Chapter 16 quiz
Flagg and Miles are each 50% partners in Decor Partnership. Each partner had a $200,000 tax basis in the partnership on January 1, 2022. Decor's 2022 net business income before guaranteed payments was $45,000. During 2022, Decor made a $7,500 guaranteed payment to Miles for deductible services rendered. What total partnership income from Decor is includible in Flagg's 2022 tax return? A) $15,000 B) $18,750 C) $22,500 D) $37,500
B) $18,750 Distributive shares of partnership income are reported by partners for their taxable year during which the end of the partnership tax year occurs. The partner will be taxed on the partnership income whether it is distributed or not. However, guaranteed payments are deductible by the partnership. Therefore, Flagg's tax return will include $18,750 of partnership income [($45,000 - $7,500) × 50%].
*Baker is a partner in BDT with a partnership basis of $60,000. BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker. What amount of gain or loss should Baker report?* A) $35,000 loss. B) $20,000 loss. C) $0. D) $15,000 gain.
C) $0. A partner recognizes gain only to the extent a money distribution exceeds the AB in the partnership interest immediately before the distribution. In the case of capital property distributions, there is no gain or loss; instead, the partner's basis in the property is adjusted for any variance between the partner's partnership basis and the partnership's AB in the property distributed. Therefore, Baker has a $0 gain (loss). [1]
*Brown, a 50% partner in Brown & White, received a distribution of $12,500 in the current year. The partnership's income for the year was $25,000. What is the character of the payment that Brown received?* A) Partial liquidation. B) Liquidating distribution. C) Disproportionate distribution. D) Current distribution.
D) Current distribution. A distribution is a transfer of value from the partnership to a partner in reference to his or her interest in the partnership. Nonliquidating distributions are current distributions. The distribution amount was in proportion to Brown's share of partnership interest. The income for the year increased his basis by the same amount as the distribution, equaling a net zero change. Therefore, the $12,500 distributed to Brown is a current distribution. [1]
Two individuals are planning to start a business and need advice on selecting the appropriate form of entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of the following is a pair of business entities each of which can make a distribution of appreciated property to its owners that would not be taxable to the business entity or to its owners? A) C corporation and a limited liability company. B) Limited liability company and an S corporation. C) S corporation and a general partnership. D) General partnership and a limited liability partnership.
D) General partnership and a limited liability partnership. Both a general partnership and an LLP can distribute appreciated property without incurring a taxable gain.
*For the tax year, Beta Corporation had net income per books of $76,000, tax-exempt interest of $4,000, excess contributions of $2,000, meals in excess of the 50% limitation (i.e., not provided by a restaurant) of $8,000, and federal income taxes of $18,000. What is the amount of Beta Corporation's taxable income as it would be shown on Schedule M-1 of its corporate income tax return?* A) $94,000 B) $100,000 C) $104,000 D) $108,000
B) $100,000 Schedule M-1 reconciles income or loss per books with income or loss per return. The $76,000 income per books is adjusted by adding federal income taxes of $18,000, excess contributions of $2,000, and meals in excess of the 50% limitation (i.e., not provided by a restaurant) of $8,000 and by subtracting tax-exempt interest of $4,000. [1]
*Media Corp. is an accrual-basis, calendar-year C corporation. Its current year reported book income included $6,000 in municipal bond interest income. Its expenses included $1,500 of interest incurred on indebtedness used to carry municipal bonds and $8,000 in advertising expense. What is Media's net M-1 adjustment on its current year Form 1120, U.S. Corporation Income Tax Return, to reconcile to its current year taxable income?* A) $(4,500) B) $1,500 C) $3,500 D) $9,500
A) $(4,500) Schedule M-1 reconciles income or loss per books with income or loss per tax return. It addresses differences between financial reporting and tax accounting. The municipal bond income and the related interest expense are not considered for tax purposes. The advertising expense is deductible for tax purposes. Therefore, Media's total net M-1 adjustment is a reduction of $4,500. [1] [2]
*Able, an individual, is a partner in CD Partnership with an adjusted basis of $30,000 for Able's partnership interest. Able received a non-liquidating distribution of $25,000 cash and property with an adjusted basis of $7,000 and a fair market value of $10,000. What amount of gain should Able recognize?* A) $0 B) $2,000 C) $5,000 D) $12,000
A) $0 Gain would be recognized if the FMV of cash exceeded Able's basis in the partnership interest. However, this is not the case. Instead, the cash is distributed at FMV and the basis in the partnership interest is reduced by the amount of the cash. Then, any remaining basis in the partnership interest is allocated to the property distributed, up to the lesser of the adjusted basis of the property in the hands of the partnership or the amount of partnership interest basis to be allocated. In this case, $5,000 of partnership interest basis is allocated to the property distributed. [1]
*While preparing a partnership tax return, the accountant discovered that ABC Partnership distributed property to Anne, a partner, in a nonliquidating transfer. No money was distributed to Anne during the year, the property was in the partnership for over 5 years, and no debt was attached to the property. Anne had a basis in her partnership interest of $10,000. The partnership had an adjusted basis of $20,000 in the property distributed to Anne. Which of the following are the tax consequences to Anne?* A) $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $10,000. B) $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $20,000. C) $10,000 gain, basis in the partnership is reduced to $0, and basis in the property received is $20,000. D) $10,000 gain, basis in the partnership is unchanged, and basis in the property received is $20,000.
A) $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $10,000. The distributee partner generally recognizes gain only to the extent that money received exceeds his or her adjusted basis in his or her interest. Since Anne did not receive any money in the distribution, she does not recognize any gain. The partner's basis in the distributed property is the partnership's adjusted basis in the property immediately before distribution, but it is limited to the distributee's adjusted basis in his or her partnership interest minus any money received in the distribution. Since Anne's adjusted basis in the partnership is $10,000, her basis in the property received is $10,000. Finally, the partner's basis in his or her ownership interest in the partnership is reduced by the adjusted basis of property received. Therefore, Anne's adjusted basis in the partnership is reduced to $0. [1] [2]
*In return for a 20% partnership interest, Kathy contributed land having a $60,000 fair market value and a $30,000 basis to the partnership. The partnership assumes Kathy's $15,000 liability arising from her purchase of the land. The partnership's liabilities arising from its purchases of assets is $4,000 immediately prior to the contribution. What is Kathy's basis in her partnership interest?* A) $18,800 B) $30,000 C) $15,000 D) $15,800
A) $18,800 The basis of a partnership interest acquired by the contribution of property is the adjusted basis of the property to the contributing partner. The assumption by a partnership of a partner's individual liabilities is treated as a distribution of money to the partner, which reduces the basis of the partner's interest. Moreover, the basis of a partner's interest in a partnership is increased by his or her percentage of ownership of the partnership's liabilities. Kathy's basis in her partnership interest will be the $30,000 basis of the land to the partnership, decreased by the $12,000 (80% × $15,000) liability assumed by the partnership, and increased by her $800 ($4,000 × 20%) share of partnership liabilities. Therefore, Kathy's basis is $18,800 ($30,000 - $12,000 + $800). [1]
*In 2022, Cape Co. reported book income of $140,000. Included in that amount was $50,000 for meals (provided by a restaurant) expense and $40,000 for federal income tax expense. In Cape's Schedule M-1 of Form 1120, which reconciles book income and taxable income, what amount should be reported as taxable income?* A) $180,000 B) $205,000 C) $230,000 D) $140,000
A) $180,000 Items not deductible for federal income tax are added to book income to arrive at taxable income. Federal income tax is not deductible. For meals provided by a restaurant, 100% is deductible, so none of that expense is added into the taxable amount. Taxable income is $180,000 ($140,000 book income + $40,000 federal income tax). [1]
*On December 31, Year 1, Fred's interest in Partnership C had an adjusted basis of $20,000, which included his $25,000 share of partnership liabilities for which neither Fred, the other partners, nor the partnership had assumed any personal liability. C had no other liabilities, no unrealized receivables, or substantially appreciated inventory items. On January 2, Year 2, Fred withdrew from the partnership and was relieved of his share of the partnership's liabilities. What are the amount and the character of Fred's gain or (loss)?* A) $5,000 capital gain. B) $5,000 ordinary gain. C) $0 D) $(20,000) capital loss.
A) $5,000 capital gain. Under Sec. 731(a), a partner does not recognize gain except to the extent that money distributed exceeds the partner's adjusted basis in the partnership. Fred's basis in his partnership interest before withdrawal was $20,000. The relief from $25,000 of partnership liabilities is treated as a distribution of money under Sec. 752(b), so Fred recognizes $5,000 of gain. The gain is capital under Secs. 731(a) and 741. [1] [2]
A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay... I. A salary of $5,000 monthly without regard to partnership income II. A 25% interest in partnership profits A) I only. B) II only. C) Both I and II. D) Neither I nor II.
A) I only. A guaranteed payment is a payment to a partner that is determined without regard to the partnership income. These payments can be in addition to regular profit shares and are deductible by the partnership.
*PDK, LLC, had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, Year 1, PDK had the following income and expense items:* *- Revenues: $120,000* *- Interest income: $6,000* *- Gain on sale of securities: $8,000* *- Salaries: $36,000* *- Guaranteed payments: $10,000* *- Rent expense: $21,000* *- Depreciation expense: $18,000* *- Charitable contributions: $3,000* *What would PDK report as non-separately stated income for Year 1 tax purposes?* A) $30,000 B) $35,000 C) $43,000 D) $51,000
B) $35,000 Each partnership item of income, gain, deduction, loss, or credit that may vary the tax liability of any partner must be separately stated. Items that must be separately stated include the following: - Section 1231 gains and loss - Net short- and long-term capital gain or loss from the sale or exchange of capital assets - Investment income and related expenses - Charitable contributions Guaranteed payments made to a partner are listed as a separate line item on the partner's K-1 form because they are ordinary income to that partner. However, when calculating non-separately stated income of the partnership, total guaranteed payments are deducted from ordinary income of the partnership. Thus, the total that PDK would report as non-separately stated income would be $35,000 ($120,000 revenues - $36,000 salaries - $10,000 guaranteed payments - $21,000 rent expense - $18,000 depreciation expense). [1] [2]
*Vital Corp. is an accrual-basis, calendar-year C corporation. Its Year 2 reported book income before federal income taxes was $500,000. Included in that amount were the following items:* *- Year 1 state franchise tax refund: $50,000* *- Municipal bond interest income: $7,500* *What should be the amount of Vital's Year 2 taxable income as reconciled on Vital's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?* A) $500,000 B) $492,500 C) $450,000 D) $442,500
B) $492,500 Permanent differences result from transactions that will not be offset by any corresponding differences in other periods. The municipal bond interest income is an example of a permanent difference. Thus, the $7,500 municipal bond interest income would be deducted from book income before federal income taxes to derive current-year taxable income of $492,500. [2]
The following information pertains to land contributed by Pink for a 50% interest in a new partnership: - Adjusted basis to Pink: $100,000 - Fair market value: $300,000 - Mortgage assumed by partnership: $30,000 The partnership has no other liabilities. The basis for Pink's partnership interest is... A) $70,000 B) $85,000 C) $100,000 D) $300,000
B) $85,000 Under Sec. 722, the basis of a partner's interest in a partnership is the partner's adjusted basis in the contributed property. When the partnership assumes a mortgage or takes the property subject to a mortgage, the contributing partner is deemed to have received a distribution of cash to the extent of the relieved liability [Sec. 752(b)]. This deemed distribution reduces the partner's basis. Adjusted basis of land contributed: $100,000 Less: Share of mortgage assumed by the other partners ($30,000 × 50%): $(15,000) Basis: $85,000
*Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?* *1. Interest Incurred on Loan to Carry U.S. Obligations* *2. Current State Corporation Income Tax Expense* A) 1. Yes: 2. Yes B) 1. No: 2. No C) 1. Yes: 2. No D) 1. No: 2. Yes
B) 1. No: 2. No Items treated differently in computing income per books and taxable income are reported and reconciled on Schedule M-1. Items treated the same for financial and tax purposes are not reported on the schedule. Both interest to carry U.S. obligations and state income tax are deducted in computing book income and taxable income. [1] [2]
*Peterson has a one-third interest in the Spano Partnership. During 2022, Peterson received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 2022 operating loss of $70,000 before the guaranteed payment. What, if any, are the net effects of the guaranteed payment?* *I. The guaranteed payment increases Peterson's tax basis in Spano by $16,000.* *II. The guaranteed payment increases Peterson's ordinary income by $16,000.* A) I only. B) II only. C) Both I and II. D) Neither I nor II.
B) II only. For purposes of determining the partner's gross income, the guaranteed payment (GP) is treated as made to a nonpartner. The partner separately states the GP from any distributive share. The payment is ordinary income to the partner. [1]
David and Mark both contributed $100,000 on January 1, 2022, to form DM Limited Partnership. David is a general partner, and Mark is a limited partner. The partnership agreement provided that David would bear any risk of loss and profits would be shared equally. Shortly after the formation, DM Limited Partnership purchased land with a $500,000 fair market value and a $300,000 recourse mortgage. DM's liability... A) Increases David's partnership basis by $150,000. B) Increases David's partnership basis by $300,000. C) Increases David's partnership basis by $500,000. D) Has no effect on David's partnership basis.
B) Increases David's partnership basis by $300,000. A partner's basis is increased by his or her share of partnership liabilities. Nonrecourse liabilities are shared based on partnership profit interests. Recourse liabilities, on the other hand, are shared based on economic losses. Since David bears all of the partnership's economic risk of loss, his basis in his partnership interest will be increased by $300,000.
Which of the following schedules is used to reconcile accounting income or loss with taxable income or loss on a corporate tax return? A) Schedule L. B) Schedule M-1. C) Schedule A. D) Schedule M-2.
B) Schedule M-1. Reconciliation of income per books (accounting income) with income per tax (taxable income) is reported on Schedule M-1.
*The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis (AB) of $5,000 and a FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang's partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?* A) $0 gain or loss. B) $0 ordinary gain and $1,000 capital loss. C) $1,000 ordinary gain and $1,000 capital loss. D) $1,000 ordinary gain and $0 capital loss.
C) $1,000 ordinary gain and $1,000 capital loss. Chang begins with $12,000 of AB. Cash is distributed first and Chang's AB is reduced to $8,000. Next, the $4,000 of inventory reduces Chang's overall AB to $4,000. Since there is only $4,000 AB remaining, Chang is only able to take a $4,000 basis in the land. He cannot go negative in basis for a non-cash distribution. The sale of the inventory was completed within 5 years of the distribution; therefore, the $1,000 gain ($5,000 sale price - $4,000 AB) is an ordinary gain (not capital gain). The sale of the land results in a $1,000 capital loss ($3,000 sale price - $4,000 AB). [1]
*An individual is a 50% partner who materially participates in Stone Partnership. The individual's adjusted basis at the beginning of the year was $0. Stone had a $70,000 loss from its business. Stone borrowed $30,000 from a bank of which $20,000 remained unpaid at year end. What amount of loss is the individual allowed in the current year from Stone?* A) $35,000 B) $15,000 C) $10,000 D) $0
C) $10,000 A partner is allowed to deduct the pro rata share of the partnership's ordinary loss only to the extent of his or her basis in the partnership. At the beginning of the year, the individual's adjusted basis was $0. The adjusted basis was increased to $10,000 (50% of the $20,000 liability that remained unpaid at year end). The individual's pro rata share of the ordinary loss was $35,000, but (s)he could only deduct ordinary loss to the extent of the adjusted basis in the partnership, which is $10,000. [1]
*Gulde's tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde's basis in the land?* A) $0 B) $10,000 C) $14,000 D) $30,000
C) $14,000 The distributee's basis in (noncash) property received in a liquidating distribution is any excess of his or her AB in the partnership interest immediately before distribution over any amount of money received. Therefore, Gulde's basis in the land is $14,000 ($26,000 basis - $12,000 cash received in distribution). [1]
*For the current year, accrual-basis Corp. A's books and records reflected the following:* *- Net income per books: $104,000* *- Accrued federal income tax: $35,000* *- Net capital loss: $4,000* *- Tax-exempt interest: $5,000* *- Book depreciation in excess of allowable tax depreciation: $2,000* *Based on the above facts, what is the amount of A's taxable income?* A) $69,000 B) $70,000 C) $140,000 D) $150,000
C) $140,000 Federal income tax, excess capital losses, and book depreciation in excess of tax depreciation are not deductible. These amounts must be added back to book income. Tax-exempt interest is not taxable and must be subtracted from book income. These adjustments are done on Schedule M-1 of the corporation tax return. Net income per books: $104,000 Add back: Federal income tax: $35,000 Net capital loss: $4,000 Excess book depreciation: $2,000 = $145,000 Subtract: Tax-exempt interest: $(5,000) Taxable income: $$140,000 [1]
*The following information is available from the books of ABC Corporation. Determine what taxable income should be reported on Form 1120.* *- Federal income tax accrued for the tax year: $55,000* *- Net income per books, after tax: $148,000* *- Life insurance premiums (not deductible on return): $17,000* *- Tax exempt interest income: $15,000* A) $150,000 B) $201,000 C) $205,000 D) $220,000
C) $205,000 Federal income tax and life insurance premiums are not deductible. These amounts must be added back to book income. Tax-exempt interest is not taxable and must be subtracted from book income. These adjustments are done on Schedule M-1 of the corporation tax return. The taxable income of Corporation ABC is $205,000, as computed below. Net income per books: $148,000 Add back: Federal income tax: $55,000 Life insurance premiums: $17,000 =$220,000 Subtract: Tax-exempt interest: $(15,000) = Taxable income: $205,000 [2]
*Garner is a 25% partner in Classic General Partnership. On February 3, Garner's tax basis in Classic was $10,000 when she received a nonliquidating distribution of $5,000 cash. Classic had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Classic reported the following for the same year:* *- U.S. Treasury interest: $30,000* *- Ordinary business income: 120,000* *What amount of income from Classic should Garner include in her gross income for that year?* A) $7,500 B) $30,000 C) $37,500 D) $42,500
C) $37,500 Each partner is taxed on his or her share of partnership income, regardless of it being distributed. Nonliquidating distributions, up to the amount of the partner's basis, reduce the basis of the partner's interest in the partnership and are not included in the taxable income of that partner. Nonliquidating distributions in excess of the partner's basis in the partnership are taxed as a capital gain. Garner must include 25% of her share of all taxable income. The amount of $37,500 is equal to 25% of $150,000 ($30,000 U.S. Treasury interest + $120,000 ordinary business income) and is therefore the amount included in her gross income for that year. [2]
*In the current year, Starke Corp., an accrual-basis, calendar-year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What amount should Starke's taxable income be as reconciled on Starke's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?* A) $330,000 B) $500,000 C) $502,000 D) $550,000
C) $502,000 The municipal bond income and the related interest expenses are not considered for tax purposes. The federal tax expense is not deductible for federal income tax purposes. Therefore, the net Schedule M-1 adjustment of $122,000 ($2,000 + $170,000 - $50,000) results in taxable income of $502,000 ($380,000 + $122,000). [1] [2]
*ABC Corporation reports $710,000 pretax book income for the current year, including the items listed below:* *- $50,000 capital gains* *- $54,000 capital losses* *- $22,000 meals not provided by a restaurant* *- $15,000 cash contributions to qualified organizations* *- $12,000 refund of state taxes deducted in the prior year* *ABC has no carryforwards from prior years. Given the information above, what is ABC's taxable income?* A) $775,000 B) $732,000 C) $725,000 D) $713,000
C) $725,000 To arrive at taxable income, 50% of nondeductible (i.e., not provided by a restaurant) meals expenses ($11,000) should be added back to pretax book income. Corporations cannot take a net capital loss deduction. Instead, capital losses can only offset capital gains. Therefore, $4,000 in net capital losses is also added back to pretax book income. Charitable contributions are limited to 10% of taxable income before the charitable deduction but are not a factor in this scenario. No adjustment is needed for the refund of state taxes deducted for a prior year because it is included in income for the current year, to the extent that the deduction in the prior year generated a tax benefit. [1]
*The adjusted basis of Vance's partnership interest in Lex Associates was $180,000 immediately before receiving the following distribution in complete liquidation of Lex:* *Cash:* *- Basis to Lex = $100,000* *- Fair Market Value = $100,000* *Real estate:* *- Basis to Lex = $70,000* *- Fair Market Value = $96,000* *What is Vance's basis in the real estate?* A) $96,000 B) $83,000 C) $80,000 D) $70,000
C) $80,000 In a liquidating distribution, a partner's basis for his or her partnership interest is reduced by the amount of money received. Any remaining basis is then allocated to other property received ($180,000 basis - $100,000 cash). [1] [2]
*You are a partner in ABC Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or appreciated inventory items. You sell your interest in the partnership for $11,000 in cash. Which of the following statements is true?* *1. You report the entire amount as a gain since your adjusted basis in the partnership is zero.* *2. You report $5,000 as ordinary income from the sale of the partnership's depreciable property.* *3. You report the remaining $6,000 gain as capital gain.* A) 2 and 3 are true, but 1 is false. B) All of the statements are false. C) All of the statements are true. D) 1 is true, but 2 and 3 are false.
C) All of the statements are true. The sale or exchange of an interest in a going partnership is similar to the sale of stock in a corporation. The gain or loss on the sale of the partnership interest is a capital gain or loss, subject to long- or short-term treatment depending upon the length of time the selling partner owned the interest in the partnership. An exception to this rule applies when the partnership owns unrealized receivables or inventory. In this case, the selling partner must allocate a portion of the sales proceeds to the unrealized receivables and to the inventory and, to that extent, will realize ordinary income. [1]
*On January 1, 2022, Ruth had a basis in her partnership interest of $55,000. Thereafter, in liquidation of her entire interest, she received an apartment house and an office building. The apartment house has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. The office building has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. What is Ruth's basis in each property after the distribution?* A) Apartment house, $40,000; office building, $15,000 B) Apartment house, $44,000; office building, $11,000 C) Apartment house, $25,000; office building, $30,000 D) Apartment house, $45,000; office building, $10,000
C) Apartment house, $25,000; office building, $30,000 If a partner's interest is liquidated solely through a distribution of partnership property other than money, no gain is recognized. If the partnership distributes property other than money, the partner's basis in the partnership must be transferred to the distributed assets. When a liquidation occurs and the partner's basis in the partnership exceeds the partnership's basis in the distributed assets, the excess of the partner's basis in the partnership must also be allocated among the distributed assets. Any basis increase required is allocated first to properties with unrealized appreciation in proportion to the respective amounts of unrealized appreciation inherent in each property (but only to the extent of each property's unrealized appreciation). Any remaining increase is then allocated in proportion to the properties' fair market values. The apartment house is first assigned its basis of $5,000 and the office building is assigned $10,000. Another $40,000 ($55,000 partnership basis - $15,000 assigned to properties) must be allocated to the two properties. The apartment house is allocated $35,000 ($35,000 increase in FMV ÷ $35,000 total increase in FMV × $35,000). Accordingly, $5,000 still remains to be allocated. It is allocated based on the FMVs of the properties. The apartment house will be allocated $4,000 [$40,000 FMV ÷ ($40,000 FMV of the apartment + $10,000 FMV of the building) × $5,000 remaining increase], and the building will be allocated the remaining $1,000. Thus, the basis in the apartment house will be $44,000 ($5,000 + $35,000 + $4,000), and the basis in the office building will be $11,000 ($10,000 + $1,000). [1] [2]
*Guaranteed payments made by a partnership to partners for services rendered to the partnership that are deductible business expenses under the Internal Revenue Code are...* *I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss).* *II. Included on Schedule K-1 to be taxed as ordinary income to the partners.* A) I only. B) II only. C) Both I and II. D) Neither I nor II.
C) Both I and II. Guaranteed payments are considered as ordinary and necessary business expenses, like salary expenses, so they are deductible by the partnership and reported on line 10 of Form 1065. The recipient partner also includes the full guaranteed payment, reported on line 4 of Schedule K-1, as ordinary income. [1]
*In the reconciliation of income per books with income per return,* A) Only temporary differences are considered. B) Only permanent differences are considered. C) Both temporary and permanent differences are considered. D) Neither temporary nor permanent differences are considered.
C) Both temporary and permanent differences are considered. Reconciling income per books with income per return considers both temporary differences (i.e., differences expected to be eliminated in the future, such as an accelerated method of depreciation for tax purposes and a straight-line method for financial reporting purposes) and permanent differences (i.e., differences not expected to be eliminated in the future, such as that caused by the deduction of federal income tax for financial reporting purposes). [1]
A $100,000 increase in partnership liabilities is treated in which of the following ways? A) Increases each partner's basis in the partnership by $100,000. B) Increases the partners' bases only if the liability is nonrecourse. C) Increases each partner's basis in proportion to their ownership. D) Does not change any partner's basis in the partnership regardless of whether the liabilities are recourse or nonrecourse.
C) Increases each partner's basis in proportion to their ownership. A partner's share of a partnership liability is treated as if the partner contributed an equivalent amount of money to the partnership. The deemed contribution increases the partner's basis in his or her partnership interest. Normally, general partners share liabilities based on their ratio for sharing economic losses (recourse liability).
*On January 2, Year 1, Harvey contributed $12,000 cash to Partnership K, a calendar-year partnership, for a one-fifth interest. On February 1, Year 1, the partnership borrowed $50,000 from a local bank. Neither Harvey, the other partners, nor the partnership has assumed personal liability for the debt. There is no minimum gain and the partners have no loss limitation agreements. The partnership has no other liabilities and has no unrealized receivables or inventory items. On November 1, Year 1, Harvey received a $15,000 cash distribution from the partnership. For Year 1, K reported ordinary income of $60,000 and the partners reported their distributive shares on their individual income tax returns. On January 2, Year 2, Harvey sold his interest in K for $20,000 cash. What is the amount of Harvey's capital gain or (loss)?* A) $(1,000) B) $1,000 C) $8,000 D) $11,000
D) $11,000 A partner's adjusted basis is increased by his or her distributive share of partnership income and decreased by cash distributions from the partnership. The nonrecourse liability is shared according to the profit ratio since there is no minimum gain. Harvey's adjusted basis at the time of sale is $19,000. Adjusted basis at contribution of cash: $12,000 Plus: 20% of the partnership liabilities: $10,000 Less: Cash distribution: $(15,000) Plus: Distributive income share ($60,000 × 20%): $12,000 = Adjusted basis 1/2/Yr 2: $19,000 The capital gain is $11,000 and is calculated as follows: Cash proceeds: $20,000 Liabilities assumed by the purchaser: $10,000 = Amount realized: $30,000 Less: Adjusted basis: $(19,000) = Capital gain: $11,000 [1] [2]
*Doug sold 50% of his business to his son, Ben. The resulting partnership had an operating income of $60,000. Capital is a material income-producing factor. Doug performed services worth $24,000, which is reasonable compensation, and Ben performed no services. What is the maximum amount of profit that Ben can report from the partnership for the tax year?* A) $30,000 B) $36,000 C) $12,000 D) $18,000
D) $18,000 Guaranteed payments are payments to a partner for services or for the use of capital that are determined without regard to the income of the partnership. Guaranteed payments are deductible by the partnership. After deducting the payment, the partnership's remaining income is $36,000. This income is split between the partners on a 50% basis. Thus, Ben will report his share, which is $18,000. [2]
Sally, a first-year staff accountant, has identified items in the financial statements of a client that she believes are permanent book-to-tax differences. Which of the following identified items would not be a permanent difference between book and taxable expense? A) $700 contributed to the campaign of a county commissioner. B) A $500 fine paid to the IRS for late payment of payroll taxes. C) $1,900 paid for officers' life insurance; the client is the beneficiary. D) $2,500 in travel expenses to send employees to training seminars.
D) $2,500 in travel expenses to send employees to training seminars. Travel expenses to send employees to training seminars are a deductible expense for both book and tax purposes and do not result in a permanent book-to-tax difference. Permanent differences result from transactions that will not be offset by any corresponding differences in other periods. Permanent differences between book and tax are reported on Schedule M-1.
*On September 1, 2022, Julie's basis in her partnership interest was $75,000. In a distribution in liquidation of her entire interest on that date, she received properties A and B, neither of which were inventory or unrealized receivables. On September 1, 2022, property A had an adjusted basis to the partnership of $35,000 and a fair market value of $75,000. Property B had an adjusted basis to the partnership of $15,000 and a fair market value of $25,000. Based on this information, what was Julie's basis in property A immediately after the distribution?* A) $35,000 B) $52,500 C) $56,250 D) $55,000
D) $55,000 If a partner's interest is liquidated solely through a distribution of partnership property other than money, no gain is recognized. If the partnership distributes property other than money, the partner's basis in the partnership must be transferred to the distributed assets. When a liquidation occurs and the partner's basis in the partnership exceeds the partnership's basis in the distributed assets, the excess of the partner's basis in the partnership must also be allocated among the distributed assets. Any basis increase required is allocated first to properties with unrealized appreciation in proportion to the respective amounts of unrealized appreciation inherent in each property (but only to the extent of each properties unrealized appreciation). Any remaining increase is then allocated in proportion to the properties' fair market values. Property A is first assigned its basis of $35,000 and property B is assigned $15,000. Another $25,000 ($75,000 partnership basis minus $50,000 AB assigned to properties) must be allocated to the two properties. Property A is allocated $20,000 [$40,000 increase in FMV over $50,000 ($40,000 appreciation of A + $10,000 appreciation of B) total increase in FMV times $25,000]. Thus, property A is assigned a basis of $55,000 ($35,000 initial basis + $20,000 based on increase in FMVs). [1] [2]
*Sara is a member of a four-person, equal partnership. Sara is unrelated to the other partners. In 2022, Sara sold 100 shares of a listed stock to the partnership for the stock's fair market value of $20,000. Sara's basis for this stock, which was purchased in 2011, was $14,000. Sara's recognized gain on the sale of this stock was...* A) $0 B) $1,500 C) $4,500 D) $6,000
D) $6,000 When a partner engages in a transaction with the partnership not in a capacity as a partner, the transaction is considered to occur between the partnership and a nonpartner. Sara recognizes a $6,000 long-term capital gain ($20,000 proceeds less $14,000 AB). If Sara had owned more than 50% of the capital or profit interest of the partnership, a gain could still have been recognized, but a loss on a sale to the partnership would not. [1]
*On June 30, 2022, Berk retired from his partnership. At that time, his basis was $80,000 including his $30,000 share of the partnership's liabilities. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2022. Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income from the payments of...* A) 2022 = $13,333: 2023 = $26,667 B) 2022 = $20,000: 2023 = $20,000 C) 2022 = $40,000: 2023 = $0 D) 2022 = $0: 2023 = $40,000
D) 2022 = $0: 2023 = $40,000 A retiring partner who receives payments from the partnership is considered to be a partner until the last payment is received. Payments made in complete liquidation of a partnership interest are considered distributions by the partnership to the extent made in exchange for the interest of the partner in partnership property. Gain on a distribution is recognized only to the extent money distributed exceeds the partner's basis in the interest. The $30,000 of liability relief and the $30,000 cash received by Berk in 2022 are tax-free and reduce basis to $20,000. Of the $60,000 cash received in 2023, the $40,000 excess over the remaining $20,000 adjusted basis is recognized gain. [1]
Clare has prepared a schedule to reconcile income per books with taxable income. Identify her mistakes, if any, in the calculation below. Net income (loss) per books + Federal income tax + Income recorded on books not subject to tax + Income subject to tax not recorded on books + Expenses recorded on books not deducted on the tax return - Excess of capital losses over capital gains - Deductions on this return not charged against book = Taxable income A) No errors. B) Federal income tax and income subject to tax not recorded on books should be deducted from, not added back to, net income (loss) per books. C) Expenses recorded on books not deducted on the tax return should be deducted from, not added back to, net income (loss) per books, and deductions on this return not charged against book income should be added back to, not deducted from, net income (loss) per books. D) Income recorded on books not subject to tax should be deducted from, not added back to, net income (loss) per books, and excess of capital losses over capital gains should be added to, not deducted from, net income (loss) per books.
D) Income recorded on books not subject to tax should be deducted from, not added back to, net income (loss) per books, and excess of capital losses over capital gains should be added to, not deducted from, net income (loss) per books. Income recorded on books not subject to tax should be subtracted from net income per books to arrive at taxable income. Excess of capital losses over capital gains should be added back to net income per books to arrive at taxable income.