paying the employer portion of the payroll tax to the government.

Which of the following statements regarding employer withholding of income taxes is false?

Employers are required to withhold federal, but not state, income taxes from employee compensation.

Which of the following are eligible to be shareholders in an S corporation? (Select all that apply.)

Estates Individuals who are U.S. citizens

At the end of the year, employers provide detailed information regarding salary and withholding to their employees using which of the following forms?

Form W-2

Which of the following taxpayers would qualify for a home office deduction? (Select all that apply.)

Grant, a psychologist, uses a room in his home exclusively to meet with patients and perform business administrative tasks. Jane, a landscaper, uses a small room in her house exclusively for business administrative activities.

Which of the following amounts can an employer deduct for an employee working in a trade or business? (Select all that apply.)

Gross salary and wages paid Employer payroll tax paid

If an S corporation election is inadvertently terminated, the ______.

IRS may allow the election to remain in effect if the shareholders take immediate steps to correct the situation causing the termination

Which of the following statements regarding the cash flow generated by a sole proprietorship is false?

If a sole proprietor uses business cash flows for personal purposes, the withdrawal of cash from the business account is taxable as a dividend.

For each of the following items, indicate whether the item increases, decreases, or has no effect on an S corporation shareholder's tax basis in their S corporation stock.

Increase in S corporation debt outstanding = Has no effect on shareholder's tax basis in S corporation stock S corporation capital gain = Increases shareholder's tax basis in S corporation stock S corporation nondeductible expenses = Decreases shareholder's tax basis in S corporation stock

A partner's distributive share of partnership income is reported on Schedule

K-1

A shareholder who works for an S corporation will receive two IRS Forms at year-end. Schedule ______ Blank 1Blank 1 SS , Incorrect Unavailable will report the shareholder's share of S corporation income, gain, deduction, and loss items. Compensation will be reported to the shareholder on Form ______.

K-1 W-2

Which of the following service business is not a qualified business for purposes of the QBI deduction?

Law firm Consulting business Accounting firm

Which of the following is a requirement for a corporation to elect S corporation status? (Select all that apply.)

No more than 100 shareholders Only common stock outstanding

Which of the following statements regarding the application of the QBI deduction and the excess business loss limitation to partnerships is false?

The QBI deduction is computed by a partnership and reported to the partners on their Schedule K-1s.

Which of the following are tax consequences of the termination of an S corporation election? (Select all that apply.)

The S corporation final return is due for the period ending on the date of termination. The S corporation becomes a C corporation and must file a corporate tax return for the period after the termination.

True or false: In general, the QBI deduction equals 20 percent of qualified business income.

True

True or false: All 50 states have statutes to define the characteristics and requirements for partnerships operating within their jurisdiction.

True Reason: Such statutes are typically modeled after the Revised Uniform Partnership Act and the Revised Uniform Limited Partnership Act.

In applying the excess business loss limitation, a taxpayer involved in multiple businesses is allowed to net losses from one business against profits from another.

True Reason: The excess business loss limitation is applied to aggregate net losses.

The self-employment tax on profit of a sole proprietorship is ______.

a substitute for payroll taxes

A sole proprietor sells business equipment and replaces it with new equipment. The gain recognized on the sale is ______.

reported on Form 4797

The income of a sole proprietorship is ______.

reported on Schedule C of Form 1040

The QBI deduction cannot exceed ______.

the greater of 50 percent of W-2 wages, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property

If a shareholder provides services to an S corporation, ______. (Select all that apply.)

the shareholder must be paid a reasonable salary both employer and employee payroll taxes will be owed on the shareholder's salary

For taxpayers whose income exceeds the threshold amounts for exemption from the QBI wage limitation, ______.

the wage limitation is phased in

A shareholder who provides services to an S corporation is ______.

treated as an employee and is paid a salary

Under the check-the-box regulations, an LLC ______. (Select all that apply.)

with more than one member is treated as a partnership with a single corporate member is treated as a division or branch of the corporation