Chapter 10

self-employment income

Has no effect on basis in partnership interest

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

K1

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 is a requirement for a corporation to elect S corporation status?

Only common stock outstanding No more than 100 shareholders

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

Unincorporated business No legal identity separate from its owners

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

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

reported to the shareholder on Schedule K-1

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

sole proprietorship

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

Which of the following statements regarding LLC characteristics is true?

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

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

C

Section 1231 Gain

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

Charitable contribution

Decreases basis partnership interest

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

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

$12,162

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

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

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

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

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

1065

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

107,650

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

1120S

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

15,000 750

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

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

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

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

Which of the following are 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.

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.

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

Law firm Accounting firm Consulting business

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 deductibility of partnership losses is false?

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

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

Retail business operated by a sole proprietorship

Which of the following 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 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.

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 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.

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

True

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

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

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

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

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

A partnership agreement ______.

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

The employee portion of payroll tax is owed ______.

in addition to the employer portion

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

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

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