Tax Final

Grantly Seafood is a calendar year taxpayer. This year, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. Grantly received a $1 million reimbursement from its insurance company and purchased a new fishing boat for $750,000 before the end of the tax year. 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

Johnson Incorporated and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. JohnsonC&KFMV$ 900,000$ 675,000Adjusted tax basis593,000462,000Mortgage200,000-0- Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

$225,000 gain recognized; $593,000 basis in C&K property.

Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Incorporated 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.

$228,500 gain realized and recognized; $340,200 basis in M&W shares

On January 21, 2010, Andy purchased 350 shares of Baker common stock for $24,500. On November 13, 2021, he sold the 350 shares for $7,250. On December 1, 2021, Andy purchased 350 shares of Baker common stock for $8,000. What is Andy's basis in these shares?

$25,250

Max is a 10% limited partner in LMN partnership. His adjusted basis in his partnership interest was $50,000 at the beginning of the current year. During the year, the partnership earned $100,000 of ordinary income, incurred a $5,000 capital loss, and paid $1,000 of nondeductible expenses. Max received a distribution of $2,000 from the partnership. Calculate Max's ending adjusted basis in his partnership interest.

$57,400

Mr. and Mrs. Arlette spent $5,900 for child care for their 12-year-old daughter. Mr. Arlette's earned income was $178,000, Mrs. Arlette's earned income was $33,100, and the AGI on their joint return was $225,200. Calculate their dependent care credit.

$600

A fire destroyed furniture and fixtures used in Jock's business. Jock's adjusted basis in the furniture and fixtures was $81,300. Jock received a $100,000 reimbursement from his insurance company and immediately spent $93,000 to purchase new furniture and fixtures. How much gain or loss must Jock recognize on this involuntary conversion?

$7,000

Kyrsten Haas expects her S corporation to generate a profit of $200,000. Kyrsten's marginal tax rate on ordinary income is 37%. What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?

($74,000)

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?

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?

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

Jennifer and Jamar are married and live in a home with their 13-year-old dependent son, Oscar. This year, they had the following tax information. Jamar's salary$ 60,000Jennifer's Qualified Business Income from sole proprietorship95,000Dividend income2,800Deduction for self-employment tax6,712Itemized deductions19,200 Compute adjusted gross income (AGI) and taxable income.

AGI $151,088; taxable income $107,530.

Which of the following statements about individual capital gains and losses is false?

Capital losses are deductible only against capital gains.

Ficia Incorporated owned investment land subject to a $294,500 recourse mortgage. Ficia failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's basis in the land was $300,000, and the land's appraised FMV was $260,000. The creditor informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage. Which of the following statements is true?

Ficia recognizes $34,500 ordinary income and a $40,000 capital loss.

Fleet, Incorporated owns 85% of the stock of Pete, Incorporated and 35% of the stock of Zete, Incorporated and 90% of the stock of Bete, Incorporated 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?

Fleet, Pete, and Bete are an affiliated group.

Five years ago, Q&J Incorporated transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for $533,000 cash. Compute Q&J's book and tax gain on sale.

None of these choices are correct

In April, vandals completely destroyed outdoor signage owned by Renfru Incorporated 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 these choices are correct

Last year, TPC Incorporated sold investment land with a $388,000 book and tax basis for $523,000. The purchaser paid $60,000 in cash and gave TPC a note for the $463,000 balance of the price. This year, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). This year, TPC's use of the installment sale method results in a:

None of these choices are correct

Philp Incorporated sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset. Compute Philp's net cash flow from the sale assuming a 21% tax rate.

None of these choices are correct

Johnson Incorporated and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. JohnsonC&KFMV$ 900,000$ 675,000Adjusted tax basis593,000462,000Mortgage200,000-0- Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the property received from Johnson.

None of these choices are correct.

Which of the following statements regarding the calculation of taxable income is false?

Taxpayers are allowed to deduct the greater of itemized deductions or above-the-line deductions in calculating taxable income.

Mr. and Mrs. Harvey's tax liability before credits was $1,675. Their income tax withholding was $1,050, and they are entitled to a $1,189 earned income credit. Which of the following statements is true?

The Harveys are entitled to a $564 tax refund.

Which of the following statements regarding the personal holding company tax is false?

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

Mr. and Mrs. Borem spent $1,435 for child care for their two dependent children, who are two and four years old. Mr. Borem's earned income was $55,870, Mrs. Borem had no earned income, and the AGI on their joint return was $66,210. Calculate their dependent care credit.

$0

Babex Incorporated and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. BabexOMGFMV$ 1,000,000$ 825,000Adjusted tax basis768,000514,500Mortgage175,000-0- Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG.

$175,000 gain recognized; $768,000 basis in OMG property.

Rydell Company exchanged business realty (initial cost $55,250; accumulated depreciation $25,450) for like-kind realty worth $44,000 and $2,000 cash. Assume that depreciation on the realty exchanged was computed using the straight-line method and that Rydell Company is not a corporation. As a result, Rydell must recognize:

$2,000 Section 1231 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 (including relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest.

$2,000 gain

In June, a fire completely destroyed office furniture owned by W&S Incorporated W&S's adjusted tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its property insurance company, and on August 8, it paid $16,000 to replace the furniture. Compute W&S's recognized gain on loss on the involuntary conversion and its tax basis in the new furniture. $2,040 recognized loss; $16,000 basis in the furniture

$2,040 recognized loss; $16,000 basis in the furniture

Frederick Tims, a single individual, sold the following investment assets this year. AssetDate purchasedDate soldTax basisSales price100 shares Gamma Incorporated01/04/0905/07/21$ 5,000$ 15,00030 shares Land Incorporated12/31/9110/01/21$ 75,000$ 100,00050 shares Down Corporation05/10/1311/01/21$ 12,000$ 8,00010 shares Extel Incorporated03/25/0802/19/21$ 17,000$ 5,000 If Frederick's preferential tax rate on adjusted capital gain is 15%, compute his tax attributable to the above sales.

$2,850

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?

$1,200,000

Mr. and Mrs. Cox reported $490,000 AGI on their joint return. The couple has three dependent children under age 17. Compute their child tax credit. $0

$1,500

Honu, Incorporated has book income of $1,200,000. Book income includes $380,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of business meals expense. Based only on these items, compute Honu's taxable income.

$1,645,000

Ms. Beal recognized a $42,400 net long-term capital gain and a $33,000 net short-term capital loss this year. What is her current net income tax cost from her capital transactions if her marginal rate on ordinary income is 37%?

$1,880

Steiger Company owned investment land subject to a $715,000 recourse mortgage. Steiger failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Steiger's basis in the land was $587,300, and the land's appraised FMV was $690,000. Steiger completely settled its recourse debt by paying $25,000 cash to the creditor. As a result of the foreclosure, Steiger recognizes:

$102,700 capital gain

Kuong Incorporated sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building 20 years ago for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain recognized on sale as:

$107,600 ordinary gain and $530,400 Section 1231 gain

Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's marginal tax rate is 24%, and Ben's marginal tax rate is 32%.

$12,600

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:

$125,000

Kelly operates a sole proprietorship with qualified business income of $920,000. Her business paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis of $410,000. Compute Kelly's allowable QBI deduction before the taxable income limitation.

$125,000

Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

$126,400

Mr. and Mrs. Upton's marginal tax rate on their joint return is 32%. This year, their itemized deductions totaled $25,500, and their standard deduction (MFJ) was $25,100. Compute their incremental tax savings from their itemized deductions.

$128

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 gain2,100Dividend income1,600Cash distribution5,800 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? Assume the excess business loss limitation does not apply.

$13,300

Several years ago, Y&S Incorporated purchased a patent on a production process for $250,000 and has amortized $91,000 of the cost. Y&S has learned that a rival company recently developed a new process that renders the patent worthless. Consequently, Y&S made a public announcement that it would no longer enforce the patent. What is the tax consequence to Y&S of this unfortunate situation?

$159,000 ordinary abandonment loss.

Cactus Company is a calendar year S corporation with the following current year information: Operating loss$ (120,000)Liabilities:Notes payable, City Bank20,000Notes payable, Jake Crow20,000 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? Assume the excess business loss limitation does not apply.

$30,000

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$ 41,000Short-term capital loss1,500 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

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 basis in his/her partnership interest.

$35,000

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.

$36,400 loss recognized; $136,200 basis

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$ 100,000Long-term capital gain10,000Total distributions to partners60,000 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?

$37,000

This year, Mary recognized a $45,000 gain on the sale of Section 1231 property. Over the previous five-year period, Mary recognized the following net Section 1231 gains and (losses): last year ($28,000) two years ago $16,000 three years ago ($30,000) Mary's current year gain is characterized as:

$42,000 ordinary gain and $3,000 capital gain

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: Net income from self-employment before home office deduction$ 150,000Expenses from home (100%)Home mortgage interest12,000Property taxes4,000Homeowner's insurance2,500Utilities2,200Depreciation on office portion of home1,100

$5,240

Brace, Incorporated 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:

$50,000

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?

$500,000

Lennie and Margo spent $2,800 for child care for their 7-year-old son. Lennie's earned income was $41,000, Margo's earned income was $24,800, and the AGI on their joint return was $71,200. Calculate their dependent care credit.

$560

Palm Corporation has book income of $424,000. Book income reflects $130,000 federal income tax expense and $55,000 depreciation expense. Tax depreciation expense computed under MACRS is $65,000. Palm received $25,000 of prepaid rent not included in book income. Based only on these items, compute Palm's taxable income.

$569,000

Meraleigh, age 16, is claimed as a dependent on her parents' tax return. This year, Meraleigh earned $510 from babysitting and $220 interest income from a savings account. Compute Meraleigh's standard deduction.

$730

Gem Company's manufacturing facility was destroyed by a flood. The facility's adjusted basis was $665,000, and Gem received an $850,000 insurance reimbursement. Within 18 months of the flood, Gem rebuilt the facility at a total cost of $975,000. Which is Gem's basis in the new facility?

$790,000

Gavin owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following: Ordinary business income$ 60,000Share of partnership debt, beginning of year10,000Share of partnership debt, end of year15,000 Calculate Gavin's tax basis in his partnership interest at the end of the year?

$85,000

Forward Incorporated'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

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$ 500,000Interest income6,000Long-term capital gain10,000Cost 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

Which of the following statements concerning partnerships is false?

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

XYZ, Incorporated wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false?

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

Which of the following is NOT one of the characteristics of a constructive dividend?

All of these choices are common characteristics of constructive dividends.

Blitza Incorporated owned real property used for 12 years in its business that was subject to a $294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the property's appraised FMV was $260,000. Which of the following statements is true?

Both Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage and Blitza recognizes a $5,500 Section 1231 loss is true.

Firm F purchased a commercial office building for business use in 15 years ago for $965,000. This year, the firm sold the building for $1 million. Accumulated MACRS depreciation through date of sale was $275,000. Which of the following statements is true?

Both if Firm F is a corporation, it recognizes $55,000 ordinary income and $255,000 Section 1231 gain and if Firm F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain are true.

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?

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

A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?

Corporate tax, $0; individual tax, $37,000

A business generates profits of $150,000. The owner currently has a 32% marginal tax rate. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sole individual shareholder?

Corporate tax, $31,500; individual tax, $3,000

Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support for their two children, Dana, age 26, and John, age 17. Both children live in the Andersons' home. Dana earned $9,100 from a part-time job, while John earned no income this year. Which of the following statements is true?

Dana is neither a qualifying child nor a qualifying relative of the Andersons.

Mr. and Mrs. Jelk file a joint return. They provide 65% of the financial support for David, the 14-year old son of a friend who died three years ago. David lives in the home of his aunt Sarah, who provides 35% of his financial support. Which of the following statements is true?

David is neither a qualifying child nor a qualifying relative of the Jelks.

Which of the following statements regarding S corporations is true?

Generally, the transfer of property by a controlling shareholder to a newly-formed S corporation in exchange for stock is a nontaxable event.

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.

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.

Eliot Incorporated 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.

In its current tax year, PRS Corporation generated $300,000 ordinary income from the performance of consulting services for its clients. PRS sold two assets, recognizing a $20,000 gain on the first sale and a $31,000 loss on the second sale. Which of the following statements is false?

If the gain was capital gain and the loss was ordinary, PRS's taxable income was $269,000.

This year, Izard Company sold equipment purchased several years ago at a cost of $48,500. Accumulated depreciation through date of sale was $18,900. Which of the following statements is false?

If the sale price was $42,500, Izard recognized $12,900 Section 1231 gain.

This year, Adula Company sold equipment purchased in five years ago at a cost of $117,200. Accumulated depreciation through date of sale was $33,000. Which of the following statements is false?

If the sale price was $80,000, Adula recognized $4,200 ordinary loss.

A tornado demolished several delivery vans owned for three years by Wadham Company. Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase new vans. Wadham received a $25,000 settlement from its casualty insurance company. Consequently, Wadham recognizes:

None of these choices are correct

Tauber Incorporated and J&I Company exchanged like-kind assets. Tauber's asset had a $17,500 FMV and $3,000 adjusted tax basis, and J&I's asset had a $19,000 FMV and a $9,000 adjusted tax basis. Tauber paid $1,500 cash to J&I as part of the exchange. Which of the following statements is false?

J&I's realized gain is $10,000 and recognized gain is -0-.

B&I Incorporated sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 10 years ago for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale. B&I should characterize the $329,200 gain recognized on sale as:

None of these choices are correct

Ms. Lewis maintains a household which is the principal place of residence for Kathy. Ms. Lewis provides more than 50% of Kathy's financial support. Assuming Kathy is not disabled, in which of the following cases can Ms. Lewis claim Kathy as a qualifying child?

Kathy is Ms. Lewis' 15-year-old niece.

On January 1 of the current year, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Incorporated, 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 current year ordinary business loss was $34,100, and she received no cash distributions during the year. Assume the excess business loss limitation does not apply. Which of the following statements is accurate?

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

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

Limited partnership

Teco Incorporated 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.

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

No gain recognized; $340,200 tax basis in property

Three individuals transferred property to newly formed Triple Incorporated 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?

None of these choices are false.

LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash. Which of the following statements is false?

None of these statements are false.

Which of the following statements regarding partnerships versus S corporations is false?

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$ 500,000Interest income6,000Long-term capital gain10,000Cost 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.

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 $30,000 per year. Cash receipts and disbursements for the year were as follows Net income from operations (before guaranteed payment)$ 90,000Guaranteed payment to Clover30,000 What is Clover's share of the partnership's ordinary income and guaranteed payment?

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

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

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

Which of the following statements regarding the tax treatment of start-up losses is false?

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

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:

Schedule C, Statement of Profit or Loss from Business

Kent, an unmarried individual, invited his widowed father, Martin, to move into his home in January of this year. Martin's only income item was a $14,000 taxable pension from his former employer. Kent provides about 75% of his father's financial support. What is Kent's filing status for the year?

Single

Which of the following statements regarding tax payments is true?

Sole proprietors must make quarterly estimated payments of income tax and self-employment tax.

Which of the following statements regarding alternative business forms is true?

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

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?

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

G&G Incorporated 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.

Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true?

The owners of a general partnership have unlimited personal liability for the debts of the business.

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

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

Which of the following statements about Section 1250 recapture rule is false?

The rule applies to sales of depreciable realty by noncorporate taxpayers but not to sales by corporate taxpayers.

In determining the standard deduction, which of the following statements is true?

The standard deduction is a function of filing status.

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, Incorporated, 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?

Wheel, Axle, and Trunk are an affiliated group.