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Which of the following would NOT be an example of an involuntary conversion?

A stock becomes worthless

Mundo Company is a calendar year, accrual basis taxpayer. In June 2019, Mundo received a $72,000 cash payment from a tenant who leases space in a commercial office building that Mundo owns. The payment was rent for the 24-month period beginning on July 1, 2019. As a result of the payment, Mundo should report:

A. $6,000 book income and taxable income B. $72,000 book income and taxable income C. No book income and $72,000 taxable income D. None of the above D IS THE ANSWER. Mundo should report $18,000 book income (six months) and $72,000 taxable income.

Gavin owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following: Calculate Gavin's tax basis in his partnership interest at the end of the year. A. $85,000 B. $95,000 C. $75,000 D. $65,000

A. $85,000

Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on: A. Schedule C, Statement of Profit or Loss from Business B. The first page of Form 1040 as other income C. A separate tax return prepared for the business operation D. Schedule E, Statement of Rent and Royalty Income

A. Schedule C, Statement of Profit or Loss from Business

Which of the following taxes can only be assessed after a corporation is audited?

Accumulated earnings tax

In which of the following properties would be qualifying property in a like-kind exchange?

An apartment complex

Which of the following statements is true? A. There is an AMT credit carryback from 2016 to 2015. B. There is an AMT credit carryover from 2016 to 2017. C. There is an AMT credit carryover from 2015 to 2016. D. There is an AMT credit carryback from 2015 to 2014.

Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest? A.$500,000 B. $1,200,000 C. $850,000 D. $650,000

B. $1,200,000

Mutt and Jeff are general partners in M&J Partnership and share profits and losses equally. Partnership operations for the current tax year were: Mutt's tax basis in his partnership interest at the beginning of the current year was $12,000. What is his basis at the beginning of next year? A. $25,000 B. $37,000 C. $13,000 D. $27,000

B. $37,000

Chapter 9: Aggie Company transferred an old asset with a $60,000 adjusted tax basis in exchange for a new asset worth $90,000 and $10,000 cash. Which of the following statements is false? A. The old asset's FMV is $100,000 B. If the exchange is nontaxable, Aggie 's tax basis in the new asset is $70,000 C. If the exchange is nontaxable, Aggie 's recognized gain is $10,000 D. None of the statements is false

B. If the exchange is nontaxable, Aggie 's tax basis in the new asset is $70,000

Which of the following is a taxpayer federal income tax purposes (i.e., is not a pass through entity)?

C Corporation

Jackie contributed $60,000 in cash to a partnership for a 50% interest. This year, the partnership earned $200,000 ordinary business income, made a $20,000 contribution to the United Way, and distributed $25,000 cash to Jackie. Her tax basis in the partnership at year end is: A. $110,000 B. $85,000 C. $125,000 D. $215,000

C. $125,000

C. $68.000 50% * ($120,000 ordinary income + $6,000 interest income + $10,000 capital gain)

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate? A.Martha must pay income tax on $141,200 and self-employment tax on $48,000. B. Martha must pay income tax on $141,200 and self-employment tax on $93,200. C. Martha must pay both income tax and self-employment tax on $141,200. D. Martha must pay income tax on $48,000 and self-employment tax on $93,200.

C. Martha must pay both income tax and self-employment tax on $141,200.

Section 1231 Gain

Choice, Increases basis in partnership interest Increases basis in partnership interest

In which of the following statements about tax credits is FALSE?

Corporations do no receive tax credits

Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following: Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How much of the ordinary loss may he deduct on his Form 1040? A. $11,700 B. $14,000 C. $10,200 D. $13,300

D. $13,300

Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following: Ordinary Business Loss: (20,000) Short-term Capital Gain: 2,100 Dividend Income: 1,600 Cash distribution: 5,800 Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How much of the ordinary loss may he deduct on his Form 1040? A.$11,700 B. $14,000 C. $10,200 D. $13,300

D. $13,300 $15,400 - $5,800 + $2,100 + $1,600 = 13,300 basis for loss limitation

During 2010, Elena had $10,000 taxable income before considering the following: What is her taxable income? A. $34,500 B. $24,500 C. $30,752 D. $32,626

D. $32,626

Orange, Inc. is a calendar year partnership with the following current year information: On January 1, John James bought 50% general interest in Orange, Inc. for $30,000. How much of the operating loss may John deduct on his Form 1040? A. $60,000 B. $30,000 C. $40,000 D. $50,000

D. $50,000

During 2010, Scott Howell received a salary of $125,000. The social security base amount for 2010 was $106,800. How much payroll tax should have been withheld from Scott's salary for 2010? A.$0 B. $6,622 C. $9,563 D. $8,435

D. $8,435

Which of the following statements concerning partnerships is false? A.A properly-drafted partnership agreement is crucial. B. A general partner's basis in a partnership includes his share of partnership debt. C. Limited partnerships must have at least one general partner. D. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

D. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

Which of the following statements concerning partnerships is false? A. A properly-drafted partnership agreement is crucial. B. A general partner's basis in a partnership includes his share of partnership debt. C. Limited partnerships must have at least one general partner. D. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

D. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false? A. All of the corporation's shareholders must consent to make an S election. B. If a shareholder in an S corporation sells his shares of stock to a nonresident alien, the election will terminate. C. If an S corporation loses its election, the shareholders cannot make a new election for five years without IRS consent. D. All of the shareholders must consent to voluntarily terminating an S election.

D. All of the shareholders must consent to voluntarily terminating an S election.

Charitable contribution

Decreases basis partnership interest

Which of the following statements about MACRS is false?

Depreciable assets are assumed to have no residual or salvage value. Every depreciable asset is assigned to one of ten recovery periods. Allowable depreciation methods are based on the assets assigned recovery period. Correct! None of the above is false.

Guaranteed payments are... A. given to limited partners who actively manages or works in a partnership business. B. given to partners who work on a continuous basis, based on their level of work. C. deducted in computing the ordinary income. D. A and C E. B and C

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2019, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following is true?

Eaton can deduct $600 in 2019, $2,400 in 2020, and $1,800 in 2021.

A nondeductible charitable contribution is a permanent book/tax difference.

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

False

Eagle, Inc. made a contribution to the Boy Scouts of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000. T/F

False. Can only be up to 10% of the contribution (200,000 * 0.1 = $20,000).

Partners must add the basis in their partnership interest by their share of losses. T/F

False. Must REDUCE the basis by their share of losses. But, cannot reduce the partnership basis below zero. Any excess deductive loss is carried forward indefinitely.

Partners are employees who also receive W-2 forms, salaries, and they withhold federal tax and social security. T/F

False. Partners are not employees. They do not receive W-2 forms or salaries. They do not withhold federal tax and social security. Instead, the guaranteed payment is an ordinary income item on Schedule K-1.

self-employment income

Has no effect on basis in partnership interest

Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000. Which of the following statements is false?

If the exchange is nontaxable, Eliot's recognized gain is $5,000. Eliot recognizes no gain on the nontaxable exchange.

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

Which of the following taxpayers is subject to the excess business loss limitation?

Kenny, who is married filing a joint return and incurred a $(675,000) business loss this year.

When price competition is fierce, the incidence of the corporate income tax

May be passed on to employees through lower compensation

The charitable contributions deduction limitation is calculated as 10% of taxable income before all of the following items EXCEPT:

NOL carryforwards

Mr. Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash. Which of the following statements is true?

None of the above is true. its 95k

Corporations cannot be shareholders in an S corporation.

General partners are considered self-employed.

True. Therefore, guaranteed payments and distributive shares of income are subject to self-employment tax (SE tax). However, limited partners do not pay SE tax.

Which of the following taxes was NOT discussed in the videos?

Unemployment taxes

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

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

gross income means

all income from whatever source derived

deductions are

all ordinary and necessary expenses in carrying on any trade of business

Ch. 9: When unrelated parties agree to an exchange of noncash properties, the economic presumption is that the properties are of equal value. True or False

true

Chapter 10: A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest. True of False

true

Chapter 9: Qualifying property received in a nontaxable exchange has a substituted basis for tax purposes. A) True B) False

true

B&P Inc., a calendar year corporation, purchased only one operating asset during 2019: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2019.

Hank exchanged an old asset with a $12,000 adjusted basis for a new asset with a $32,000 FMV plus $2,000 cash. Compute Hank's realized and recognized gain if the new and old assets are like-kind properties.

$22,000 realized gain; $2,000 recognized gain

Maxwell, Inc. had taxable income of $2,500,000 for its fiscal year ended June 30, 2018. Compute Maxwell's regular tax liability.

$687,500 Students will need a corporate tax rate schedule. Under the transition rule, tax liability is $687,500 = $267,500 [($2,500,000 x 21%) x 6/12 + $425,000 ($850,000 from 2017 rate schedule x 6/12)

Southlawn Inc.'s taxable income is computed as follows: Book income before tax $ 2,405,600 Net permanent differences (512,000 ) Net temporary differences (189,000 ) Taxable income $ 1,704,600 Using a 21% rate, compute Southlawn's tax expense per books and tax payable.

($2,405,600 − $512,000 permanent differences) × 21% = tax expense per books. Tax payable is always based on taxable income. Tax expense per books $397,656; tax payable $357,966.

Capital asset

- All assets are capital assets except for the following business assets: - Inventory - Accounts receivable - Supplies - Real property used in a business - Depreciable or amortizable personalty used in a business

Special accrual rules

- Compensation accruals: employer can't deduct expense unless compensation paid within 2 ½ months after close of year - Related party accruals: payer can't deduct an accrued expense until the year that recipient recognizes income - Bad debt expense: GAAP requires allowance method; for tax purposes the direct write-off method is required

Relief of debt as amount realized

- If the owner sells the property and is relieved of debt in the transaction, the owner must include the debt relief in the amount realized on the sale

rule of thumb:

- receipts are taxable unless a specific rule states that the receipt is nontaxable - expenses are deductible only if a specific rule states it

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2019. Kemp made one asset purchase: used manufacturing equipment costing $1,543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made the Section 179 election with respect to the equipment, compute Kemp's 2019 cost recovery deduction.

1,543,600 $1,020,000 Section 179 expense deduction + $523,600 100% bonus depreciation.

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

1065

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

1120S

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

Kelly received a $60,000 salary during 2016. Her federal income tax withholding rate was 20%, and the Social Security base amount for 2016 was $118,500. What is the total amount that her employer should have withheld in 2016? A. $16,590 B. $12,000 C. $4,590 D. $0

Which of the following items is not used to compute the Domestic Production Activities Deduction? A. Overseas sales of domestic products B. Taxable income C. Compensation paid to US workforce D. Net income from qualified domestic production activity

Jaboy Inc. was incorporated three years ago. In its first year, Jaboy capitalized $72,000 organizational and start-up costs for tax purposes. However, it expensed these costs for financial statement purposes. Which of the following statements is true?

A. As a result of the accounting difference three years ago, Jaboy has a $4,800 favorable book/tax difference in the current year. B. As a result of the accounting difference three years ago, Jaboy has a $4,800 unfavorable book/tax difference in the current year. C. The accounting difference three years ago has no book/tax consequence in the current year. D. None of the above is true. A IS THE ANSWER Jaboy's current year amortization deduction is $4,800 ($72,000/180 months × 12 months).

Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses the installment sale method, compute Dolzer's book and tax gain in the year of sale.

A. Book gain $301,000; tax gain $100,000 B. Book and tax gain $38,839 C. Correct! Book gain $301,000; tax gain $38,839 $100,000 cash payment × ($301,000 gain/$775,000 contract price) = $38,839 tax gain. D. None of the above

Which of the following taxpayers is subject to the excess business loss limitation?

A. Delta Corporation, which incurred a $(2 million) business loss this year. B. Kenny, who is married filing a joint return and incurred a $(675,000) business loss this year. C. QT Partnership, which incurred a business loss of $(300,000) this year. D. LetGo Partnership, which incurred a $(730,000) business loss this year. B IS THE ANSWER

Which of the following statements about MACRS is false?

A. Depreciable assets are assumed to have no residual or salvage value. B. Every depreciable asset is assigned to one of ten recovery periods. C. Allowable depreciation methods are based on the assets assigned recovery period. D. None of the above is false. D IS THE ANSWER

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders: A. Grant and Amy must each be allocated $50,000 of the operating loss. B. If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant. C Because the shareholders have limited liability for the S corporation's debts, they are not permitted any . deduction for the operating loss. D. The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.

A. Grant and Amy must each be allocated $50,000 of the operating loss.

On December 19, 2019, Acme Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mrs. Tabor, who is Acme's CFO. Acme paid the $50,000 to Mrs. Tabor on January 15, 2020. Which of the following statements is false?

A. If Mrs. Tabor owns no stock in Acme (i.e. is not a related party), Acme can deduct the accrued expense in 2019. B. Mrs. Tabor includes her $50,000 bonus in 2020 gross income. C. If Mrs. Tabor owns 75 percent of Acme's stock (i.e. is a related party), Acme can't deduct the expense until 2020. D. If Mrs. Tabor owns 75 percent of Acme's stock (i.e. is a related party), Acme can never deduct the bonus expense. D IS THE ANSWER

Chapter 9: Which of the following statements about the transfer of debt in a like-kind exchange is false? A. If both properties in the exchange are subject to debt, both parties will be treated as receiving boot B. The party relieved of debt treats the relief as boot received C. The party assuming debt treats the assumption as boot paid D. None of the above is false

A. If both properties in the exchange are subject to debt, both parties will be treated as receiving boot

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true?

A. JKL and Matthew must account for the transaction using the same method of accounting. B. The IRS has the right to reallocate income from the transaction to prevent distortion. C. The cash method of accounting must be used to account for such transactions. D. JKL and Matthew must request permission from the IRS to engage in the related party transaction. B IS THE ANSWER

Lovely Cosmetics Inc. incurred $785,000 research costs on the development of its formula for a new line of face creams. Lovely obtained a 17-year patent on the formula from the U.S. government. Which of the following statements is true?

A. Lovely is allowed to deduct the $785,000 research costs. B. Lovely's tax basis in its patent is $785,000. C. The $785,000 cost results in a favorable book/tax difference. D. Both Lovely is allowed to deduct the $785,000 research costs and Lovely's tax basis in its patent is $785,000 are true. A IS THE ANSWER Lovely's tax basis in the patent is zero. The accounting treatment of research and experimental expenditures typically is the same for book and tax purposes.

Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true?

A. Mr. and Mrs. Carleton are allowed to amortize the $5 million value of their business goodwill over 15 years. B. Mr. and Mrs. Carleton have a zero tax basis in their business goodwill. C. Mr. and Mrs. Carleton cannot amortize the $5 million value of their business goodwill because it is an intangible asset with an indeterminable life. D. None of the above is true. B IS THE ANSWER The goodwill is a self-created asset. Only purchased goodwill has an amortizable cost basis.

Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax? A. None of the items are subject to SE tax because Debbie is a limited partner. B. $19,000 ordinary business income C. $19,000 ordinary business income and $2,000 long-term capital gain D. All income reported on a partner's Schedule K-1 are subject to self-employment tax.

A. None of the items are subject to SE tax because Debbie is a limited partner.

Schatz Corporation generated $8,083,000 ordinary business income and recognized a $73,900 net capital gain on the sale of assets. Which of the following statements is true?

A. Schatz must pay tax at the regular corporate rate on $8,156,900 taxable income. B. Schatz must pay tax at the regular corporate rate on $8,083,000 taxable income. The $73,900 capital gain is eligible for a preferential tax rate. C. Schatz's net capital gain results in a permanent book/tax difference. D. None of the above is true. A IS THE ANSWER

Which of the following is a capital asset?

A. Supplies used in a business B. Business inventory C. Land used in a business D. Correct! None of the above

Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. Which of the following statements is true?

A. The accounting treatment of the goodwill does not result in any book/tax difference in the current year. B. This year, Bettis has a $40,000 unfavorable temporary difference because of the accounting treatment of goodwill. C. This year, Bettis has a $40,000 favorable temporary difference because of the accounting treatment of goodwill. D. None of the above is true. C IS THE ANSWER

Which of the following statements about the NOL deduction is false?

A. The deduction prevents the tax distortion that could result from an inflexible one-year reporting period. B. The deduction can reduce taxable income to zero in carryforward years. C. The deduction has value based on the NPV of its related tax savings. D. None of the above statements is false. B IS THE ANSWER

Timm Inc., a calendar year, accrual basis taxpayer, is being sued by a customer who was injured when she tripped over a loose carpet in Timm's retail store. Timm's auditors required the corporation to accrue a $500,000 contingent liability and current year expense. Which of the following statements is true?

A. Timm can deduct the $500,000 accrued expense. B. Timm can never deduct the $500,000 expense. C. Timm can deduct the expense in the year in which the liability becomes fixed and determinable. D. Timm can deduct the expense in the year of payment. D IS THE ANSWER This accrued expense is a payment liability.

Warsham Inc. sold land with a $300,000 basis to Sara Phillips for $117,000 cash. Sara owns 68 percent of Warsham's outstanding stock. Which of the following statements is true?

A. Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return. B. Warsham does not report the $183,000 realized loss on its current year financial statements. C. The $183,000 loss is an unfavorable temporary difference between Warsham's book and tax income. D. Both Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return and the $183,000 loss is an unfavorable temporary difference between Warsham's book and tax income is true. A IS THE ANSWER The $183,000 nondeductible loss is an unfavorable permanent book/tax difference.

Bernard and Leon formed a partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Bernard's tax basis in his partnership interest? A.$1,200,000 B. $600,000 C. $800,000 D. $1,400,000

A.$1,200,000 $600,000 + ($800,000 * 75%)

Kelly received a $60,000 salary during 2010. Her federal income tax withholding rate was 20%, and the Social Security base amount for 2010 was $106,800. What is the total amount that her employer should have withheld in 2010? A.$16,590 B. $15,720 C. $15,979 D. $6,849

A.$16,590 ($60,000 * 20%) + ($60,000 * 7.65%)

On January 1, Leon purchased a 10% stock interest in an S corporation for $30,000. He also loaned the S corporation $5,000 in exchange for a written promissory note. The S corporation generated a $330,000 operating loss for the year. Leon deducted his 10% share of the loss, reducing his tax basis in his stock to zero, and his tax basis in the note to $2,000. The following year, the S corporation repaid the note before Leon restored his basis in the note. What are the consequences of the loan repayment to Leon? A.$3,000 capital gain B. $3,000 ordinary income C. $2,000 capital gain D. $2,000 ordinary income

A.$3,000 capital gain

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income? A.$3,300 net capital gain; $12,000 deductible net Section 1231 loss B. $4,500 net capital gain; $12,000 deductible net Section 1231 loss C. $4,500 net capital gain; $15,000 deductible net Section 1231 loss D. $3,300 net capital gain; -0- deductible net Section 1231 loss

A.$3,300 net capital gain; $12,000 deductible net Section 1231 loss

Aaron James has a qualifying home office. The office is 500 square feet and the entire house is 2,500 square feet. Use the following information to determine his allowable home office deduction: A.$5,240 B.$4,140 C.$4,260 D.$21,800

A.$5,240

Aaron James has a qualifying home office. The office is 500 square feed and the entire house is 2,500 square feet. Use the following information to determine her allowable home office deduction: Net income from self-employment before deduction: 150,000 Home mortgage interest: 12,000 Property Taxes: 4,000 Homeowner's insurance: 2,500 Utilities: 2,200 Depreciation on office part of home: 1,100 A.$5,240 B. $4,140 C. $4,260 D. $21,800

A.$5,240 (12,000+4,000+2,500+2,200+1,100)*20%=$4,140+1,100=$5,240

Gavin's owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following: Ordinary Business Income: 60,000 Share of partnership debt, beginning of year: 10,000 Share of partnership, end of year: 15,000 Calculate Gavin's tax basis in his partnership interest at the end of the year? A.$85,000 B. $95,000 C. $75,000 D. $65,000

A.$85,000 $20,000 + $60,000 + $5,000 increase in share of debt

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Sales Revenue: 500,000 Interest income: 6,000 Long-term capital gain: 10,000 COGS: (250,000) Salary and wages: (75,000) Other operating expenses: (55,000) Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year. A.$93,000 B. $118,000 C. $50,000 D. $85,000

A.$93,000 $50,000 + $60,000 + $3,000 + $5,000 - $25,000

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders: A.Grant and Amy must each be allocated $50,000 of the operating loss. B. If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant. C. Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss. D. The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.

A.Grant and Amy must each be allocated $50,000 of the operating loss.

Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax? A.None of the items are subject to SE tax because Debbie is a limited partner. B. $19,000 ordinary business income C. $19,000 ordinary business income and $2,000 long-term capital gain D. All income reported on a partner's Schedule K-1 are subject to self-employment tax.

A.None of the items are subject to SE tax because Debbie is a limited partner.

Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on: A.Schedule C, Statement of Profit or Loss From Business B. The first page of Form 1040 as other income C. A separate tax return prepared for the business operation D. Schedule E, Statement of Rent and Royalty Income

A.Schedule C, Statement of Profit or Loss From Business

Which of the following assets is not a Section 1231 asset?

All of the above are Section 1231 assets held on for longer than a year

Which of the following is NOT one of the characteristics of a constructive dividend? a. Payment between a corporation and a shareholder b. Original payment treated as deductible by the corporation c. Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation d. All of these choices are common characteristics of constructive dividends

All of these choices are common characteristics of constructive dividends

Which of the following is a consequence of establishing a family partnership or a family-owned S corporation? a. The original owners will have their control of the business diluted b. For the structure of the family business to be honored, the transfers to the younger family members must be complete and legally binding c. The transfers to the younger family members must be irrevocable d. All of these choices are consequences of establishing a family partnership or a family-owned S corporation

All of these choices are consequences of establishing a family partnership or a family-owned S corporation

In determining the incidence of the corporate income tax: a. Corporations may pass the tax burden onto consumers in the form of higher prices b. Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investment c. Corporate employees may bear the burden of the corporate tax in the form of lower compensation d. All of these parties may bear the indirect burden of the corporate income tax

All of these parties may bear the indirect burden of the corporate income tax

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.

Which of the following statements about S corporations is true? a. An S corporation has unlimited liability b. An S corporation is a flow-through entity for federal income tax purposes c. S corporations can only have 75 shareholders d. S corporations can have several classes of stock

An S corporation is a flow-through entity for federal income tax purposes.

As a cash basis taxpayer, Eaton can deduct the $4,800 expense in 2019. Eaton can deduct $600 in 2019, and the remaining $4,200 in 2020. Eaton can deduct $600 in 2019, $2,400 in 2020, and $1,800 in 2021. None of the above is true. C IS THE ANSWER Because the expense resulted in a benefit extending more than 12 months, Eaton must capitalize it and amortize it over 24 months.

As a result of the accounting difference three years ago, Jaboy has a $4,800 favorable book/tax difference in the current year.

. Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? A. $50,000 ordinary income B. $50,000 ordinary business income and $22,000 guaranteed payment C. $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain D. All income reported on a general partner's Schedule K-1 are subject to self-employment tax

. Which of the following amounts are not subject to self-employment tax? A. General partner's share of partnership income B. Limited partner's share of partnership income C. Sole proprietor's income from business activity D. Guaranteed payment to general partner

. Which of the following statements regarding the taxation of corporate profits is true? A. Dividends payments are deductible in computing corporate taxable income. B. The tax treatment of corporate dividends creates a bias in favor of debt financing. C. Corporations cannot deduct interest payments in computing corporate taxable income. D. Corporations with high debt-to-equity ratios have less burdensome cash flow commitments and lower risk of insolvency.

During the current year, Margie earned wage income of $300,000. If Margie is single, which of the following statements regarding her Medicare tax liability is true? A. Margie will owe both the regular 1.45 percent Medicare tax and the additional .9 percent Medicare tax on her entire wage income. B. Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $200,000. C. Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $250,000. D. Margie's employer is required to withhold both the regular Medicare tax but does not withhold the additional .9 percent Medicare tax.

Harmon, Inc. was incorporated and began business on January 1, 2014. Its tax liability for 2014 was $36,000. Its tax liability for 2015 was $50,000. Which of the following is a correct statement concerning the payment of estimated taxes for 2015? A. Harmon must pay $12,500 on the15th day of April, June, September, and December. B. Harmon must pay $9,000 on the 15th day of April, June, September and December. The $14,000 balance is payable by March 15, 2016. C. Harmon may pay the $50,000 tax no later than March 15, 2016. D. None of the above statements is correct.

In applying the basis limitation on the deduction of S corporation losses, which of the following statements is true? A. The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, is computed in the same manner as a partner's basis in a partnership interest. B. A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder. C. If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that obligation is considered ordinary income. D. All of the above statements are false.

Lexington Associates, Inc. is a personal service corporation. This year, Lexington reported $75,000 of taxable income. Which of the following statements regarding Lexington's regular tax liability is true? A. Regular tax liability will be less than it would have been if Lexington were not a personal service corporation. B. Regular tax liability will be greater than it would have been if Lexington were not a personal service corporation. C. Regular tax liability will be the same as it would have been if Lexington were not a personal service corporation. D. Regular tax liability will be zero.

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization? A. No payroll taxes will be owed as a result of the audit. B. Loretta and Country Collectibles will each be liable for unpaid payroll taxes as a result of the audit. C. Only Loretta will be liable for unpaid payroll taxes as a result of the audit. D. Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit.

Sue's 2016 net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year? A. $25,127 B. $30,000 C. $29,480 D. None of the above

Which of the following could cause a corporation's alternative minimum taxable income to be lower than regular taxable income? A. Current year percentage depletion is smaller than cost depletion B. ADS depreciation is larger than MACRS depreciation C. The company is not entitled to an AMT exemption D. The corporation has adjusted current earnings greater than AMTI before the ACE adjustment

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

Which of the following statements regarding Schedule M-1 is true? A. The corporate dividends-received deduction is reported on Line 8 of Schedule M-1. B. A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1. C. Line 2 of schedule M-1 should reflect the corporation's actual federal income tax liability for the current year. D. A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would not report that gain on Schedule M-1.

Which of the following statements regarding a partner's tax basis in a partnership interest is true? A. Partnership tax basis is increased annually by cash distributions from the partnership. B. Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses. C. Partnership tax basis is reduced by the partner's share of nontaxable partnership income. D. Partnership tax basis becomes negative if allocable losses exceed basis.

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

Which of the following statements regarding limited liability companies is false? A. Every member of an LLC has limited liability for the LLC's debts. B. An LLC with only one member is generally treated as a corporation for income tax purposes. C. An LLC with more than one member is generally treated as a partnership for income tax purposes. D. State laws do not limit the number of members or the type of entity that can be a member in an LLC.

B. $1,200,000

On January 1, 2010, Conrad Nelson contributed $15,000 cash in exchange for 50 shares of stock in Sterling Inc., an S corporation. Sterling employs Conrad as its director of marketing. Conrad's 2010 salary was $70,000 and his pro rata share of Sterling's 2010 ordinary business income was $16,800. During the year, Conrad received a $9,000 cash distribution with respect to his Sterling stock. Compute Conrad's basis in his Sterling stock on January 1, 2011. A.$15,000 B. $22,800 C. $31,800 D. $92,800

B. $22,800

On January 1, 2011, Conrad Nelson contributed $15,000 cash in exchange for 50 shares of stock in Sterling Inc., an S corporation. Sterling employs Conrad as its director of marketing. Conrad's 2011 salary was $70,000 and his pro rata share of Sterling's 2011 ordinary business income was $16,800. During the year, Conrad received a $9,000 cash distribution with respect to his Sterling stock. Compute Conrad's basis in his Sterling stock on January 1, 2012. A. $15,000 B. $22,800 C. $31,800 D. $92,800

B. $22,800

Cactus Company is a calendar year S corporation with the following current year information: On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the operating loss may John deduct on his Form 1040? A. $60,000 B. $30,000 C. $40,000 D. $50,000

B. $30,000

Sue's 2010 net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year? A. $25,736 B. $30,000 C. $29,536 D. None of the above

B. $30,000

Cactus Company is a calendar year S corporation with the following current year information: Operating Loss: (120,000) Liabilities: Notes payable, City Bank: 20,000 Notes Payable, Jake Crow: 20,000 On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the operating loss may John deduct on his Form 1040? A.$60,000 B. $30,000 C. $40,000 D. $50,000

B. $30,000 S corporation debt is included in tax basis only if loaned directly by the shareholder. So John's basis equals the cash invested.

Sue's net (take-home) pay was $23,205. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year? A.$25,736 B. $30,000 C. $29,536 D. None of the above

B. $30,000 x - $4,500 - 7.65% * x = $23,205, so solving for x, 92.35% * x = $27,705, x = $30,000

Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax year showed the following: Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct because of the basis limitation. What is his tax basis in his partnership interest at the end of the current tax year? A. $41,000 B. $32,500 C. $39,500 D. $34,000

B. $32,500

Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax year showed the following: Ordinary business income: 41,000 Short-term capital loss: 1,500 Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct because of the basis limitation. What is his tax basis in his partnership interest at the end of the current tax year? A.$41,000 B. $32,500 C. $39,500 D. $34,000

B. $32,500 Carryforward loss $(7,000) + $41,000 - $1,500 = $32,500

Mutt and Jeff are general partners in M&J Partnership and share profits and losses equally. Partnership operations for the current tax year were: Ordinary business income: 100,000 Long-term capital gain: 10,000 Total distributions to partners: 60,000 Mutt's tax basis in his partnership interest at the beginning of the current year was $12,000. What is his basis at the beginning of next year? A. $25,000 B. $37,000 C. $13,000 D. $27,000

B. $37,000 $12,000 beginning basis + 50% * ($100,000 + $10,000 - $60,000) = $37,000

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? A.$50,000 ordinary income B. $50,000 ordinary business income and $22,000 guaranteed payment C. $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain D. All income reported on a general partner's Schedule K-1 are subject to self-employment tax

B. $50,000 ordinary business income and $22,000 guaranteed payment

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? A. $50,000 ordinary income B. $50,000 ordinary business income and $22,000 guaranteed payment C. $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain D. All income reported on a general partner's Schedule K-1 are subject to self-employment tax

B. $50,000 ordinary business income and $22,000 guaranteed payment

In applying the basis limitation on the deduction of S corporation losses, which of the following statements is true? A.The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, is computed in the same manner as a partner's basis in a partnership interest. B. A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder. C. If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that obligation is considered ordinary income. D. All of the above statements are false.

B. A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder.

In applying the basis limitation on the deduction of S corporation losses, which of the following statements is true? A.The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, . is computed in the same manner as a partner's basis in a partnership interest. B. A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder. C If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that . obligation is considered ordinary income. D. All of the above statements are false.

B. A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder.

Which of the following statements regarding limited liability companies is false? A.Every member of an LLC has limited liability for the LLC's debts. B. An LLC with only one member is generally treated as a corporation for income tax purposes. C. An LLC with more than one member is generally treated as a partnership for income tax purposes. D. State laws do not limit the number of members or the type of entity that can be a member in an LLC.

B. An LLC with only one member is generally treated as a corporation for income tax purposes.

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization? A.No payroll taxes will be owed as a result of the audit. B. Loretta and Country Collectibles will each be liable for unpaid payroll taxes in the amount of $5,738 as a result of the audit. C. Only Loretta will be liable for unpaid payroll taxes as a result of the audit. D. Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit.

B. Loretta and Country Collectibles will each be liable for unpaid payroll taxes in the amount of $5,738 as a result of the audit.

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization? A. No payroll taxes will be owed as a result of the audit. B. Loretta and Country Collectibles will each be liable for unpaid payroll taxes in the amount of $5,738 as a result of the audit. C. Only Loretta will be liable for unpaid payroll taxes as a result of the audit. D. Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit.

B. Loretta and Country Collectibles will each be liable for unpaid payroll taxes in the amount of $5,738 as a result of the audit.

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated. A. Ordinary income, $126,000; long-term capital gain is separately stated B. Ordinary income, $120,000; interest income and long-term capital gain are separately stated C. Ordinary income, $136,000; nothing is separately stated D. Ordinary income, $195,000; interest income, long-term capital gain, and salary costs are separately stated

B. Ordinary income, $120,000; interest income and long-term capital gain are separately stated

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Sales Revenue: 500,000 Interest income: 6,000 Long-term capital gain: 10,000 COGS: (250,000) Salary and wages: (75,000) Other operating expenses: (55,000) Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated. A.Ordinary income, $126,000; long-term capital gain is separately stated B. Ordinary income, $120,000; interest income and long-term capital gain are separately stated C. Ordinary income, $136,000; nothing is separately stated D. Ordinary income, $195,000; interest income, long-term capital gain, and salary costs are separately stated

B. Ordinary income, $120,000; interest income and long-term capital gain are separately stated Ordinary income = $500,000 - $250,000 - $75,000 - $55,000

B. Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses.

Book gain $301,000; tax gain $38,839 $100,000 cash payment × ($301,000 gain/$775,000 contract price) = $38,839 tax gain.

Which of the following assets is not a Section 1231 asset?

Business equipment held for four years Correct Answer Office furniture held for eight months You Answered Land used in a business and held for 16 years All of the above are Section 1231 assets

. Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability is $450,000. No estimated tax payments have been made. Which of the following statements is true? A. The corporation should receive a tax refund for the current year. B. The portion of the rehabilitation credit that cannot be used this year will be lost. C. The credit would have been higher if the company had restored a certified historic structure. D. The credit is available for restoration of a building that is at least ten years old.

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? A. Fleet, Pete, and Zete are an affiliated group. B. Fleet and Zete are an affiliated group. C. Fleet and Pete are an affiliated group. D. There is no affiliated group here.

In 2016, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true? A. Mike does not owe any self-employment tax because his salary exceeded the 2016 base amount ($118,500) for federal employment tax. B. Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 earnings from his small business. C. Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business. D. Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business.

Loda Inc. made an $8,300 nondeductible charitable contribution and a $2,000 nondeductible political contribution this year. Which of the following statements is true? A. Both nondeductible contributions are permanent book/tax differences. B. Both nondeductible contributions are temporary book/tax differences. C. The nondeductible charitable contribution is a temporary book/tax difference. The nondeductible political contribution is a permanent book/tax difference. D. The nondeductible charitable contribution is a permanent book/tax difference. The nondeductible political contribution is a temporary book/tax difference.

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate? A. Martha must pay income tax on $141,200 and self-employment tax on $48,000. B. Martha must pay income tax on $141,200 and self-employment tax on $93,200. C. Martha must pay both income tax and self-employment tax on $141,200. D. Martha must pay income tax on $48,000 and self-employment tax on $93,200.

On January 1, 2016, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2016 ordinary business loss was $34,100, and she received no cash distributions during the year. Which of the following statements is accurate? A. Laura can deduct $30,000 of the loss in 2016. On January 1, 2017, the basis in her Suki stock is zero, and the basis in her Suki note is $8,500. B. Laura can deduct $34,100 of the loss in 2016. On January 1, 2017, the basis in her Suki stock is $4,400, and the basis in her Suki note is zero. C. Laura can deduct $34,100 of the loss in 2016. On January 1, 2017, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400. D. None of the above is accurate.

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

Which of the following statements about partnerships is false? A. A partnership is a legal entity that may enter into valid contracts. B. Partnerships are unincorporated entities. C. Only individuals may be partners in a partnership. D. Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax.

Which of the following statements regarding S corporations is true? A. An S corporation may have no more than 50 shareholders. B. Any individual, estate, corporation, or trust may be an S corporation shareholder. C. An S corporation may have only one class of stock. D. An S corporation shareholder's allocable share of ordinary income is subject to self-employment tax.

Which of the following statements regarding limited liability companies is true? A. Just like an S corporation, an LLC member's share of ordinary income is not subject to self-employment taxes. B. Just like an S corporation, an LLC is restricted to 100 members. C. Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved. D. Just like a limited partnership, only LLC members who are not actively involved in the entity's business activities have limited liability for the LLC's debts.

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

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

C. $125,000 $60,000 + ($200,000 * .50) - ($20,000 * .5) - $25,000

At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her of share Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash. Compute Paulina's gain or loss on the sale of her partnership interest. A. $3,000 loss B. $8,000 loss C. $2,000 gain D. $0 gain or loss

C. $2,000 gain

At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash. Compute Paulina's gain or loss on the sale of her partnership interest. A.$3,000 loss B. $8,000 loss C. $2,000 gain D. $0 gain or loss

C. $2,000 gain Her basis prior to the sale is $30,000 = $25,000 + $10,000 - $5,000. Her amount realized on the sale is $32,000 = $22,000 cash + $10,000 relief of liabilities

Chapter 9: In March, a flood completely destroyed three delivery vans owned by Aggie Inc. Aggie 's adjusted tax basis in the vans was $50,000. Aggie received a $90,000 reimbursement from its property insurance company, and on September 1, it purchased one new delivery van for $70,000. Compute Aggie 's recognized gain or loss on the involuntary conversion and its tax basis in the new van. A. No recognized gain or loss; $50,000 basis in the van B. $20,000 recognized gain; $70,000 basis in the van C. $20,000 recognized gain; $50,000 basis in the van D. None of the above

C. $20,000 recognized gain; $50,000 basis in the van

Rebecca has a qualifying home office. The room is 600 square feet and the entire house is 3,000 square feet. Use the following information to determine her allowable home office deduction: Revenue from legal practice: 160,500 Expenses from legal practice: 157,000 Expenses from home (100%): Home mortgage interest: 10,000 Property taxes: 3,300 Homeowners' insurance: 2,000 Utilities: 1,200 Cost to convert patio into a sunroom: 5,000 Depreciation on office part of home: 800 A.$3,300 home office deduction B. $16,500 home office deduction C. $3,500 home office deduction D. $4,100 home office deduction

C. $3,500 home office deduction $10,000 +$3,300 + $2,000 +$1,200 = $16,500. $16,500 * 20% = $3,300. $3,300 + $800 depreciation = $4,100; however, there is only $3,500 of income to offset the home office deduction

Funky Chicken is a calendar year S corporation with the following current year information: On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? A. $57,000 B. $80,000 C. $65,000 D. $75,000

C. $65,000

Funky Chicken is a calendar year S corporation with the following current year information: Operating Loss: (300,000) Liabilities: Notes payable, Big Bank: 30,000 Notes payable, June Cross: 20,000 On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? A.$57,000 B. $80,000 C. $65,000 D. $75,000

C. $65,000 S corporation debt is included in basis only if loaned directly by the shareholder. So June gets the full $20,000 she loaned as basis, but none of the bank loan.

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Waters distributed $25,000 to each of its shareholders during the year. If Mia has no other sources of income, what is her gross income for the year? A. $63,000 B. $60,000 C. $68,000 D. $97,500

C. $68,000

Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest? A.$500,000 B. $1,200,000 C. $850,000 D. $650,000

C. $850,000

Which of the following statements regarding S corporations is true? A.An S corporation may have no more than 50 shareholders. B. Any individual, estate, corporation, or trust may be an S corporation shareholder. C. An S corporation may have only one class of stock. D. An S corporation shareholder's allocable share of ordinary income is subject to self-employment tax.

C. An S corporation may have only one class of stock.

Which of the following statements regarding limited liability companies is true? A.Just like an S corporation, an LLC member's share of ordinary income is not subject to self-employment taxes. B. Just like an S corporation, an LLC is restricted to 100 members. C. Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved. D. Just like a limited partnership, only LLC members who are not actively involved in the entity's business activities have limited liability for the LLC's debts.

C. Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved.

Which of the following statements regarding limited liability companies is true? A. Just like an S corporation, an LLC member's share of ordinary income is not subject to selfemployment taxes. B. Just like an S corporation, an LLC is restricted to 100 members. C. Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved. D Just like a limited partnership, only LLC members who are not actively involved in the entity's business . activities have limited liability for the LLC's debts.

C. Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved.

On January 1, 2010, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2010 ordinary business loss was $34,100, and she received no cash distributions during the year. Which of the following statements is accurate? A.Laura can deduct $30,000 of the loss in 2010. On January 1, 2011, the basis in her Suki stock is zero, and the basis in her Suki note is $8,500. B. Laura can deduct $34,100 of the loss in 2010. On January 1, 2011, the basis in her Suki stock is $4,400, and the basis in her Suki note is zero. C. Laura can deduct $34,100 of the loss in 2010. On January 1, 2011, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400 D. None of the above is accurate.

C. Laura can deduct $34,100 of the loss in 2010. On January 1, 2011, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400

On January 1, 2011, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2011 ordinary business loss was $34,100, and she received no cash distributions during the year. Which of the following statements is accurate? A. Laura can deduct $30,000 of the loss in 2011. On January 1, 2012, the basis in her Suki stock is zero, and the basis in her Suki note is $8,500. B. Laura can deduct $34,100 of the loss in 2011. On January 1, 2012, the basis in her Suki stock is $4,400, and the basis in her Suki note is zero. C. Laura can deduct $34,100 of the loss in 2011. On January 1, 2012, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400. D. None of the above is accurate.

C. Laura can deduct $34,100 of the loss in 2011. On January 1, 2012, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400.

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate? A. Martha must pay income tax on $141,200 and self-employment tax on $48,000. B. Martha must pay income tax on $141,200 and self-employment tax on $93,200. C. Martha must pay both income tax and self-employment tax on $141,200. D. Martha must pay income tax on $48,000 and self-employment tax on $93,200.

C. Martha must pay both income tax and self-employment tax on $141,200.

In 2010, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true? A.Mike does not owe any self-employment tax because his salary exceeded the 2010 base amount ($106,800) for federal employment tax. B. Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 earnings from his small business. C. Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business. D. Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business.

C. Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business.

In 2011, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true? A Mike does not owe any self-employment tax because his salary exceeded the 2011 base amount . ($106,800) for federal employment tax. B Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 . earnings from his small business. C. Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business. D. Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business.

C. Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business.

Which of the following statements about partnerships is false? A.A partnership is a legal entity that may enter into valid contracts. B. Partnerships are unincorporated entities. C. Only individuals may be partners in a partnership. D. Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax.

C. Only individuals may be partners in a partnership.

Which of the following statements about partnerships is false? A partnership is a legal entity that may enter into valid contracts. B. Partnerships are unincorporated entities. C. Only individuals may be partners in a partnership. D. Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax.

C. Only individuals may be partners in a partnership.

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

C. Partners can increase tax basis in their partnership interest only by making additional capital contributions.

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

C. Partners can increase tax basis in their partnership interest only by making additional capital contributions.

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

C. The home office deduction is limited to the taxable income of the business before the deduction.

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

C. The home office deduction is limited to the taxable income of the business before the deduction.

C.$3,500 home office deduction

Corp A owns 100% Corp B. Which of the following is NOT a member of the affiliated group?

Corp C, which is 50% owned by Corp A, 20% owned by Corp B, and 30% own by unaffiliated owners

Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had 7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and recognized gain on the exchange and the tax basis in her 4,200 M&W shares.

Correct! $228,500 gain realized and recognized; $340,200 basis in M&W shares Because Mrs. Brinkley does not own at least 80% of the outstanding Brinkley stock immediately after the exchange, her exchange of property for stock is taxable, and she has a cost basis in her Brinkley shares. $228,500 gain realized and recognized; $111,700 basis in M&W shares $228,500 gain realized and no gain recognized; $111,700 basis in M&W shares None of the above

Ms. Ellis sold 889 shares of publicly traded Omer stock (tax basis $161,400) for $125,000 cash on July 2. She paid $136,200 cash to purchase 900 Omer shares on August 8. Compute Ms. Ellis' loss recognized on the July 2 sale and determine her tax basis in the 1,000 shares.

Correct! $36,400 loss recognized; $136,200 basis The wash sale rule does not apply because Ms. Ellis waited for more than 30 days to repurchase her Omer stock. No loss recognized; $136,200 basis No loss recognized; $76,200 basis $36,400 loss recognized; $125,000 basis

G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false?

Correct! The old asset's FMV is $150,000. The old asset's FMV is $130,000. If the exchange is nontaxable, G&G's recognized gain is -0-. If the exchange is nontaxable, G&G's tax basis in the new asset is $130,300. None of the statements is false.

Which of the following statements about the inclusion of boot in a nontaxable exchange is false?

Correct! The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged. The purpose of including boot is to equalize the FMV of the properties exchanged. The receipt of boot can trigger gain recognition but not loss recognition. The party paying the boot includes the FMV of the boot in the tax basis of the property received. None of the above is false.

Which of the following statements regarding the tax burden imposed on business entities is true? a. The tax burden imposed on corporate earnings is always lower if the corporation makes an S election b. Business owners desiring current cash flow can maximize annual after-tax cash flow by operating as a regular corporation c. Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary, interest, or rental income d. All of these statements are true

Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary, interest, or rental income

Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true? A. The income from the collection and distribution of food and the income from grocery store are taxable. B. No income from either of the activities is taxable. C. Only the income from the collection and distribution of food is taxable. D. Only the income from the grocery store is taxable.

Armond earned $10,000 of profit from a sole proprietorship in 2016. If he also has $120,000 of salary income, how much self-employment tax will he owe? A. $1,530 B. $1,413 C. $290 D. $268

During 2016, Scott Howell received a salary of $125,000. The social security base amount for 2016 was $118,500. How much payroll tax should have been withheld from Scott's salary for 2016? A. $0 B. $9,065 C. $9,563 D. $9,160

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. and 90% of the stock of Stock ownership of Bete, Inc. Bete owns 5% of the stock of Pete and 5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? A. Fleet, Zete, Pete, and Bete are an affiliated group. B. Fleet and Zete are an affiliated group. C. Fleet and Pete are an affiliated group. D. Fleet, Pete, and Bete are an affiliated group.

For tax years beginning after December 31, 2015, which of the following statements regarding corporate tax filing requirements is false? A. Corporations must file their annual federal income tax returns by the 15th day of the fourth month following the close of the taxable year. B. Most corporations may request an automatic six-month extension of time to file their federal income tax returns. C. An extension of the income tax filing deadline does not extend the payment deadline for any balance of tax due for the taxable year. D. Corporations must file their annual federal income tax returns by 15th day of the third month following the close of the taxable year.

In determining the incidence of the corporate income tax: A. Corporations may pass the tax burden onto consumers in the form of higher prices B. Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investment C. Corporate employees may bear the burden of the corporate tax in the form of lower compensation D. All of the above parties may bear the indirect burden of the corporate income tax

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. Which of the following statements accurately describes the tax consequences of these withdrawals? A. The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments. B. The withdrawals are considered taxable dividends to Loretta. C. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would increase taxable income for both Loretta and the S corporation. D. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would not change taxable income for Loretta and reduce taxable income of the S corporation.

The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the outstanding stock of Tire Corporation, a German company. Wheel and Tire each own 50 percent of the outstanding stock of Bumper, Inc., a U.S. company. Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation, a U.S. company. Which of these corporations form an affiliated group eligible to file a consolidated tax return? A. Wheel, Axle, Tire, Bumper, and Trunk are an affiliated group. B. Wheel, Axle, and Tire are an affiliated group. C. Wheel and Axle are an affiliated group. D. Wheel, Axle, and Trunk are an affiliated group.

Three statutory requirements for S corps include: A) Shareholders can only be individuals, estates, trusts, and tax-exempt orgs (but not partnerships or other companies). B) A maximum number of 100 shareholders. C) Only a single class of outstanding stock belonging to the S corp (but not preferred stock). D) All of the above E) None of the above

Which of the following is a means to avoid the double taxation burden imposed on the profits of corporations? A. Treat all corporations as passthrough entities for federal tax purposes. B. Enact tax legislation that would make dividends nontaxable to all of the corporation's shareholders. C. Allow corporate shareholders a credit on their tax returns for the taxes paid by the corporation on the profits currently distributed to such shareholders as dividends. D. All of the above would avoid double taxation.

Which of the following items would be separately stated instead of included in ordinary income when reported by a partnership? A. Municipal bond interest income B. Capital loss C. Dividend income D. All of the above items would be separately stated

Which of the following statements concerning partnerships is false? A. A properly-drafted partnership agreement is crucial. B. A general partner's basis in a partnership includes his share of partnership debt. C. Limited partnerships must have at least one general partner. D. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

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

Which of the following statements regarding the domestic production activities deduction is false? A. The deduction is equivalent to a reduced tax rate on income from any qualified activity. B. The amount of the deduction allowed for any tax year cannot exceed 50% of the total compensation paid to the corporation's U.S. workforce. C. The deduction equals a percentage of the lesser of the corporation's net income from qualified activities or its taxable income before the deduction. D. The deduction is only available for U.S. taxpayers engaged in manufacturing activities.

Alice is a partner in Axel Partnership. Her share of the partnership's 2011 ordinary business income was $100,000. She received a $60,000 cash distribution from the partnership on December 1, 2011. Assuming that Alice's marginal tax rate is 35%, calculate her after-tax cash flow from the partnership in 2011. A. $65,000 B. $39,000 C. $60,000 D. $25,000

D. $25,000

Alice is a partner in Axel Partnership. Her share of the partnership's 2010 ordinary business income was $100,000. She received a $60,000 cash distribution from the partnership on December 1, 2010. Assuming that Alice's marginal tax rate is 35%, calculate her after-tax cash flow from the partnership in 2010. A.$65,000 B. $39,000 C. $60,000 D. $25,000

D. $25,000 $60,000 cash received - $35,000 tax ($100,000 * 35%)

Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest? A.$500,000 B. $850,000 C. $650,000 D. $300,000

D. $300,000

Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest? A. $500,000 B. $850,000 C. $650,000 D. $300,000

D. $300,000

Orange, Inc. is a calendar year partnership with the following current year information: Operating loss: (120,000) Liabilities: Note payable, City Bank 20,000 Note payable, Jake Crow 20,000 On January 1, John James bought 50% general interest in Orange, Inc for $30,000. How much of the operating loss may John deduct on his Form 1040? A.$60,000 B. $30,000 C. $40,000 D. $50,000

D. $50,000 For a general partner, tax basis includes a pro rata share of all debt. Therefore, John gets basis for his cash and 50% of the debt

Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest? A.$500,000 B. $1,200,000 C. $850,000 D. $650,000

D. $650,000

Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest? A.$500,000 B. $1,200,000 C. $850,000 D. $650,000

D. $650,000

Funky Chicken is a calendar year general partnership with the following current year information: On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the partnership $20,000. How much of the operating loss may Cross deduct currently? A. $57,000 B. $80,000 C. $65,000 D. $75,000

D. $75,000

Funky Chicken is a calendar year general partnership with the following current year information Operating loss: (300,000) Liabilities: Note payable, Big Bank: 30,000 Note payable, June Cross: 20,000 On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the partnership $20,000. How much of the operating loss may Cross deduct currently? A.$57,000 B. $80,000 C. $65,000 D. $75,000

D. $75,000 For a general partner, tax basis includes a pro rata share of all debt. Therefore, June gets basis for her cash and 60% of the debt.

D. $8,435 $125,000 * 1.45% = $1,813 Medicare + $106,800 * 6.2% = $6,622 Social Security. Total = $8,435.

During 2012, Elena generated $24,500 of earnings on Schedule C. If Elena had no other earned income, how much self-employment tax will she owe on her Schedule C net profit? A. $3,749 B. 3,259 C. 3,462 D. 3,009

D. 3,009 24,500*92.35%*13.3%

XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false? A.All of the corporation's shareholders must consent to make an S election. B. If a shareholder in an S corporation sells his shares of stock to a nonresident alien, the election will terminate. C. If an S corporation loses its election, the shareholders cannot make a new election for five years without IRS consent. D. All of the shareholders must consent to voluntarily terminating an S election.

D. All of the shareholders must consent to voluntarily terminating an S election.

Hay, Straw and Clover formed the HSC Partnership, agreeing to share profits and losses equally. Clover will manage the business for which he will receive a guaranteed payment of $30,000 per year. Cash receipts and disbursements for the year were as follows: What is Clover's share of the partnership's ordinary income and guaranteed payment? A. Ordinary income, $30,000; Guaranteed payment, $10,000 B. Ordinary income, $20,000; Guaranteed payment, $10,000 C. Ordinary income, $30,000; Guaranteed payment, $30,000 D. Ordinary income, $20,000; Guaranteed payment, $30,000

D. Ordinary income, $20,000; Guaranteed payment, $30,000

Hay, Straw and Clover formed the HSC Partnership, agreeing to share profits and losses equally. Clover will manage the business for which he will receive a guaranteed payment of $30,000 per year. Cash receipts and disbursements for the year were as follows: Net income from operations (before guaranteed payment) 90,000 Guaranteed payment to Clover 30,000 What is Clover's share of the partnership's ordinary income and guaranteed payment? A.Ordinary income, $30,000; Guaranteed payment, $10,000 B. Ordinary income, $20,000; Guaranteed payment, $10,000 C. Ordinary income, $30,000; Guaranteed payment, $30,000 D. Ordinary income, $20,000; Guaranteed payment, $30,000

D. Ordinary income, $20,000; Guaranteed payment, $30,000 Ordinary income is $60,000 ($90,000 - $30,000). Clover is allocated 1/3 of the ordinary income and all of the guaranteed payment.

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

D. The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.

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

D. The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. Which of the following statements accurately describes the tax consequences of these withdrawals? A.The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments. B. The withdrawals are considered taxable dividends to Loretta. C. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would increase taxable income for both Loretta and the S corporation. D. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would not change taxable income for Loretta and reduce taxable income of the S corporation.

D. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would not change taxable income for Loretta and reduce taxable income of the S corporation. Loretta would report salary income and an equal reduction in ordinary income from the S corporation, with a zero net effect on her taxable income.

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. Which of the following statements accurately describes the tax consequences of these withdrawals? A. The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments. B. The withdrawals are considered taxable dividends to Loretta. C.There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such . treatment would increase taxable income for both Loretta and the S corporation. D.There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such . treatment would not change taxable income for Loretta and reduce taxable income of the S corporation.

D.There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such . treatment would not change taxable income for Loretta and reduce taxable income of the S corporation.

Thunder, Inc. has invested in the stock of several corporations and has $500,000 current year operating income before dividends: Corporation Dividend Ownership % Incorporated Hail, Inc. $52,000 14 Delaware Hurricane Company 17,500 62 France Lightening, Inc. 2,800 41 Utah Tornado Corporation 131,000 92 New Jersey Calculate Thunder's dividends-received deduction and taxable income:

DRD, $176,320; taxable income $526,980. $500,000 + ($52,000 - $26,000 DRD) + ($17,500 - $17,500 DRD) + ($2,800 - $1,820 DRD) + ($131,000 - $131,000 DRD) = $526,980.

Grantly Seafood is a calendar year taxpayer. In 2020, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2020, Grantly received a $1.2 million reimbursement from its insurance company. What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion? a. December 31, 2020 b. December 31, 2021 c. December 31, 2022 d. October 11, 2022

December 31, 2022

Which of the following does NOT reduce Qualified Business Income?

Deduction for home mortgage insurance

Which of the following statements regarding employee liability for payroll taxes is true?

Employees are liable for payroll taxes, which are computed in the same manner as the employer payroll tax.

Which of the following amounts can an employer deduct for an employee working in a trade or business?

Employer payroll tax paid Gross salary and wages paid

Which of the following are eligible to be shareholders in an S corporation?

Estates Individuals who are U.S. citizens

Which of the following are legal characteristics of an LLC?

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

A corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit.

A corporation that is unable to meet its original filing deadline may obtain an automatic twelve-month extension of the time to file its federal income tax return.

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

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

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

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

AMT adjustments can only increase a corporation's alternative minimum taxable income

Angel Corporation's current-year regular tax liability is $40,000. Angel is eligible for a general business credit of $45,000. The corporation will receive a $5,000 refund of federal income tax.

At least three corporations are required to form an affiliated group.

Bisou Inc. made a $48,200 contribution to charity this year. Only $39,000 of the contribution was deductible. Bisou can carry the $9,200 nondeductible contribution back three years and forward five years.

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

Corporations are rarely targeted in political debates over taxation.

Corporations report their taxable income and calculate the federal income tax on Form 1040.

Donatoni Corporation owns 40% of Market, Inc. voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $21,000 dividends-received deduction.

Generally, the corporate income tax is computed on a proportionate rate schedule.

Hearth, Inc. reported $30,000 of depreciation expense on its financial statements. For federal income tax purposes, it deducted depreciation of $35,000. This book/tax difference would result in an increase to net income per books on the Schedule M-1 or M-3.

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

If a corporation's depreciation expense for regular tax purposes is $32,000 and its depreciation expense for alternative minimum tax purposes is $28,000, such corporation will have a negative (decrease) depreciation adjustment for alternative minimum taxable income.

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

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

Matthew earned $150,000 in wages during 2016. FICA taxes withheld by his employer would have been $11,475.

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

On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable.

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

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

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

The Schedule M-3 reconciliation requires less detailed information than the M-1 reconciliation.

The corporate alternative minimum tax rate is 26% of AMTI in excess of the AMT exemption.

The corporate characteristic of free transferability exists if the corporate stock is subject to a buy-sell agreement.

The dividends-received deduction is equal to 80% of any dividends-received by a corporate taxpayer.

The domestic production activities deduction is computed as a percentage of the greater of taxable income or net income from qualified production activities.

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

The four primary legal characteristics of a corporation are unlimited liability, limited life, free transferability of interests, and centralized management.

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

Ch. 9: A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot. True or False

FALSE Payment of boot does not trigger gain recognition.

Which of the following does NOT increase a partner's basis in their partnership interest?

FMV of property contributed

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

False

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

False

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

False

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

False

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

False

Ch. 9 Mrs. Cooley exchanged 400 shares of stock for corporate bonds. If the stock and bonds were issued by the same corporation, they are like-kind properties, and the exchange is nontaxable. True or False

False

Chapter 10: C Corporations can be shareholders in an S corporation. A) True B) False

False

Chapter 10: If a business is formed as an S corporation, its income may be subject to double taxation. A) True B) False

False

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

False

John's share of partnership loss was $60,000. He had only enough tax basis to deduct $34,000 of the loss. He may deduct the loss against other income in the following year, regardless of what happens in the partnership .T or F

False

Matthew earned $150,000 in wages during 2010. FICA taxes withheld by his employer would have been $11,160.

False

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

False

On June 1, Jacob had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $30,000. All of the cash distribution is taxable. True of False

False

On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable.

False

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

False

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

False

Partnerships are subject to income tax. T/F

False

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

False

The Schedule M-3 reconciliation requires less detailed information than the M-1 reconciliation. T/F

False

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

False

A limited liability partnership (LLP) is a professional service business (physicians, surgeons, cardiologists, CPA's, etc.) in which a general partner is personally liable for the professional negligence of any other partners, and they are not personally liable for the other debts. T/F

False The general partner is NOT personally liable for the professional negligence of other partners, but they ARE personally liable for the other debts.

Partners pay tax on their distributive share of income (net of credits, deductions) dependent on how much cash is paid to the partner in the form of a cash distribution. T/F

False. They pay tax on their distributive share of income REGARDLESS OF how much cash is paid to the partner in the form of a cash distribution.

Use Schedule M-1 for corporations that have assets worth > $10 million. T/F

False. Use Schedule M-3. Schedule M-1 is for corps that have assets worth < $10 million.

Which of the following is NOT a limitation on shifting of passthrough entity income?

Family members can never be partners in a personal service business

On what form are business income and expenses for a sole proprietorship listed?

Form 1040, Schedule C

On what form are business income and expenses for a S Corp listed?

Form 1120S

Which of the following roles has the LEAST amount of liability protection?

General Partner

Hitz Company, a calendar year, accrual basis taxpayer, recorded $1,735 accrued interest expense and $1,735 accrued interest payable when it closed its books on December 31. The interest relates to a loan from First State Bank and accrued over the last two months of the year. Which of the following statements is true?

Hitz can deduct the accrued interest expense this year.

Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?

If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a $400,000 basis in Asset Z. If the exchange is nontaxable, Nixon recognizes $15,750 of its $125,750 realized gain and takes a $400,000 substituted basis in Asset Z.

Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Partnership in exchange for a partnership interest. Which of the following statements is true?

If Mr. Jamail owns 34% partnership interest immediately after the exchange, he recognizes no gain on the exchange. **Regardless of his ownership percentage, Mr. Jamail recognizes no gain on the exchange of property for an equity interest in a partnership and takes a $29,900 substituted basis in the interest.

Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Partnership in exchange for a partnership interest. Which of the following statements is true?

If Mr. Jamail owns a 14% partnership interest immediately after the exchange, he must recognize a $157,100 gain. Correct! If Mr. Jamail owns 34% partnership interest immediately after the exchange, he recognizes no gain on the exchange. Regardless of his ownership percentage, Mr. Jamail recognizes no gain on the exchange of property for an equity interest in a partnership and takes a $29,900 substituted basis in the interest. If Mr. Jamail owns a 14% partnership interest immediately after the exchange, his tax basis in the interest is $187,000. Statements A and C are true.

Mr. Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash. Which of the following statements is true?

If Mr. Quick can offer evidence that the FMV of the securities is $95,000, he can recognize his $17,900 realized loss. If Mr. Quick and his corporation negotiated the terms of the sale at arm's length, Mr. Quick can recognize his $17,900 realized loss. The corporation's tax basis in the securities is $112,900. Correct! None of the above is true. The corporation's tax basis in the securities is $95,000.

If Mrs. Tabor owns 75 percent of Acme's stock (i.e. is a related party), Acme can never deduct the bonus expense.

Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to Massur Inc. in exchange for Massur common stock. Which of the following statements is false?

If Vincent is not in control of Massur immediately after the exchange, both Vincent and Massur must recognize a $1,327,000 gain. Corporations never recognize gain on loss on the exchange of their stock for property.

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.

Capital expenditures

If an expenditure results in a benefit that extends beyond 12 months, the expenditure is capitalized to an asset account. - Cost of the asset may be recovered over time (through depreciation, amortization, or cost of goods sold) - Major repairs may result in a dispute with the IRS concerning deduction versus capitalization

Which of the following statements about the transfer of debt in a like-kind exchange is false?

If both properties in the exchange are subject to debt, both parties will be treated as receiving boot. **If both properties are subject to debt, only the party with net relief of debt is treated as receiving boot

Ch. 9 Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000. Which of the following statements is false? A. The old asset's FMV is $70,000. B. If the exchange is nontaxable, Eliot's recognized gain is $5,000. C. If the exchange is nontaxable, Eliot's tax basis in the new asset is $58,100. D. None of the statements is false.

If the exchange is nontaxable, Eliot's recognized gain is $5,000. Paying cash boot does not trigger gain recognition.

Which of the following is NOT a consequence of boot in a nontaxable exchange?

Inclusion of boot can trigger gain or loss recognition for the receiver

Which of the following statements regarding taxable business entities is false?

Income generated by an S corporation is subject to corporate income tax.

Which of the following does NOT impact an owner's basis in an S Corp?

Increases in corporate liabilities

Partner's economic investment = ?

Initial investment + The share of partnership debt.

Which of the following business entities are not subject to an entity-level federal income tax?

LLC S corporation Partnership General partnership Limited partnership Sole proprietorship

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

Law firm Accounting firm Consulting business

Which of the following is NOT is not a benefit of organizing as a passthrough entity for tax purposes?

Limited liability

Which of the following amounts are not subject to self-employment tax? a. General partner's share of partnership income b. Limited partner's share of partnership income c. Sole proprietor's income from business activity d. Guaranteed payment to general partner

Limited partner's share of partnership income

Which of the following is NOT legal characteristic of a corporation?

Limited professional liability of employees

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization? a. No payroll taxes will be owed as a result of the audit. b. Loretta and Country Collectibles will each be liable for unpaid payroll taxes as a result of the audit c. Only Loretta will be liable for unpaid payroll taxes as a result of the audit d. Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit

Loretta and Country Collectibles will each be liable for unpaid payroll taxes as a result of the audit

Lovely is allowed to deduct the $785,000 research costs.

Teco Inc. and MW Company exchanged like-kind assets. Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the following statements is false?

MW's basis in its newly acquired asset is $35,600. MW's basis is $28,100.

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate? a. Martha must pay income tax on $141,200 and self-employment tax on $48,000 b. Martha must pay income tax on $141,200 and self-employment tax on $93,200 c. Martha must pay both income tax and self-employment tax on $141,200 d. Martha must pay income tax on $48,000 and self-employment tax on $93,200

Martha must pay both income tax and self-employment tax on $141,200

Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate? A. Martha must pay income tax on $141,200 and self-employment tax on $48,000. B. Martha must pay income tax on $141,200 and self-employment tax on $93,200. C. Martha must pay income tax on $48,000 and self-employment tax on $93,200. D. Martha must pay both income tax and self-employment tax on $141,200.

Martha must pay both income tax and self-employment tax on $141,200.

In 2020, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true? a. Mike does not owe any self-employment tax because his salary exceeded the 2020 base amount ($137,700) for federal employment tax b. Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 earnings from his small business c. Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business d. Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business

Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business

Mr. and Mrs. Carleton have a zero tax basis in their business goodwill. The goodwill is a self-created asset. Only purchased goodwill has an amortizable cost basis.

The revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 21%, and Ms. Lewis' marginal tax rate is 32%. Which of the following is not a consequence of the recharacterization? a. LCW's taxable income will increase b. Ms. Lewis' taxable income will increase c. Ms. Lewis' payroll tax liability will decrease d. Ms. Lewis' income tax liability will decrease

Ms. Lewis' taxable income will increase *Note: LCW's taxable income will increase by $125,000. Ms. Lewis' taxable income will not increase because $125,000 of her salary is recharacterized as a dividend. However, her payroll tax liability and her income tax liability will decrease because the dividend is not subject to payroll tax and is eligible for a 15% preferential income tax rate.

Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange. Which of the following properties will qualify for like-kind exchange treatment? a. New York office building b. Tractor c. 35 hogs raised for slaughter d. Personal residence in Des Moines which Carman would use as her personal residence

New York office building

R&T Inc. made the following sales of capital assets this year. Tax Basis Sale Price Asset 1 $ 60,000 $ 68,100 Asset 2 250,000 263,500 Asset 3 50,000 22,400 What is the effect of the three sales on R&T's taxable income this year?

No effect Because R&T recognized $21,600 total capital gain on the sales of assets 1 and 2, it can deduct $21,600 of its $27,600 capital loss on the sale of asset 3.

Which of the following is not a good reason to form a family partnership? a. Income can be shifted to lower-tax-rate individuals b. A buy-sell agreement can ensure that all ownership interests are retained in the family c. No gift tax is due on the transfer d. Non-voting interests can be given to younger family members to ensure the older generation maintains operational control

No gift tax is due on the transfer

Ch. 9In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its property insurance company, and on August 8, it paid $60,000 to replace the signage. Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the new signage. A. No recognized gain or loss; $50,000 basis in the signage B. No recognized gain or loss; $60,000 basis in the signage C. $18,700 recognized gain; $60,000 basis in the signage D. None of the above

None of the above

Gowda Inc., a calendar year taxpayer, purchased $1,496,000 of equipment on March 23. This was Gowda's only purchase of depreciable property for the year. If the equipment has a 7-year recovery period, refer to Table 7.2 and compute Gowda's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

None of the above First year $213,778 ($1,496,000 × 0.1429); second year $366,370 ($1,496,000 × 0.2449)

None of the above Mundo should report $18,000 book income (six months) and $72,000 taxable income.

In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its property insurance company, and on August 8, it paid $60,000 to replace the signage. Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the new signage.

None of the above Renfru's basis in the new signage is $41,300 ($60,000 cost − $18,700 deferred gain)

Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for 148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the transferred assets, each Triple share is worth $125. Which of the following is false? a. Mr. Albert's tax basis in his 820 shares is $50,000 b. Triple Inc.'s tax basis in the assets transferred by Mrs. Billig is $9,000 c. Mrs. Crisp's tax basis in her 32 shares is $4,000 d. None of these choices are false

None of these choices are false *NOTE: Mr. Albert's and Mrs. Billig's exchanges are nontaxable because the three transferors in the aggregate own 80% or more (100%) of Triple's outstanding stock immediately after the exchange.

Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a new asset worth $20,000. Which of the following statements is false? a. The old asset's FMV is $20,000 b. If the exchange is nontaxable, Berly's tax basis in the new asset is $12,300 c. If the exchange is taxable, Berly's recognized gain is $7,700 d. None of these statements are false

None of these statements are false

Cobly Company, a calendar year taxpayer, made only one asset purchase this year: machinery costing $1,932,500. The machinery is 7-year recovery property, and Cobly placed it in service on October 12. How many months of MACRS depreciation on the machinery is Cobly allowed this year?

One and one-half months

One and one-half months The midquarter convention applies because Cobly placed more than 40% (100%) of its depreciable personalty into service in the fourth quarter.

Which of the following is a requirement for a corporation to elect S corporation status?

Only common stock outstanding No more than 100 shareholders

Chapter 10: Which of the following statements about partnerships is false? A.A partnership is a distinct legal entity that may enter into valid contracts B.Only individuals may be partners in a partnership C.Partnerships are unincorporated entities D.Partnerships are sometimes referred to as "passthrough entities" since they do not pay taxes.

Only individuals may be partners in a partnership

Which of the following statements regarding partnerships versus S corporations is false? a. Ordinary income allocated from both types of passthrough entities is subject to self-employment tax b. Partners are not permitted to be employees of their partnerships, but S corporation shareholders can be employees of their S corporation c. S corporation shareholders are not liable for entity debts, but general partners are liable for partnership debts d. Partnerships have more flexibility than S corporations in the manner in which items are allocated to the owners

Ordinary income allocated from both types of passthrough entities is subject to self-employment tax

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Sales revenue$500,000 Interest income 6,000 Long-term capital gain 10,000 Cost of goods sold (250,000) Salary and wages (75,000) Other operating expenses (55,000) Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated.

Ordinary income, $120,000; interest income and long-term capital gain are separately stated. Ordinary income = $500,000 − $250,000 − $75,000 − $55,000.

Ordinary income, $20,000; Guaranteed payment, $30,000. Ordinary income is $60,000 ($90,000 − $30,000). Clover is allocated 1/3 of the ordinary income and all of the guaranteed payment.

Which of the following items are reported on Schedule K-1?

Partner's distributive share of ordinary income Partner's distributive share of all separately state items

Which of the following are characteristics of a partnership?

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

Which of the following statements regarding the basis limitation on deduction of partnership losses is false? a. If a partner's share of partnership losses exceeds the partner's tax basis in the partnership interest, the excess is not deductible in the current year b. Partnership losses that are not deductible due to the basis limitation can be carried forward indefinitely c. Partners can increase tax basis in their partnership interest only by making additional capital contributions d. If a partnership becomes profitable in the future, the partner's share of such future income will create basis against which loss carryforwards can be deducted

Partners can increase tax basis in their partnership interest only by making additional capital contributions

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 a partner's tax basis in a partnership interest is true? a. Partnership tax basis is increased annually by cash distributions from the partnership b. Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses c. Partnership tax basis is reduced by the partner's share of nontaxable partnership income d. Partnership tax basis becomes negative if allocable losses exceed basis

Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses

Which of the following is NOT a means by which a C Corp can make a deductible cash distribution to a owner?

Pay the owner a dividend on their shares of stock

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

Retail business operated by a sole proprietorship

Schatz Corporation generated $8,083,000 ordinary business income and recognized a $73,900 net capital gain on the sale of assets. Which of the following statements is true?

Schatz must pay tax at the regular corporate rate on $8,156,900 taxable income.

Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on: a. Schedule C, Statement of Profit or Loss from Business b. The first page of Form 1040 as other income c. A separate tax return prepared for the business operation d. Schedule E, Statement of Rent and Royalty Income

Schedule C, Statement of Profit or Loss from Business

Which of the following IRC code sections gives tax exempt status to charitable nonprofit corporations?

Section 501(c)(3)

Which of the following statements about S Corp shareholders is FALSE?

Shareholders cannot be an estate

Which of the following is NOT a potential difference between a partnership and an S Corp?

Single layer of taxation vs two layers of taxation

Which of the following statements regarding alternative business forms is true? a. If an S corporation's election terminates, the corporation is forced to liquidate b. Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes c. Generally, the transfer of property to a new partnership in exchange for a partnership interest is a taxable event d. The owners of a new business should be indifferent between operating as an S corporation and a partnership

Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes

Which of the following statements regarding the tax treatment of start-up losses is false? a. Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit b. Start-up losses of a business organized as a partnership are deductible by the partners, potentially generating immediate tax savings c. Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit d. Start-up losses of a business organized as an S corporation are deductible by the shareholders, potentially generating immediate tax savings

Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit

Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900,000 salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable income will: a. Increase by $550,000 b. Decrease by $550,000 c. Increase by $900,000 d. Stay the same

Stay the same

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

. Most tax credits for which a corporate taxpayer would be eligible are nonrefundable.

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

A corporation is required to report differences between book and taxable income on either Schedule M-1 or Schedule M-3 of the corporate income tax return.

A corporation's minimum tax credit can reduce the corporation's future regular tax liability if regular tax liability exceeds tentative minimum tax in that year.

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

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

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

A nonprofit corporation may incur a federal income tax if it has unrelated business income

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

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

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

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

A significant advantage of issuing stock instead of debt is that payment of dividends is discretionary.

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

An affiliated group consists of a parent company that directly owns 80% of at least one subsidiary corporation plus all other subsidiaries that are 80% owned within the group.

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

Carter's share of a partnership's operating loss is $17,200. His tax basis in his partnership interest before any adjustment for this loss is $26,000. Carter may deduct the full loss on his individual tax return.

Corporations are allowed a deduction for charitable contributions, limited to 10 percent of taxable income before the deduction.

Corporations are required to pay their federal tax liability in four quarterly estimated tax installments.

Corporations with more than $1 million taxable income must pay 100% of their current federal income tax liability in the form of quarterly estimate payments to avoid an underpayment penalty.

Corporations with taxable incomes in excess of $18,333,333 have a 35% marginal tax rate and a 35% average tax rate.

Dividends-received deductions generally are not allowed for dividends from foreign corporations.

Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.

For a consolidated group of corporations, Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.

Frazier, Inc. paid a $150,000 cash dividend to its shareholders. The corporation cannot deduct this payment on its corporate income tax return.

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

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

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

In terms of dispersal of ownership, corporations are classified as either closely held or publicly held.

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

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

The burden of corporate taxation is often borne by corporate shareholders, customers, employees, and suppliers.

The corporate alternative minimum tax is designed to insure that corporations with substantial economic income will pay their fair share of the federal tax burden.

The corporate characteristic of limited liability is more important to the shareholders than the characteristic of centralized management.

The domestic production activities deduction is a permanent book/tax difference.

The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket.

The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income.

The rate schedule for determining the regular tax liability of a corporation includes rates ranging from 15% to 39%.

The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement.

The taxable income earned by a personal service corporation is taxed at a flat rate of 35%.

Ch. 9: Mr. Lexon owns investment property with a $719,000 basis. If the property is worth only $500,000, Mr. Lexon would prefer a taxable disposition of the property over a like-kind exchange. True or False

TRUE A like-kind exchange would result in deferral of Mr. Lexon's recognition (and deduction) of a loss.

Which of the following statements regarding the flow-through of ordinary partnership income to the partners is false?

Tax on partnership ordinary income is computed on Form 1065, then allocated to and paid by the partners.

Which of the following is NOT a potential limit on the amount of QBI deduction?

Taxable income (before QBI deduction) in excess of $326,600 (MFJ) or $163,300 (all others)

Teco's realized gain is $26,100 and recognized gain is -0-. MW's realized gain is $59,400 and recognized gain is $7,500. Teco's basis in its newly acquired asset is $61,400. Correct! MW's basis in its newly acquired asset is $35,600. MW's basis is $28,100.

Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Which of the following statements is true? a. The FMV of Rhea's 180 shares is $180,000 b. Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR immediately after the exchange c. LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets d. None of these choices are true

The FMV of Rhea's 180 shares is $180,000

The FMV of Rhea's 180 shares is $180,000. The exchange is nontaxable to both shareholders because in the aggregate they own 80% or more (100%) of LooNR's stock immediately after the exchange.

The FMV of Rhea's 180 shares is $180,000. The exchange is nontaxable to both shareholders because in the aggregate they own 80% or more (100%) of LooNR's stock immediately after the exchange. Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR immediately after the exchange. LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets. None of the above is true.

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true?

The IRS has the right to reallocate income from the transaction to prevent distortion.

Assume an S Corp owner was not able to take a loss deduction last year because basis in the S Corp stock had been reduced to $0. Which of the following would NOT enable the owner to deduct the loss this year?

The S Corp takes out a loan from the bank

Which of the following statements regarding sole proprietorships is false? a. A sole proprietorship has no legal identity separate from that of its owner b. Sole proprietorships are the most common form of business entity in the U.S c. The cash flow generated by a sole proprietorship belongs to the owner d. The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner

The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner

Which of the following situations would not violate the requirements for a corporation to elect S corporation status?

The corporation issues voting common stock to some shareholders and nonvoting common stock to other shareholders.

In which of the following is NOT a tax provision we have previously discussed that is still applicable to the taxation of flow through entities?

The dividends received deduction

Which of the following statements regarding the home office deduction is true? a. In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers b. A home office deduction is not allowed for using the home office for administrative or management activities only c. The home office deduction is limited to the taxable income of the business before the deduction d. A depreciation deduction is not allowed for a home office

The home office deduction is limited to the taxable income of the business before the deduction

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

The home office deduction is limited to the taxable income of the business before the deduction.

Mr. Eddy loaned his solely-owned corporation $3,000,000. The corporation paid a market rate of interest annually. Upon audit, the IRS reclassified some of the debt as equity. Which of the following statements is true? a. The interest paid by the corporation on the reclassified amount is treated as a dividend b. The taxable income of the corporation should stay the same c. Mr. Eddy's taxable income will increase by the amount of the reclassified debt d. None of these statements are true

The interest paid by the corporation on the reclassified amount is treated as a dividend

Which of the following is a primary legal characteristic of the corporate form of business? a. The management of the business is centered in a Board of Directors elected by the shareholders b. A shareholder must seek permission to sell his stock c. The life of the corporation will terminate when a majority of the shareholders die or cease to exist d. A shareholder is personally liable for the debts of the corporation

The management of the business is centered in a Board of Directors elected by the shareholders

G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false? a. The old asset's FMV is $150,000 b. If the exchange is nontaxable, G&G's recognized gain is -0- c. If the exchange is nontaxable, G&G's tax basis in the new asset is $130,300 d. None of these statements are false

The old asset's FMV is $150,000 *NOTE: The old asset's FMV is $130,000.

G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false?

The old asset's FMV is $150,000. The old asset's FMV is $130,000.

G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false?

The old asset's FMV is $150,000. The old asset's FMV is $130,000.

Which of the following statements about the transfer of debt in a like-kind exchange is false?

The party relieved of debt treats the relief as boot received. The party assuming debt treats the assumption as boot paid. Correct! If both properties in the exchange are subject to debt, both parties will be treated as receiving boot. If both properties are subject to debt, only the party with net relief of debt is treated as receiving boot. None of the above is false.

Which of the following statements about boot included in a nontaxable exchange is false? a. The purpose of boot is to equalize the values of the exchanged properties b. The payment of boot triggers recognition of realized gain to the payer c. The receipt of boot triggers recognition of realized gain to the recipient d. The receipt of boot does not trigger recognition of realized loss to the recipient

The payment of boot triggers recognition of realized gain to the payer

Which of the following statements about the inclusion of boot in a nontaxable exchange is false?

The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged. The purpose of including boot is to equalize the FMV of the properties exchanged.

Which of the following statements about the inclusion of boot in a nontaxable exchange is false?

The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged. **The purpose of including boot is to equalize the FMV of the properties exchanged.

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

The receipt has no effect on current year taxable income.

Lenoci Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Which of the following statements is true?

The sale results in a $53,487 favorable temporary book/tax difference. Correct! The sale results in a $53,487 unfavorable temporary book/tax difference. The sale results in a $53,487 unfavorable permanent book/tax difference. None of the above is true.

The sale results in a $53,487 unfavorable temporary book/tax difference.

Which of the following accurately describes the taxation of S corporation items allocated to a shareholder?

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.

Which of the following is NOT a commonality across nontaxable exchanges?

The transaction often gives rise to a permanent book-tax difference

Which of the following statements about the uniform capitalization (unicap) rules is false?

The unicap rules apply to all taxpayers with inventory, regardless of size.

Which of the following statements regarding the calculation of federal payroll taxes is false?

Total federal employee payroll tax is 7.65 percent of annual compensation, regardless of the amount of such compensation.

1. Chapter 10: Aggie Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year. True of False

True

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

True

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

True

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

True

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

True

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

True

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

True

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

True

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

True

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

True

All owners of a general partnership have unlimited personal liability for the debts of the entity.

True

An affiliated group can file a consolidated tax return, and a net loss guaranteed by one member can offset taxable income generated by other members. T/F

True

An annual deduction for a charitable contribution is limited to 10% of taxable income before the deduction. T/F

True

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

True

Chapter 9: A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized. T or F

True

Chapter 9: Mr. Jacob owns investment property with a $1,000,000 basis. If the property is worth only $600,000, Mr. Jacob would prefer a taxable disposition of the property over a like- kind exchange. A) True B) False

True

Corporations cannot be shareholders in a Subchapter S corporation. T/F

True

Corporations cannot be shareholders in an S corporation.

True

For partnerships, you have to file an annual form 1065. T/F

True

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

True

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

True

Limited liability companies (LLC), like partnerships, have income "flow through" to individual partners, and thus, LLC's are not taxed. Additionally, advantages include limited liability and ownership by "members." T/F

True

Limited partners are prohibited by state law from becoming actively involved in the day-to-day operations of the partnership.

True

Members of LLC's include individuals, partnerships, corporations, and other LLC's. T/F

True

Partners include their share of income on their respective returns. In other words, partnerships are "pass through entities." T/F

True

Subchapter S corporations (S corps) have a limited liability, are "pass through" entities, and are not taxed. T/F

True

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

True

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

True

The domestic production activities deduction is a permanent book/tax difference. T/F

True

The taxable income earned by a personal service corporation is taxed at a flat rate of 35%. T/F

True

To compute corporate taxable income, use form 1120, and calculate Gross income less Allowable deductions. T/F

True

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

True

Which of the following are business characteristics of a sole proprietorship?

Unincorporated business No legal identity separate from its owners

Warsham Inc. sold land with a $300,000 basis to Sara Phillips for $117,000 cash. Sara owns 68 percent of Warsham's outstanding stock. Which of the following statements is true?

Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return.

Wheel, Axle, and Trunk are an affiliated group.

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

A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income? A. Schedule M-1 B. Schedule M-2 C. Schedule M-3 D. Schedule M-4

Chapter 10: Jacob and Jordan have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders: A.If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Jacob B.Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss. C. Jacob and Jordan must each be allocated $50,000 of the operating loss D. The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.

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 ______.

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

Which of the following statements regarding Schedule M-3 is false? A. The IRS developed Schedule M-3 with the goal of increasing transparency between reported net income for financial accounting purposes and reported net income for tax purposes. B. Schedule M-3 reports the temporary versus permanent characterization of book-tax differences. C. Part I of Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group. D. Schedule M-3 replaces Schedule M-1 for all tax years beginning after December 31, 2004.

Which of the following statements regarding the tax treatment of corporate dividends is true? A. All shareholders receiving dividend payments from U.S. corporations are entitled to a dividends-received deduction. B. Dividends-received from foreign corporations are eligible for the dividends-received deduction. C. Corporations are entitled to deduct dividend payments to shareholders in calculating corporate taxable income. D. Dividend payments between members of an affiliated group of corporations filing a consolidated return are tax exempt.

A partnership agreement ______.

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

Taxable income =

gross income - allowable deductions

The employee portion of payroll tax is owed ______.

in addition to the employer portion

An LLC member actively involved in LLC management ______.

is protected from liability for LLC debts

The QBI deduction ______.

lowers the effective tax rate on business profit earned by sole proprietorships and passthrough entities

none First year $213,778 ($1,496,000 × 0.1429); second year $366,370 ($1,496,000 × 0.2449)

Which of the following is a capital asset?

none of above

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

Sole proprietors are not considered employees of their business and are not liable for payroll taxes. Instead, sole proprietors pay _____-_____ tax on their business profits.

self employment

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

sole proprietorship

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

Chapter 9: Gain realized on a property exchange that is not recognized is actually deferred rather than nontaxable. A) True B) False

true

Chapter 9: When unrelated parties agree to an exchange of non-cash properties, the economic presumption is that the properties have the same fair market value. A) True B) False

true

Tax basis =

unrecovered dollars represented by an asset - Most cases, initial basis of an asset is cost (FMV)

Chapter 10: Jacob and Jordan formed a partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Jacob's tax basis in his partnership interest? A. $600,000 B. $800,000 C. $1,200,000 D. $1,400,000

$1,200,00

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

$12,162

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Babex OMG FMV $1,000,000 $825,000 Adjusted tax basis 768,000 514,500 Mortgage 175,000 -0- Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex.

$175,000 gain recognized; $514,500 basis in Babex property. Correct! No gain recognized; $689,500 basis in Babex property. OMG treats the $175,000 assumption of debt as boot paid. Therefore, its basis in the Babex property is $689,500 ($514,500 substituted basis + $175,000 boot). No gain recognized; $514,500 basis in Babex property. None of the choices are correct

BugLess Inc, a calendar year, accrual basis corporation, provides pest extermination services to its customers. In October 2019, BugLess contracted with Mr. Cass to provide monthly service calls for 24 months. Each service call costs $60, and Mr. Cass prepaid $1,440 when he signed the contract. BugLess made three service calls to Mr. Cass' home in 2019. As a result of the contract, BugLess should report:

$180 taxable income in 2019, and $1,260 taxable income in 2020.

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

$2,000 gain Her basis prior to the sale is $30,000 = $25,000 + $10,000 − $5,000. Her amount realized on the sale is $32,000 = $22,000 cash + $10,000 relief of liabilities.

$20,000 realized gain; $0 recognized gain $22,000 realized gain; $0 recognized gain Correct! $22,000 realized gain; $2,000 recognized gain $2,000 realized gain; $2,000 recognized gain

R&T Inc. made the following sales of capital assets this year. Tax Basis Sale Price Asset 1 $60,000 $68,100 Asset 2 250,000 263,500 Asset 3 50,000 22,400 What is the effect of the three sales on R&T's taxable income this year?

$21,600 increase $12,900 increase Correct! No effect Because R&T recognized $21,600 total capital gain on the sales of assets 1 and 2, it can deduct $21,600 of its $27,600 capital loss on the sale of asset None of the choices are correct

Mrs. Stile owns investment land subject to a $600,000 nonrecourse mortgage. Her basis in the land is $212,000, and the land's appraised FMV is $575,000. Mrs. Stile is considering defaulting on the mortgage and allowing the creditor to foreclose. If Mrs. Stile disposes of the land through a foreclosure, she will recognize:

$212,000 capital loss $212,000 ordinary abandonment loss $363,000 capital gain Correct! $388,000 capital gain The foreclosure is treated as a sale of the land for an amount realized equal to the $600,000 nonrecourse mortgage.

Grantly Seafood is a calendar year taxpayer. In 2019, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2019, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2020, Grantly purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in the new boat.

$215,500 recognized gain; $750,000 basis in the boat Grantly's realized gain is $215,500 ($1,000,000 − $784,500 adjusted basis). Because Grantly failed to reinvest $250,000 of the reimbursement in replacement property, it must recognize the entire gain.

$228,500 gain realized and recognized; $340,200 basis in M&W shares Because Mrs. Brinkley does not own at least 80% of the outstanding Brinkley stock immediately after the exchange, her exchange of property for stock is taxable, and she has a cost basis in her Brinkley shares.

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

$24,325

On January 21, 2008, Andy purchased 350 shares of Baker common stock for $24,500. On November 13, 2019, he sold the 350 shares for $7,250. On December 1, 2019, Andy purchased 350 shares of Baker common stock for $8,000. What is Andy's basis in these shares?

$25,250 Andy's basis in the new shares equals their cost of $8,000 plus the deferred loss from the wash sale ($17,250 = $7,250 − $24,500).

Rebecca has a qualifying home office. The room is 600 square feet and the entire house is 3,000 square feet. Use the following information to determine her allowable home office deduction: Revenue from legal practice$160,500 Expenses from legal practice 157,000 Expenses from home (100%): Home mortgage interest 10,000 Property taxes 3,300 Homeowner's insurance 2,000 Utilities 1,200 Cost to convert a patio into a sunroom 5,000 Depreciation on office portion of home 800

$3,500 home office deduction. $10,000 + $3,300 + $2,000 + $1,200 = $16,500. $16,500 × 20% = $3,300. $3,300 + $800 depreciation = $4,100; however, there is only $3,500 of income to offset the home office deduction.

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

Toro Inc. has average gross receipts of $30 million annually. This year, Toro incurred $5 million of net business interest and has adjusted taxable income of $12 million. Toro's current deduction for business interest is:

$3.6 million

$3.6 million Toro's deduction for business interest is limited to 30% of adjusted taxable income ($12 million × 30% = $3.6 million).

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged. PerryDally FMV$500,000 $530,000 Adjusted tax basis 410,000 283,000 Mortgage 70,000 100,000 Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

$30,000 gain recognized; $283,000 basis in the Perry property. Dally treats its $30,000 net relief of debt as boot received.

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

$32,500 Carryforward loss ($7,000) + $41,000 − $1,500 = $32,500.

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of realty. Based only on these items, compute Airfreight's taxable income.

$345,000

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

$35,000 $5,000 cash contribution plus 50 percent share of partnership debt.

$36,400 loss recognized; $136,200 basis The wash sale rule does not apply because Ms. Ellis waited for more than 30 days to repurchase her Omer stock.

$36,400 loss recognized; $136,200 basis The wash sale rule does not apply because Ms. Ellis waited for more than 30 days to repurchase her Omer stock

$388,000 capital gain

Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: Wave Surf Ordinary operating income (loss) $500,000 $(100,000) Capital gain (loss) (5,000) 7,000 Section 1231 gain (loss) 3,000 (10,000)

$395,000. $500,000 − $100,000 + ($7,000 − $5,000) + ($3,000 − $10,000) Wave's capital loss can be deducted against Surf's capital gain. The consolidated Section 1231 loss is fully deductible.

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

Noah's basis in Rio Partnership at the beginning of the current year was $45,000. His Schedule K-1 for the year reported $(70,000) ordinary loss and $3,000 dividend income. How much of the reported loss can Noah deduct this year under the basis limitation?

$48,000

Molton Inc. made a $60,000 cash expenditure this year (year 0). Use Appendix A (Links to an external site.)of your textbook provided to compute the after-tax cost if Molton must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Molton has a 21% marginal tax rate and uses a 7% discount rate.

$48,206

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

JebSim Inc. was organized on June 1 and began business on August 10. JebSim elected a calendar year for tax purposes. The corporation incurred $25,160 of legal and other professional fees attributable to its formation. How much of these costs can JebSim deduct on its first tax return?

$5,560 JebSim can deduct $5,000 of the organizational costs and is allowed a $560 amortization deduction ([$20,160 capitalized cost/180 months] × 5 months beginning in August).

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

$50,000 For a general partner, tax basis includes a pro rata share of all debt. Therefore, John gets basis for his cash and 50% of the debt.

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? A. $50,000 ordinary income B. $50,000 ordinary business income and $22,000 guaranteed payment C. $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain D. All income reported on a general partner's Schedule K-1 are subject to self-employment tax

$50,000 ordinary business income and $22,000 guaranteed payment

Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? a. $50,000 ordinary income b. $50,000 ordinary business income and $22,000 guaranteed payment c. $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain d. All income reported on a general partner's Schedule K-1 are subject to self-employment tax

$50,000 ordinary business income and $22,000 guaranteed payment

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

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

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

Funky Chicken is a calendar year S corporation with the following current year information: Operating loss$(300,000) Liabilities: Note payable, Big Bank 30,000 Note payable, June Cross 20,000 On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? Assume the excess business loss limitation does not apply.

$65,000 S corporation debt is included in basis only if loaned directly by the shareholder. So June gets the full $20,000 she loaned as basis, but none of the bank loan.

Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest? A. $500,000 B. $1,200,000 C. $850,000 D. $650,000

$650,000

Delta Inc. generated $668,200 ordinary income from operations this year. It also recognized $3,910 recaptured ordinary income, $5,000 net Section 1231 gain, and $14,600 net capital loss on the sale of assets. Compute Delta's taxable income.

$672,110

$672,110 Only $5,000 of the net capital loss is deductible against the net Section 1231 gain. $677,100 $668,200 $697,700

Forward Inc.'s book income of $739,000 includes a net long-term capital loss of $42,000 and charitable contribution of $170,000. Taxable income shown on the Schedule M-1 would be:

$855,900 $855,900 = ($739,000 + $42,000 + $170,000) − 10% × ($739,000 + $42,000 + $170,000).

Scott Howell received a salary of $135,000. The social security base amount for 2018 was $128,400. How much payroll tax should have been withheld from Scott's salary for 2018? A. $0 B. $10,328 C. $9,823 D. $9,919

$9,919

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Sales revenue$500,000 Interest income 6,000 Long-term capital gain 10,000 Cost of goods sold (250,000) Salary and wages (75,000) Other operating expenses (55,000) Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year.

$93,000 $50,000 + $60,000 + $3,000 + $5,000 − $25,000.

Chapter 10: During 2018, Jacob received a salary of $135,000. The social security base amount for 2018 was $128,400. How much payroll tax should have been withheld from Jacob's salary for 2018? A. $0 B. $9,823 C. $9,919 D. $10,328

$9919

Amount realized

- Amount realized from a disposition = cash received + FMV of any property received, including buyer's note + amount of any debt relief - selling costs such as sales commissions, broker fees

Deductible expense or capitalized cost?

- Capitalization: an expenditure is recorded as an asset on the balance sheet rather than as a current expense - No expenditure is deductible unless the IRC authorizes the deduction - Supreme court said "an income tax deduction is a matter of legislative grace" - IRC allow firms to deduct all "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business"

Substituted basis rule

- Causes the unrecognized gain or loss on a nontaxable exchange to be embedded in the basis of qualifying property acquired - Deferred gain or loss is embedded in the tax basis of the qualifying property received - If no boot is involved, tax basis equals: - Basis of property surrendered - FMV of property received - deferred gain or + deferred loss

Depreciation recapture

- Changes the character of gain on the sale of section 1231 property - Does not create additional gain - 3 components - Full recapture (section 1231 recapture): depreciation recapture equals the lesser of the gain recognized or the accumulated depreciation or amortization - Prevents conversion of ordinary income to capital gain - Partial recapture: accelerated depreciation in excess of straight line depreciation is recaptured - 20% recapture: corporate sellers must recapture 20% of the gain that would be ordinary income under a full recapture rule

Limitations on corporations using cash method

- Corporations that average more than $25 million in annual gross receipts can't use the cash method - Personal service corporations (providing professional services much medical, legal, and accounting services) may use the cash method

Depletion

- Cost depletion: method for recovering a firm's investment in an exhaustible natural resource - Cost depletion = units of production sold during the year // Estimated total units in ground at beginning of the year X unrecovered basis in mine/well - Percentage depletion: annual deduction based on the gross income generated by a depletable property multiplied by an arbitrary depletion rate

cash method deductions

- Deduct expenses when paid, a check is paid on the date it is mailed - When tax savings from the deduction are greater than the opportunity cost of early payment firm should pay expense early

Favorable/unfavorable differences

- Difference that causes an excess of book income over taxable income is favorable - Difference that causes an excess of taxable income over book income is unfavorable

Net operating loss (NOL)

- Excess of deductible business expenses over gross income - Yields no current tax savings but may be deductible in a later tax year - Can be carried forward indefinitely - Generates only future tax savings - Deduction in future years is limited to 80% of taxable income before the NOL deduction

Acquisition intangibles

- Firm that purchases an entire business for a lump sum price must allocate the cost to both tangible and intangible assets - Cost allocation based on FMV - Capital cost of most acquisition intangibles is amortized over 15 years

COGS

- Formula: Beginning inventory + Capitalized costs Inventory available for sale - Ending inventory = COGS - Firms must use a costing convention that is not based on the physical movement of inventory through the system, 2 most commonly used are LIFO and FIFO

Realized gain or loss

- Formula: Amount realized on disposition - adjusted tax basis of property = realized gain/loss - Realized gains or losses on disposition are recognized unless there is a specific exception (in chapter 9)

Book-tax differences

- GAAP seeks to protect shareholders and creditors (do not overstate book income) - Tax law seeks to protect government revenues (do not understate taxable income)

Section 482

- Grants IRS broad powers to "distribute, apportion, or allocate income" among businesses to clearly reflect the income of each

Capitalized costs

- If an expenditure creates or enhances an identifiable asset with a useful life substantially beyond the current year, the expenditure must be capitalized - Some capitalized costs can be recovered through depreciation, amortization, or depletion deductions - If not recovered through there are recovered only on disposition of the asset

Section 1231 assets

- If the combined result of all sales and exchanges of Section 1231 assets during the year is a net loss, the loss is treated as an ordinary loss - If the result is a net gain, the gain is treated as capital gain - Best of both worlds ordinary loss or capital gain on sale of operating assets - Tax result of any Section 1231 asset cannot be fully determined until year end, after application of netting process.

Involuntary conversion

- Includes theft or vandalism, government claim of property, natural disasters - If insurance proceeds exceed basis of converted property, taxpayer may elect to defer gain recognition - If basis of converted property exceeds insurance proceeds, taxpayer recognizes ordinary loss - A taxpayer who realizes a gain on the involuntary conversion of property can elect to defer the gain if 2 conditions are met: 1. Taxpayer must reinvest the amount realized on the conversion in property similar or related in service or use 2. Replacement of involuntary converted property must occur within the 2 taxable years following the year in which the conversion took place

Capital loss limitation

- Individuals: - Can deduct $3,000 of net loss per year against ordinary income - Carryforward remaining loss indefinitely - Corporations: - No deduction for net loss - Carryback 3 years and forward 5 years against capital gains

Adjusted basis

- Initial basis reduced by depreciation, amortization, or depletion deductions UNICAP rules - UNICAP rule: firms must capitalize all direct costs of manufacturing, purchasing, or storing inventory and any indirect costs that "benefit or are incurred by reason of the performance of production or resale activities"

Cash method deductions - inventory

- Inventory must be accounted for on the accrual method, even for cash basis taxpayers - Hybrid method of accounting - Purchases and sales of inventories are accounted for under the accrual method and all other transactions are accounted for under the cash method

Related party losses

- Losses realized on sales of property between related parties are not recognized - Related parties include: - Family members - An individual and a corp in which the individual owns more than 50% of stock - 2 corporations owned by the same shareholders

Prepaid income (temporary difference)

- May be taxed when received even though it has not been earned - Not included in book income - Ex: prepaid rent and prepaid interest - Unfavorable difference resulting in a deferred tax asset - Example: Acme, an accrual basis, calendar year taxpayer, received a $12,000 prepayment of four months' rent from a tenant. Rent was for December of this year and January through March of the next year - Reports $3,000 rent income - Reports $12,000 taxable income

Partnership formations

- Neither the partners or the partnership recognizes gain or loss when property is exchanged for an equity interest in the partnership

Like kind exchanges

- No gain or loss is recognized on the exchange of business or investment real property for property of like kind - Like kind property: virtually all types of business and investment real estate - Any swap of realty for realty can be structured as a nontaxable exchange, other than real property held primarily for sale

Corporate formations

- No gain or loss is recognized when property is transferred to a corporation solely in exchange for that corporation's stock if the transferors of property are in control of the corporation immediately after the exchange

Intangible assets

- No physical substance (leases, patents) - Amortized on a straight line method over determinable life - No determinable life are not amortizable (securities and partnership interests)

Tax neutrality

- Nontaxable exchange provision makes the tax law natural with respect to certain business and investment decisions

Wash sales

- Nontypical exchange provision because it defers only the recognition of losses realized on certain sales of marketable securities - Realized gains are not deferred - 30 days before or 30 days after the sale

Temporary book-tax differences

- Occur when an item of income or expense is taken into account in a different year (or years) for book purposes than for tax purposes - Examples: - Depreciation and amortization - Receipt of prepaid income - Accrued expenses that fail the all events test - Bad debts (allowance vs. direct write off)

Depreciation

- Only applies to assets that: - Lose value over time because of wear and tear, physical deterioration, or obsolescence - Have a reasonably ascertainable useful life - Under MACRS, the estimated useful life of an asset is irrelevant in computing tax depreciation

Accrued expenses (temporary difference)

- Only deductible if it passes the all events test: - All events that establish the liability have occurred - Amount must be determinable with reasonable accuracy - Economic performance with respect to the liability has occurred

One year rule for prepaid service income

- Prepayment for services rendered in the year of receipt is taxable in that year - Remaining payment is taxable in the following year

Cost basis

- Price paid to acquire the asset - Includes any sales tax paid by the purchaser and any incidental costs related to putting the asset into production - Cost basis of asset equals the FMV of the property surrendered or the services performed - When a firm acquires an asset through debt financing, the cost basis of the asset equals its entire cost

Capital gain/loss

- Results from the exchange of a capital asset - Any gain or loss that does not meet this is an ordinary in character - 2 components: - Transaction resulting in the gain or loss must be a sale or exchange - Asset surrendered must be a capital asset

Permanent book-tax differences

- Results when income or gain is realized for book purposes but never recognized for tax purposes - Do not reverse in future years - Examples: - Tax-exempt interest on state and local bonds - Key-person life insurance premiums and proceeds - Nondeductible meals and entertainment - Political contributions - Fines and penalties

Installment sale method

- Seller does not recognize the entire realized gain in the year of sale; gain recognition is linked to the seller's receipt of cash over the term of the purchaser's note

Accrual method of accounting

- Taxpayers recognize income when the right to the income is fixed and the amount of income can be determined with reasonable accuracy - Taxpayers deduct expenses when all events have occurred that establish the fact of the liability for the expense and the amount of the liability can be determined with reasonable accuracy - Example: If someone has a check in their mailbox at 2019, but does not get it until 2020 when should they recognize the income under cash based? 2019

MACRS

- The general rules for computing depreciation for federal tax purposes - Depreciation - 3, 5, 7, and 10 year recovery period are depreciated using 200% (double) declining-balance method - 15 and 20 year recovery periods are depreciated using 150% declining-balance method - 25, 27.5, 39, and 50 year recovery period must be depreciated using straight line method - For real property, MACRS is an accelerated cost recovery system

Nontaxable exchanges

- Transactions that trigger gain or loss realization but do not result in current recognition of some or all of that gain or loss - Each one is authorized by a provision of the IRC

cash method income

- constructive receipt of income - occurs when taxpayer has unrestricted access to and control of the income even if not in the taxpayers actual possession - no constructive receipt exists if the income is available only on surrender of a valuable right or if there are substantial barriers to receipt - a calendar year, cash basis firm wants to defer income from this year to next year. can it defer income recognition if it holds the checks received from customers in December in its vault and does not cash them until January. - no the income has been constructively received

taxable year

- generally the 12 month period corresponding to a firm's fiscal year - individuals usually use a calendar year - firms generally choose a tax year that reflects their annual operating cycle - new business establishes its taxable year by filing an initial tax return based on such year - changing tax years requires IRS permission - 1st return after the change may reflect a short period of less than 12 months

cash method

- gross income includes cash or property actually received during the tax year - regardless of when the sale occurred or services were provided - deductions usually taken in the year cash or property is paid - regardless of when the expense was incurred - ex) CPA receives free automotive repair work in exchange for preparing mechanic's tax return - does the CPA recognize income under the accrual has been earned? yes, services have been provided and income has been earned - what if CPA uses the cash method of accounting? yes, cash method income includes the receipt of non-cash goods or services

constructive receipt

- income is received when a person has unrestricted access to and control of the income, even if it is not in the person's actual possession - applies when income is credited to a taxpayer's account, set apart for him, or otherwise made available so the taxpayer can draw on it during the taxable year

tax methods of accounting

- overall tax accounting method determines the year in which the taxpayer recognizes items of income, gain, deduction, and loss - IRC permits firms to use the following accounting methods -cash -accrual -combined (hybrid)

Sonic Corporation has a 21% marginal tax rate and received $10,000 of dividends from Roller, Inc., a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is:

10.5% Because of the 50% DRD, Sonic's taxable income includes only $5,000 of the $10,000 Roller dividend. The tax on $5,000 is $1,050, and $1,050/$10,000 equals a 10.5% effective tax rate.

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

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

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

Giga Company paid $50,000 in salary to Mary in 2020. The employee payroll tax owed by Mary on this salary is $_____.

3,825

Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%. a. 21% b. 58% c. 36.8% d. 37%

37% *NOTE: There is only one level of tax

Which of the following conditions would prevent a corporation from successfully electing S status?

51% of shareholders agree to making the S election

5560

In which of the following is NOT a percentage used to calculate the dividends received deduction?

75%

Schedule K is the partners' distributive share items, attached to individual tax returns, along with Schedule K-1, which =

= a partner's share of income, deductions, etc.

Assuming that the corporation has a 34% MTR, which of the following statements is true? A. Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $31,680. B. Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100,000. The after-tax cost of the $7,000 dividend paid was $4,620. C. Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100. The after-tax cost of the $7,000 dividend paid was $2,380. D. Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $16,320.

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders: A. Grant and Amy must each be allocated $50,000 of the operating loss. B. If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant. C. Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss. D. The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.

On January 1, Leon purchased a 10% stock interest in an S corporation for $30,000. He also loaned the S corporation $5,000 in exchange for a written promissory note. The S corporation generated a $330,000 operating loss for the year. Leon deducted his 10% share of the loss, reducing his tax basis in his stock to zero, and his tax basis in the note to $2,000. The following year, the S corporation repaid the note before Leon restored his basis in the note. What are the consequences of the loan repayment to Leon? A. $3,000 capital gain B. $3,000 ordinary income C. $2,000 capital gain D. $2,000 ordinary income

Which of the following is a primary legal characteristic of the corporate form of business? A. The management of the business is centered in a Board of Directors elected by the shareholders. B. A shareholder must seek permission to sell his stock. C. The life of the corporation will terminate when a majority of the shareholders die or cease to exist. D. A shareholder is personally liable for the debts of the corporation.

Which of the following statements about the calculation of alternative minimum taxable income is true? A. Excess percentage depletion is a positive adjustment to AMTI. B. The AMT net operating loss can reduce AMTI to zero. C. The AMTI exemption for all corporations is $40,000. D. The minimum tax credit can be carried back two years.

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income? A. $3,300 net capital gain; $12,000 deductible net Section 1231 loss B. $4,500 net capital gain; $12,000 deductible net Section 1231 loss C. $4,500 net capital gain; $15,000 deductible net Section 1231 loss D. $3,300 net capital gain; -0- deductible net Section 1231 loss

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 statements concerning partnerships is false? a. A properly-drafted partnership agreement is crucial b. A general partner's basis in a partnership includes his share of partnership debt c. Limited partnerships must have at least one general partner d. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed

A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed

Which of the following statements concerning partnerships is false ? A. A properly-drafted partnership agreement is crucial. B. A general partner's basis in a partnership includes his share of partnership debt. C. Limited partnerships must have at least one general partner. D. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.

Which of the following situations does NOT give rise to a deferral of a gain or loss recognition for tax purposes?

A property is destroyed by a tornado, and insurance proceeds are less than the adjusted basis of the property

A. $1,200,000

A. $1,440 taxable income in 2019. B. $180 taxable income in 2019, $720 taxable income in 2020, and $540 taxable income in 2021. C. $180 taxable income in 2019, and $1,260 taxable income in 2020. D. None of the above C IS THE ANSWER Under the special one-year deferral method of accounting for prepaid service income, BugLess recognizes the amount of prepayment earned in 2019 and defers recognition of the remaining prepayment until 2020.

Kelly received a $60,000 salary during 2010. Her federal income tax withholding rate was 20%, and the Social Security base amount for 2011 was $106,800. What is the total amount that her employer should have withheld in 2011? A. $15,390 B. $16,590 C. $15,979 D. $6,849

A. $15,390

On January 1, Leon purchased a 10% stock interest in an S corporation for $30,000. He also loaned the S corporation $5,000 in exchange for a written promissory note. The S corporation generated a $330,000 operating loss for the year. Leon deducted his 10% share of the loss, reducing his tax basis in his stock to zero, and his tax basis in the note to $2,000. The following year, the S corporation repaid the note before Leon restored his basis in the note. What are the consequences of the loan repayment to Leon? A. $3,000 capital gain B. $3,000 ordinary income C. $2,000 capital gain D. $2,000 ordinary income

A. $3,000 capital gain

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income? A. $3,300 net capital gain; $12,000 deductible net Section 1231 loss B. $4,500 net capital gain; $12,000 deductible net Section 1231 loss C. $4,500 net capital gain; $15,000 deductible net Section 1231 loss D. $3,300 net capital gain; -0- deductible net Section 1231 loss

A. $3,300 net capital gain; $12,000 deductible net Section 1231 loss

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year. A. $93,000 B. $118,000 C. $50,000 D. $85,000

A. $93,000

On December 12, 2019, Hook Company, a calendar year, cash basis business, mailed a $5,600 bill to Mrs. Gilder for professional services rendered during the month of November. Mrs. Gilder dropped off her $5,600 check at Hook's office on December 28, but the company secretary did not deposit the check in Hook's bank account until January 3. Which of the following statements is true? *********

A. According to the constructive receipt doctrine, Hook must recognize $5,600 income in 2019. B. According to the substance over form doctrine, Hook does not recognize $5,600 income until 2020. C. As a cash basis taxpayer, Hook does not recognize $5,600 income until 2020. D. As a cash basis taxpayer, Hook can elect to recognize $5,600 income in either 2019 or 2020.

If the partnership has $100,000 of ordinary income (net of credits and deductions) and the agreement specifies Partner A will be allocated 60% of ordinary income (on Schedule K-1), and the initial tax basis is $1M for Partner A, and Partner A received a cash distribution of $200,000, then at year-end what is the adjusted basis of A's partnership basis?

$1M + (100,000 * 0.6) = 1,060,000 1,060,000 - 200,000 = 860,000 Adjusted basis: $860,000

Separately stated items are...

...reported on Schedule K of the form 1065 and allocated to the partners for inclusion on their partner return. e.g. gains/loss on sale of securities, charitable donations

10.5% *NOTE: Because of the 50% DRD, Sonic's taxable income includes only $5,000 of the $10,000 Roller dividend. The tax on $5,000 is $1,050, and $1,050/$10,000 equals a 10.5% effective tax rate.

Which of the following statements regarding Schedule M-1 is true? a. The corporate dividends-received deduction is reported on Line 8 of Schedule M-1 b. A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1 c. Line 2 of schedule M-1 should reflect the corporation's actual federal income tax liability for the current year d. A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would not report that gain on Schedule M-1

A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1

XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false? a. All of the corporation's shareholders must consent to make an S election b. If a shareholder in an S corporation sells his shares of stock to a nonresident alien, the election will terminate c. If an S corporation loses its election, the shareholders cannot make a new election for five years without IRS consent d. All of the shareholders must consent to voluntarily terminating an S election

All of the shareholders must consent to voluntarily terminating an S election.

Marcia is a shareholder in an S corporation and also works for the corporation. This year, her share of ordinary income was $250,000 and her compensation was $100,000. Which of the following accurately describes her tax consequences from these earnings? a. Both the ordinary income and the compensation are subject to income tax and self-employment tax b. Both the ordinary income and the compensation are subject to income tax and the compensation is subject to payroll tax c. Both the ordinary income and the compensation are subject to income tax and the compensation is subject to self-employment tax d. The ordinary income is subject to income and self-employment tax; the compensation is subject to income and payroll tax

Both the ordinary income and the compensation are subject to income tax and the compensation is subject to payroll tax

Which of the following statements about like-kind exchanges is false? a. Like-kind property must be held for either business or investment use b. Businesses cannot engage in like-kind exchanges of inventory c. Businesses cannot engage in like-kind exchanges of intangible assets d. Business cannot exchange undeveloped land for developed real estate

Business cannot exchange undeveloped land for developed real estate

Ordinary income (or loss) = ?

Business operations that generate income and deductions

Two types of corporations exist: A) The closely held corporation and the distantly held corporation B) The privately held corporation and the publicly held corporation C) The closely held corporation and the publicly held corporation D) None of the above

Brace, Inc. owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is: A. $53,000 B. $58.000 C. $50,000 D. $52,000

Partnerships: A. are a legal entity and have title to property. B. are an accounting entity and have financial records. C. A and B D. none of the above

When a partnership issues a Schedule K-1 to each partner, it: A. lists the partner's share of income, credits, and deductions. B. tells each partner where each item appear on their form 1040 individual income tax return by schedule and line number. C. both A and B D. none of the above

Steve and Jim formed a partnership on January 1 with cash contributions of $600,000 and $400,000, respectively. The partners agree to share profits and losses equally. The partnership immediately borrowed $200,000. What is Jim's tax basis in his partnership interest? A. $300,000 B. $400,000 C. $500,000 D. $600,000

C. $500,000 = (400K + (200K/2)) = (400K + 100K)

Partner's initial tax basis = ?

Cash given up + Adjusted basis of property transferred. Get partnership interest as defined by the partnership agreement.

For tax years beginning after December 31, 2015, which of the following statements regarding corporate tax filing requirements is false for corporations with a calendar year end? a. Corporations must file their annual federal income tax returns by the 15th day of the fourth month following the close of the taxable year b. Calendar year corporations may request an automatic five-month extension of time to file their federal income tax returns c. An extension of the income tax filing deadline does not extend the payment deadline for any balance of tax due for the taxable year d. Corporations must file their annual federal income tax returns by 15th day of the third month following the close of the taxable year

Corporations must file their annual federal income tax returns by 15th day of the third month following the close of the taxable year

A limited partner: A. is only liable to the extent of their capital contributions. B. cannot actively manage or work in the partnership business. C. is limited to being a passive investor. D. all of the above E. none of the above

Hay, Straw and Clover formed the HSC Partnership, agreeing to share profits and losses equally. Clover will manage the business for which he will receive a guaranteed payment of $30,000 per year. Cash receipts and disbursements for the year were as follows: ***Net income from ops (before guaranteed payment): $90,000 ***Guaranteed payment to Clover: $30,000 What is Clover's share of the partnership's ordinary income and guaranteed payment? A. Ordinary income, $30,000; Guaranteed payment, $10,000 B. Ordinary income, $20,000; Guaranteed payment, $10,000 C. Ordinary income, $30,000; Guaranteed payment, $30,000 D. Ordinary income, $20,000; Guaranteed payment, $30,000

D. Ordinary income is $90,000 - 30,000 = $60,000. Clover is allocated 1/3 of the ordinary income and all of the guaranteed payment.

AMT adjustments can only increase a corporation's alternative minimum taxable income. T/F

False

At least three corporations are required to form an affiliated group. T/F

False

General Partners should withhold social security tax on their guaranteed payments. T/F

False

On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable. T/F

False

Subchapter S Corporations must file corporate tax returns and pay any necessary taxes. T/F

False

The dividends-received deduction is equal to 80% of any dividends received by a corporate taxpayer. T/F

False

The shareholders of a Subchapter S corporation must pay self-employment tax on their share of the corporation's ordinary income. T/F

False

A general partner usually cannot be held personally liable for the debts arising from the partnership business. T/F

False All partners have unlimited personal liability.

A publicly held corporation has "buy-sell agreements," which prevent the buyer from selling the closely held stock without the approval of the other shareholders. T/F

False. A closely held corporation has "buy-sell agreements."

For S corps, an owner cannot be an employee. T/F

False. An owner can be an employee, who can be paid a salary (payroll taxes withheld).

For all partners, use different Schedule K's. T/F

False. Use the same Schedule K. There will be a unique Schedule K-1 for the individual partner.

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? a. Fleet, Pete, and Zete are an affiliated group b. Fleet and Zete are an affiliated group c. Fleet and Pete are an affiliated group d. There is no affiliated group here

Fleet and Pete are an affiliated group.

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. and 90% of the stock of Bete, Inc. Bete owns 5% of the stock of Pete and 5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? a. Fleet, Zete, Pete, and Bete are an affiliated group b. Fleet and Zete are an affiliated group c. Fleet and Pete are an affiliated group d. Fleet, Pete, and Bete are an affiliated group

Fleet, Pete, and Bete are an affiliated group

Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders: a. Grant and Amy must each be allocated $50,000 of the operating loss b. If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant c. Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss d. The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation

Grant and Amy must each be allocated $50,000 of the operating loss

Which of the following would not be a successful means of avoiding double tax on the earnings of a closely-held corporation? a. Having a shareholder lend money to the corporation at a reasonable rate of interest b. Having a shareholder lease warehouse space to the corporation at a reasonable rental rate c. Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns d. Having the corporation employ the shareholder at a reasonable compensation

Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns.

Homer currently operates a successful S corporation. He would like to bring his two teenage children into the business. If he gives each child 10% of the stock, which of the following statements is true? a. Since the children did not pay for the stock, Homer will still be taxed on the full income of the corporation under the assignment of income doctrine b. Homer must receive a reasonable salary for any time he spends working on behalf of the business c. Both statements are true d. Neither statement is true

Homer must receive a reasonable salary for any time he spends working on behalf of the business.

Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to Massur Inc. in exchange for Massur common stock. Which of the following statements is false? a. If Vincent does not recognize gain on its exchange of property for stock, Vincent's tax basis in its Massur stock is $973,000 b. If Vincent recognizes gain on its exchange of property for stock, Vincent's tax basis in its Massur stock is $2.3 million c. If Vincent is not in control of Massur immediately after the exchange, both Vincent and Massur must recognize a $1,327,000 gain d. If Vincent is in control of Massur immediately after the exchange, Massur's tax basis in the transferred realty is $973,000

If Vincent is not in control of Massur immediately after the exchange, both Vincent and Massur must recognize a $1,327,000 gain.

Which of the following statements about the transfer of debt in a like-kind exchange is false? a. The party relieved of debt treats the relief as boot received b. The party assuming debt treats the assumption as boot paid c. If both properties in the exchange are subject to debt, both parties will be treated as receiving boot d. None of these choices are false

If both properties in the exchange are subject to debt, both parties will be treated as receiving boot

Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true? a. If the business is a C corporation, it will not owe regular tax liability during the first two years b. If the business is a general partnership, it will owe income tax in Year 2 c. If the business is an S corporation, the Year 1 loss can be allocated entirely to Sandy d. If the business is a C corporation, it will owe income tax in Year 2

If the business is a C corporation, it will owe income tax in Year 2

The three Crosby children intend to form a business. The business will borrow $900,000 from a local bank. Which of the following statements is true? a. Regardless of whether the business is a partnership or an S corporation, the owners will include the bank debt in the tax basis of their ownership interests b. From a liability standpoint, the owners should be indifferent as to whether they are a general partnership or an S corporation c. If the business is an S corporation, the owners can allocate income and losses in any reasonable manner. d. If the business is a partnership the owners can allocate income and losses in any reasonable manner

If the business is a partnership the owners can allocate income and losses in any reasonable manner.

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity? a. C corporation b. S corporation c. Limited partnership d. LLC

Limited partnership

Mr. Weller and the Olson Partnership entered into an exchange of investment real property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of the following statements is true? a. Mr. Weller received $193,000 boot; Olson paid $193,000 boot b. Mr. Weller paid $193,000 boot; Olson received $193,000 boot c. Mr. Weller received $428,000 boot; Olson received $235,000 boot d. Mr. Weller paid $428,000 boot; Olson paid $235,000 boot

Mr. Weller received $193,000 boot; Olson paid $193,000 boot.

Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax? a. None of the items are subject to SE tax because Debbie is a limited partner b. $19,000 ordinary business income c. $19,000 ordinary business income and $2,000 long-term capital gain d. All income reported on a partner's Schedule K-1 are subject to self-employment tax

None of the items are subject to SE tax because Debbie is a limited partner

Which of the following statements about the wash sale rule is false? a. The rule disallows loss recognition but not gain recognition b. The rule applies to both individual and corporate taxpayers c. The rule applies only to sales of marketable securities and not to sales of other types of investment assets d. None of these choices are false

None of these choices are false

Which of the following statements about partnerships is false? a. A partnership is a legal entity that may enter into valid contracts b. Partnerships are unincorporated entities c. Only individuals may be partners in a partnership d. Partnerships are sometimes referred to as passthrough entities since they do not pay federal income tax

Only individuals may be partners in a partnership.

Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true? a. The income from the collection and distribution of food and the income from grocery store are taxable b. No income from either of the activities is taxable c. Only the income from the collection and distribution of food is taxable d. Only the income from the grocery store is taxable

Only the income from the grocery store is taxable

Which of the following items might an IRS agent seek to recharacterize as a constructive dividend? a. Payment of interest expense to a corporate shareholder, where the loan bears interest at a market rate, has fixed written terms with a repayment required at a defined future point, and the corporation is not thinly capitalized b. Payment of salary expense to a corporate shareholder's wife, where the wife performs no services for the corporation c. Payment of rental expense to a corporate shareholder, for the use of equipment owned by the shareholder. The equipment is necessary to the corporate business, and the rental cost is similar to that charged by unrelated equipment providers d. All of these choices are payments could reasonably be considered constructive dividends

Payment of salary expense to a corporate shareholder's wife, where the wife performs no services for the corporation

A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income? a. Schedule M-1 b. Schedule M-2 c. Schedule M-3 d. Schedule M-4

Schedule M-3

The tax basis in property received in a like-kind exchange in which no gain or loss is recognized is a: a. FMV basis b. Cost basis c. Substituted basis d. Carryover basis

Substituted basis

Which of the following statements regarding a sole proprietorship is false? a. A sole proprietorship is an unincorporated business operated by one individual b. Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's individual income tax return c. Sole proprietors are entitled to deduct 50 percent of self-employment tax paid d. None of these statements are false

Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's individual income tax return

Which of the following statements regarding the accumulated earnings tax is true?

The accumulated earnings tax is intended to coerce corporations to pay dividends.

Which of the following statements about nontaxable exchanges is true? a. The parties to the exchange agree that the properties exchanged are of equal value b. The parties to the exchange both realize gain on the exchange c. No cash can change hands in a nontaxable exchange d. Any gain realized on the exchange is not included in financial statement income

The parties to the exchange agree that the properties exchanged are of equal value

Which of the following statements regarding the personal holding company tax is false? a. The personal holding company tax is imposed in addition to the regular corporate income tax b. The personal holding company tax was originally enacted to discourage individuals from incorporating their investment portfolios c. The personal holding company tax is calculated by a qualifying corporation and paid on its annual corporate income tax return d. The personal holding company tax is assessed on a qualifying corporation's undistributed personal holding company income

The personal holding company tax is assessed on a qualifying corporation's undistributed personal holding company income

Which of the following statements about the inclusion of boot in a nontaxable exchange is false? a. The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged b. The receipt of boot can trigger gain recognition but not loss recognition c. The party paying the boot includes the FMV of the boot in the tax basis of the property received d. None of these choices are false

The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged *NOTE: The purpose of including boot is to equalize the FMV of the properties exchanged.

Qualifying Property

The specific property eligible for a particular nontaxable exchange

Which of the following statements regarding the taxation of corporate profits is true? a. Dividends payments are deductible in computing corporate taxable income b. The tax treatment of corporate dividends creates a bias in favor of debt financing c. Corporations cannot deduct interest payments in computing corporate taxable income d. Corporations with high debt-to-equity ratios have less burdensome cash flow commitments and lower risk of insolvency

The tax treatment of corporate dividends creates a bias in favor of debt financing

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. Which of the following statements accurately describes the tax consequences of these withdrawals? a. The withdrawals are nontaxable, with no risk that they could be recharacterized as taxable salary or dividend payments b. The withdrawals are considered taxable dividends to Loretta c. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would increase taxable income for both Loretta and the S corporation d. There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would reduce the S corporation's ordinary income, but would not change Loretta's taxable income

There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would reduce the S corporation's ordinary income, but would not change Loretta's taxable income *NOTE: Loretta would report salary income and an equal reduction in ordinary income from the S corporation, with a zero net effect on her taxable income

A corporation cannot have its owners participate on a daily basis. Thus, the shareholders must elect a Board of Directors. T/F

True

A corporation has unlimited life because of the share of stock, as well as free transferability for publicly held corporations, and a centralized management. T/F

True

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

True

A non-profit, however, may have to pay corporate tax on unrelated business income, generated by conducting a profitable sideline activity. T/F

True

A parent company (which is an affiliated group of the corporation) owns greater than or equal to 80% of at least one subsidiary corp, plus all the other subsidiaries that are at least 80% owned in the group. T/F

True

Corporations have limited liability, meaning that shareholders are only at risk for the amount of investment. T/F

True

Deductions include ordinary, necessary business deductions, and cost recovery deductions (depreciation, amortization, depletion). T/F

True

General Partners are considered self employed. T/F

True

Gross income includes sales, services, interest, investment income, etc. T/F

True

If the recipient corp owns <20% of the stock of the paying corp, the deduction is 70% of the dividend received. If the recipient corp owns 20-80%, then the deduction is 80%. If the recipient corp owns >80%, then the deduction is 100%. T/F

True

In a limited partnership, one or more limited partners must have at least one general partner. T/F

True

Income/loss is allocated among the partners according to the partnership agreement. T/F

True

To compute the basis limitation on loss deductions, and computing the adjusted basis of S corp stock, apply the same concepts for the partnership. T/F

True

When you form a partnership, you need an attorney to help draft a written "partnership agreement," a legal document specifying the rights, obligations, percentage of profits and losses that are allocable. T/F

True

A non-profit corporation is any corporation formed exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster international amateur sports competition. These are exempt from federal income taxation. T/F

True Note: EXCLUSIVELY.

If the partnership income is positive, then this allocation increases the basis, while if the income is negative, the allocation decreases the basis. T/F

True. Rule: If there is a cash distribution to the partner, then this allocation decreases the basis.

The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the outstanding stock of Tire Corporation, a German company. Wheel and Tire each own 50 percent of the outstanding stock of Bumper, Inc., a U.S. company. Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation, a U.S. company. Which of these corporations form an affiliated group eligible to file a consolidated tax return? a. Wheel, Axle, Tire, Bumper, and Trunk are an affiliated group b. Wheel, Axle, and Tire are an affiliated group c. Wheel and Axle are an affiliated group d. Wheel, Axle, and Trunk are an affiliated group

Wheel, Axle, and Trunk are an affiliated group.

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