R-IV - 01 - Gross Income (Inclusions and Exclusions)

An individual is a 50% partner who materially participates in Stone Partnership. The individual's adjusted basis at the beginning of the year was $0. Stone had a $70,000 loss from its business. Stone borrowed $30,000 from a bank of which $20,000 remained unpaid at year-end. What amount of loss is the individual allowed in the current year from Stone?

$10,000. If a partner is a material participant in a partnership, the partner's share of partnership losses is deductible to the extent of the partner's basis in the partnership (50% share). (R5, M3 - Partnerships: Part 2)

Commerce Corp. elects S corporation status as of the beginning of the current year. At the time of Commerce's election, it held a machine with a basis of $20,000 and a fair market value of $30,000. In March of the current year, Commerce sells the machine for $35,000. What would be the amount subject to the built-in gains tax?

$10,000. The BUILT-IN GAIN for the machine is $10,000, the difference, on the date of the ELECTION of S status, between the $20,000 adjusted basis of the machine to the C corporation and the $30,000 fair market value. That is the amount of the gain that OCCURRED while the corporation was a C corporation, and it is also the amount that is SUBJECT to the built-in gains tax. (R5, M1 - S Corporations)

An S Corporation had the following income and expenses: Sales -$240,000 Rent Expense - $25,000 Entertainment Expense - $5,000 Interest Income - $1,500 Contributions to qualifying charities - $600 Section 179 expense - $3,000 Depreciation expense - $1,800 What would be reported as ordinary income on the corporation's income tax return?

$213,000. Ordinary income is the NET of all TAXABLE and DEDUCTIBLE ordinary business REVENUE and EXPENSES not including SEPARATELY STATED items. Ordinary income is $240,000 sales - $25,000 rent expense - $1,800 depreciation expense = $213,200. (R5, M1 - S Corporations)

Jetson and Tomson are equal partners in JT Partnership, which has the following income and expense items: Sales - $100,000 Interest income from checking account - $1,000 Charitable contributions - $3,000 Employee wages - $4,000 Cost of goods sold - $50,000 What is the non-separately stated partnership income?

$46,000. Non-separately stated income is SYNONYMOUS with ordinary income. Ordinary income is the net of all taxable and deductible ordinary business revenue and expenses not including separately stated items. Ordinary income is $100,000 sales - $4,000 employee wages - $50,000 cost of goods sold = $46,000. (R5, M3 - Partnerships: Part 2)

An individual partner received a Schedule K-1 from a partnership for Year 2 reporting the following items: Ordinary business income - $45,000 Interest income - $8,000 Net Section 1231 loss - $(5,000) Cash distribution - $6,000 No additional partnership items exist for Year 2. What is the total amount from the partnership that will be included in the partner's adjusted gross income on the partner's Form 1040 for Year 2?

$48,000. Ordinary business income $45,000 + Interest income $8,000 - Net Section 1231 loss $5,000 = $48,000.

Dale's distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in Year 1. On December 15, Year 1, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership's Year 1 income, with the $23,000 balance paid to Dale in May Year 1. In addition, Dale received a $10,000 interest-free loan from the partnership in Year 1. This $10,000 is to be offset against Dale's share of Year 2 partnership income. What total amount of partnership income is taxable to Dale in Year 1?

$50,000. The total amount of partnership income TAXABLE to Dale in Year 1 is $50,000, which is his DISTRIBUTIVE SHARE of partnership income. A partner MUST include his allocated share of partnership income, even if not received in CASH, in his tax return for his taxable year (usually calendar year) within which the taxable year of the partnership ends. (R5, M3 - Partnerships: Part 2)

Lane, Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year. Mill is a 10% shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premiums is includible in Mill's gross income?

$7,200. (R5, M1 - S Corporations)

A domestic limited liability company not classified as a corporation under IRS regulations is owned entirely by one individual taxpayer. Unless the taxpayer elects otherwise, the company will be taxed as:

A DISREGARDED ENTITY. (R5, M3 - Partnerships: Part 2)

The tax on built-in gains is a corporate-level tax on S corporations that dispose of assets that:

Appreciate while the company was a C CORPORATION. (R5, M1 - S Corporations)

A sole proprietor wants to incorporate and has requested a projection of the first-year tax results as a C corporation and as an S corporation. Taxable income from ordinary operations is projected to be $100,000. The company expects to make a $20,000 charitable contribution and projects a long-term capital loss on stock of $7,000. Which of the following projections is correct?

C corporation, $90,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are SEPARATELY STATED.

Which of the following shareholders is ineligible to own the stock of an S corporation?

Domestic C corporation. A domestic C corporation is INELIGIBLE to own stock of an S corporation. Eligible S corporation shareholders must be individuals, estates, or certain types of trusts, not C corporations. (R5, M1 - S Corporations)

A C corporation made a proper S election and will be treated as an S corporation as of the first day of Year 2. In this case, the corporation is:

Not subject to BUILT-IN GAINS tax if Year 7 is the first year it sells assets that it held as a C corporation. (R5, M1 - S Corporations)

Which of the following items would increase an S corporation's accumulated adjustments account (AAA)?

TAXABLE INTEREST INCOME. (R5, M1 - S Corporations)

Which of the following statements is not correct?

The recipient of an INCENTIVE STOCK OPTION will generally have to report COMPENSATION INCOME in the year that the OPTION is RECEIVED. (R2, M4 - Employee Stock Options)